Boy, it sure seems like every day there is a new plan out there to help the housing market!

The Wall Street Journal reported yesterday on a new plan by the Obama Administration to cut mortgage balances without actually getting the borrowers out of the home.

Before we go into analysis, here are the documents about the program:

1. F.A.Q.
2. Policy Overview from HUD
3. Samples of how program will work
4. Fact Sheet

The new program is being billed as an enhancement to the HAMP program, which we have talked about extensively on this blog. It is being funded (the tune of $50 billion) by the TARP (Troubled Asset Relief Program).

The program is designed has four goals, but two of them are simply tweaks. The two that represent entirely new areas are:

First, is  temporary assistance for unemployed homeowners. Eligible homeowners will be able to get their payments reduced, and possibly even eliminated, for a period of 3-6 months.

This program doesn’t have a set kickoff date but the memo states it should be fully in place by the fall. Eligibility is the same as HAMP. Additionally, you must apply within 90 days of delinquency on a loan and have proof that you are receiving unemployment benefits.

Secondly, principle write-downs for underwater homeowners. This is a modification to the current HAMP (Home Affordable Modification Program), the loan modification arm of the MHA (Making Home Affordable) program, which was designed to help individuals refinance or restructure their mortgage, and helping lower their monthly payments by reducing the interest on the loan, increasing the loan length, or a number of other creative methods not involving loan balance reductions.

The new modifications to the HAMP program now put principle reductions on the plate as well. It’s almost like an in-place “short sale” without actually selling the property. The WSJ calls it a “short-refinance”.

Friday’s announcement, of course, will get lots of attention because it is also expanding HAMP to include loan balance reductions to the toolkit that banks have to use to lower mortgage balances.

What does it all mean? Well, the WSJ sums it up quite well in that the administration really is getting flak from all sides and has to tread carefully:

The administration, under pressure from community activists, lawmakers and some mortgage investors, is trying to walk a fine line with these changes. Officials want to respond to criticism that HAMP hasn’t done enough to prevent foreclosures. But they also are heeding warnings from big banks that a full-fledged embrace of the idea of reducing principal might prompt many borrowers who can still afford their mortgage payments to default in the hope of being rewarded with a smaller loan.

In other words, the principle reduction plan will encourage homeowners to default on their loans so they can qualify for what is essentially a free write-off of principle as apart of a loan modification.

What’s next down the pike for federal programs? Apparently a plan as well to deal with second mortgages:

The administration also has struggled to launch a program designed to encourage banks to modify second-lien mortgages. The administration is expected to increase incentive payments under that program.

For investors, we think this is similar to our analysis of the HAFA program, in that it will have a marginal impact. Again, “marginal” when spread across the nation can still be significant; so it’s one to watch closely. But the HAMP requirements ahead of time will limit the volume to which this applies. While some homeowners may be motivated to “walk away” from their mortgages to help usher in a principle reduction under these new modifications, we think that will be the exception rather than the rule, since credit is still damaged and their is no guarantee the modification will be successful.

Bullet points of the plan:

Improvements to the Home Affordable Modification Program – More Help for Homeowners

1. Temporary assistance for unemployed homeowners while they search for re-employment

• Mortgage payments reduced to affordable level for a minimum of three months, and up to 6 months for some borrowers, while eligible homeowner looks for new job

2. Requirement to consider alternative principal write-down approach and increased principal write-down
incentives

• All servicers required to consider alternative modification approach that emphasizes principal write-down with incentives based on the dollar value of the principal reduced
• The principal reduction and the incentives will be earned by the borrower and investor based on a pay-for-success structure

3. Improvements to reach more borrowers with HAMP modifications

• Improvements to borrower solicitation requirements including clear performance timeframes for both servicers and borrowers and a prohibition against initiation of a new foreclosure referral when a borrower is cooperating with the servicer to obtain a modification
• Borrowers in active bankruptcy must be considered for HAMP upon request
• Increased incentives for servicers to provide permanent HAMP modifications
• Expansion of HAMP to include homeowners with FHA loans

4. Helping homeowners move to more affordable housing

• Relocation assistance payments to homeowners receiving foreclosure alternatives doubled
• Increased incentives to servicers and lenders, including increased incentives for extinguishment of subordinate liens, to encourage more short sales and other alternatives to foreclosure

A great analysis article today courtesy of Housing Wire discusses how the solution to the housing crisis will ultimately be REO (real-estate owned).  The REO trend is based on their analysis that the size of the foreclosure market is so overwhelming that even short sales won’t be able to keep up with the demand:

But in the end, the real key to resolving the problems that yet remain in housing is likely to come back to an old standby: REO property sales.

Yes, really. But to understand why, you’ve got to first really understand the scope of the mortgage default problem we’ve now got.

According to data from Lender Processing Services (LPS: 40.74 +1.29%), a whopping 7.4m loans are now non-current, compared to just 4.1m on average between January and June of 2008. A recent JP Morgan Chase (JPM: 43.00 -0.16%) investor presentation presents the problem more visually, per the data below:

JPM Prime Mortgage Defaults

The analysis here is that the loans in default are becoming more in default. While short sales will play a critical role in assisting in the correction process, the limitations within HAMP and the problem of 2nd lienholders make short sales too cumbersome to resolve all the issues in the housing market, and thus REO will play an increasingly important role.

The article states that for loans over 90 days past due, the average days delinquent stands at 272 days, which us up from around 200 days in 2008. For foreclosure loans; the delinquency average 410 days!

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.

So, that sets the stage to show the volume that we are facing. The article states that while short sales will be important; REO will also be important; for two reasons.

First, the infamous second lien: over half of all first mortgages have second liens as well, and these second lienholders have very little incentive (typically $1000) to agree to a short sale. (Unless, of course, there is fraud involved and money passes hands off-HUD!). In fact, the article continues on to suggest that the HAFA program may well encourage the pressure to commit fraud.

Government’s implicit endorsement of short sales via the HAFA program seems only more likely to increase this sort of pressure. Regulators now face a very unique conflict of interest, and it will be interesting to see how this is resolved: on one hand, violating RESPA helps grease the wheels of a short sale, something the administration wants to see happen; on the other hand, violating RESPA is a federal offense.

Our thoughts on this? Somewhat split! Savvy investors and agents have been able to negotiate successfully with second lienholders and will continue to do so. Yes, they are a huge area of difficulty; but in many cases a second lienholder will get some settlement (hey, even $1000 is better than $0), and if the case is made that the house will go into foreclosure and the 2nd lender is confident that will be the outcome, why wouldn’t they accept the $1000? That said; properties that are “on the fence” are of course more in jeapordy. That incentive isn’t any different today than it was six months ago, and short sales have continued to dramatically climb in popularity and use despite the 2nd lienholders unfortunate position.

Secondly, HAFA itself: the article then continues to discuss HAFA in some more detail:

Meet HAFA, child of HAMP. The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far. A loan must first be HAMP-eligible in order for anyone (borrower, servicer, or investor) to qualify for the program’s various incentive payments for short sale or deed-in-lieu.

Which means any of the guidelines applicable to the HAMP program—loan in default or default imminent, within UPB guidelines, owner-occupied, and originated prior to 2009—still apply.

The gist of the statement is that HAMP has been relatively unsuccessful, and trying to get HAFA to work in that situation will be minimal at best:

As for the 7.4m already troubled borrowers? 1.3m troubled homeowners have received offers for modifications under HAMP to date, according to the latest report card, with 1.1m agreeing to a trial – and of that, 168,000 have moved to permanent status since the program’s start in the middle of last year. (We don’t know how many have since re-defaulted, however.)

That’s certainly a small number, particularly over the course of six full months, when one considers the size of the housing crisis on hand. Similar to analysis we did on the Treasury’s report, the concern is that HAMP utilization is both low and that re-defaulting is a continuing problem on modified loans.

JPM, for example, recently reported that out of every 100 HAMP trials offered, 25 borrowers do not pay as agreed and another 29 do not submit required documents, omitting Social Security Numbers, signatures and the like on documents that are submitted.

(Makes you wonder, though, 29% of borrowers do not submit the required documents….. we are willing to bet this happens all the time and then we wonder why short sale applications sit on loss mitigators desks without movement!). And this happens at a bank that, according to the article, has 15,000 dedicated staff just for loss mitigation and each borrower receives an average of 36 calls, 15 letters, and 2 personal visits!

Additionally, HAMP’s inherent limitations limit HAFA. Of 6 million borrowers late on their loans, HAMP only applies to 1.8 million.

The article goes on to say (and this we certainly agree with) – that HAFA will not all of a sudden shift all the delinquent properties via short sale. It’s being overblown:

Instead, the short sale process in general is likely to become more streamlined as a result of the HAFA program, and that will help servicers process more short sales than they may have in the past.

Well, investors and agents would gladly take some streamlining!

So, while HAFA and government programs to aid short sales are expected to assist in a housing recovery, ultimately the author believes REO is the true end-game of recovery. While this is probably true, it certainly doesn’t diminish the opportunity short sales present, in the correct circumstance.

What are your thoughts on REO vs. Short Sales for recovery?

Ever wondered about what the steps are in a typical foreclosure process? Here’s the quick rundown!

Step 1. Delinquency – Pre Notice of Default (NOD)

Normally, a borrower will need to be at least three months late on their mortgage payments for the foreclosure process to kickoff. After three months plus, a lender will issue the Notice of Default, which is the first formal action taken towards a homeowner not meeting their obligations. In most states and with most lenders, prior to the NOD being issued the homeowner will have an opportunity to contact the lender and try to work something out. Many lenders are recently becoming more apt to use “workable solutions” – for example, the lender may allow the borrower to miss 1 or 2 payments and add it to the end of their mortgage.  If the homeowner can take advantage of this, it can be an excellent temporary way to create some “breathing room”.

Unfortunately, people with true hardship (like disability or divorce) – a few months reprieve only delays the problem. If a workable solution can’t be negotiated or worked out, the lender will likely issue a NOD.

Step 2. Further Workout Attempts

NOTE: Know your state laws! Each state is different! For example, in California, Senate Bill No. 1137 requires that foreclosing lenders take steps to attempt to help homeowners who are in default on mortgages that were originated between January 1, 2003 and December 31, 2007- lenders must attempt to contact the borrower by phone “in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” at least 30 days in advance of filing the NOD.

If a workout solution cannot be made, the lender may file for NOD. Again, depending on your state, the rules will differ. In some states, the lender must notify renters (if any). Certain languages may need to be accommodated. Some states (again, California as an example) will require longer notices sent to any tenants, such as 60 days instead of the typical 30.

Step 3. Notice of Default

The NOD Period is typically 90 days, and during this time borrowers normally are able to “catch up” on their delinquency remove the loan from the pending foreclosure status. The borrower may be responsible for any costs the lender occurs during this time period, but as with anything in the short sale business, these can often be negotiated if it’s a deal breaker. Remember, the goal is to help the homeowner ultimately – if there is a way to keep them in the house, that would be an ideal situation! Unfortunately, by this point in time there is rarely any going back.

Note that during this period, workout solutions and payment plans can still be created and implemented. The lender will be weighing their options at this point in time to identify best courses of action (foreclosure? Work out a plan? Contemplate short sale offers?) – this will vary depending on the particular circumstances of the given property.  Lenders are becoming increasingly creative during this time period as well, and may do things like add the payments to the end of the loan.

After the notice of default period expires (again, typically 90 days) the next step for the lender is that the notice of Trustee’s Sale can be recorded and published.

Step 4. Trustee’s Sale, AKA Lead Up to the Auction

The Trustee’s Sale is also known as the “Auction Date” and may occur as quickly as 21 days after the Trustee’s Sale notice is recorded (although it often takes longer).  When a short sale is in the cards, communication between all involved members is critically important, as any failure or delays can tank the short sale proceedings. It is important to note that the during this time the lender is using a “Trustee” to handle the foreclosure process, and at the same time negotiations and conversations regarding a pending short sale will be with the Loss Mitigation Department at the lender .

Again, this depends on the state, but often at this point in time the lender has the right to refuse reinstatement of the loan and can demand payment in full of the entire unpaid balance of the loan.  Most lenders will still allow reinstatement if the borrower is able to work out a solution (either via short sales or if the borrower is (unlikely) able to make a last-minute payment to catch up on the loan.

Step 5: The Auction

This is the end of the road, the last day where the borrower has an opportunity to settle up by paying the trustee the amount owed to the lender before the trustee calls an auction and bids are made.

After the Auction is over, there is little (if any) chance of recourse for the borrower. Your short sales should be completed before the auction!

Step 6: REO (Real Estate Owned) or other Ownership

Someone, or some entity, now owns the property via Trustee Deed.  The Trustee Deed is a powerful document, getting physical possession of the property requires additional legal action known as an unlawful detainer. This process typically takes 1 -2 months, depending upon the state. The lender maintains the house during this time period and will take protective action to prevent vandalism and further damage, including winterizing the house (in colder climates) and boarding up windows. If occupants still live in the property, eviction will also need to be performed.

Now What?

Now the new owner can do whatever they need to do to the property – sell it, fix it up, rent it out, whatever. If the owner is the bank, they will hold the property until they can sell it, carrying huge carrying costs and impacting their bottom lines significantly. The goal of a short sale is to stop all this before it ever gets to this step!

Running through it again!

•   Borrowers have hardship or cannot make their payments any more
•   The Borrower falls at least 3 months out of date on their mortgage
•   Lenders attempt to work out the default with the Borrower
•   If a workout can’t be completed, a notice of default (NOD) is filed
•   Short Sale process – a buyer or investor will make an offer on the property for less than the mortgage amount
•   The short sale package is included in the offer, and negotiations with the bank’s loss mit department begin
•   The lender will approves the short sale (because your short sale package was compelling!)
•   Homeowner can avoid foreclosure and the credit damage that goes along with it
•   Work to get a full release from the lender so the borrower is not financially responsible to repay the loss the lender takes.
•   Create the win / win solution for the lender and the buyer!

Short Sale Artisan Commentary: This has been spreading like wildfire on the internet, I think all investors and agents should be aware of this proposal:

The following information is extremely important!  HUD Issues Problematic Rules Interpreting SAFE Mortgage Licensing ACT

HUD has proposed to eliminate ALL seller financing unless the seller lives in the home or becomes a licensed mortgage originator.  The proposed HUD Rules interpreting the federal SAFE mortgage act can be viewed at

http://www.regulations.gov/search/Regs/home.html#home

Use the search parameter “HUD” and the keyword “safe”. Please review and comment regarding the impact of this broad interpretation of the law.

“In addition to establishing HUD’s responsibilities under the SAFE Act, through this rule, HUD proposes to clarify or interpret certain statutory provisions that pertain to the scope of the SAFE Act licensing requirements, and other requirements that pertain to the implementation, oversight, and enforcement responsibilities of the States. HUD solicits comment on the proposed clarifications and on the regulations proposed to be codified.”

History:

As you may recall, we lobbied hard last year to maintain the right for individuals to make up to five seller financed transactions per year before being subject to mortgage originator licensing, etc… However, that law was passed subject to the Department of Housing and Urban Development’s (HUD) approval of the law as “compliant” with the intention of the federal law. If any state does not have a compliant law, the SAFE act allows HUD to implement licensing for the state. HUD has since issued proposed rules.

In a nutshell, seller financing would no longer be allowed for non-owner occupied homes.

How YOU can help:

We learned about the publishing of the rules very late in the process… and the deadline for comment is upon us on February 16. However, we desperately need for thousands of REIA members across the country to go on record with HUD on this issue. We will be working to try to affect this law in other legislative ways, but cannot hope to gain traction unless our members have clearly communicated that they are opposed to this portion of the rules.

This is your chance to be counted on this issue.

PLEASE SUBMIT YOUR COMMENTS TO HUD! We have less than one week to flood this system with comments.
Follow these simple steps:

1. Logon to http://www.regulations.gov

You will see two white boxes for searching

1. On the left box labeled “Document Type”, pull the menu down and select “proposed rules”
2. On the right box labeled “Enter keyword or ID”, enter “safe mortgage”. Then, press search
3. Locate the blue search result “FR-5271-P-01 Safe Mortgage Licensing Act: HUD Responsibilities Under ….” To read the rules, click on this title. You will be taken to another page. You will see “views”. You can click on PDF file or another symbol which will show you the rule document online.
4. On the right of the screen, click on “submit comment”
5. Complete the form providing required information and your comments and then submit

What do you say? Say what you feel, but say it politely!

The message should include that you would like the definitions in the proposed rules to be changed so that private individuals can originate and service loans on properties they personally own. Some ideas from others:

• Bank loans are not available on some types of properties
• The tight lending climate has made bank financing “out of reach” for many
• Seller financing is an “age old” tradition based on private property rights
• These rules would prohibit even partial seller financing – i.e. a “seller second”
• According to HUD’s “Residential Finance Survey” in 2001, roughly 40% of all non-farm residential properties in the US are owned free and clear
• An estimated 6 million Americans own a property other than their own primary residence
• An estimated 4.5% of Americans own three or more properties, many purchased solely as investment properties
• 40% of non-owner occupied residences are mobile homes which are more difficult to sell with bank financing
• Approximately 5% of homes in US are for sale or for lease… seller financing may be key to liquidating this inventory

The continued success of our industry as we know it is threatened by these proposed regulatory changes. Please do not hesitate to follow the steps above and make your voice heard.

Found this graph today which shows the breakdown of distressed properties over time in Orange County. The total number of distressed properties was going down until October and November is showing an uptick. Interestingly though is the breakdown of short sales vs. foreclosures – you can see that short sales are becoming an increasingly larger part of the distressed property breakdown.

CNN reports some incredible facts as it relates to the mortgage industry.

The Mortgage Banker’s Association (MBA) 3rd Quarter Reports indicate some pretty unbelievable statistics about the state of foreclosure and delinquency:

• 9.64% of all mortgages are in delinquency
• 4.47% of all mortgages are in foreclosure
• Added up, a total of 14.41% of mortgages are delinquent or already in foreclosure!
• Over 50% of these delinquencies are on PRIME, fixed-rate mortgages (not the typically-blamed sub-prime mortgage!)
• FHA loans, while having grown significantly, are also showing increases in delinquency rates
• 43% of all delinquent mortgages are in California, Florida, Arizona, and Nevada
• … and the number of loans that are delinquent or in foreclosure now for the first time exceeds the number of homes that are for sale!

This is truly staggering information and demonstrates the growth and persistence that can be expected in the short sale and preforeclosure market. What I found most intriguing about this was that it isn’t just sub-prime borrowers that are the root of the mess – even those with fixed rate mortgages are in trouble.

Post your comments! Much like the post earlier today, what do you think this means for the state of the economic recovery and the housing recovery in particular?

-Nick