From NMN, a summary of HAFA, with doubts (more videos coming!):
As an alternative to foreclosure, the government’s forthcoming program to spur short sales may prove just as ineffectual as the push to modify loans.
In a short sale, the borrower sells the home for less than the amount owed on the mortgage and the lender accepts a discounted payoff. They can be far less costly to the lender than foreclosures.
But experts in such transactions say second-lien holders have scuttled many deals by reserving the right to chase after the borrower for the amount of debt not covered by the home sale in states where doing so is allowed.
“Subordinate lien holders are the biggest obstacle to successful short sales,” said Travis Hamel Olsen, the chief operating officer at Loan Resolution Corp.
The Home Affordable Foreclosure Alternatives program, which starts next month, will attempt to change that. To give junior mortgage holders an incentive to release their liens and waive any future claims against the borrower, the government will offer up to 3% of what they are owed, subject to a cap of $3,000 per home.
But that carrot may not be enticing enough. According to Olsen-whose Scottsdale, Ariz., company specializes in arranging short sales-second mortgage holders have been asking defaulted homeowners to come up with additional funds to bring the payoff on home equity loans to 6% of the unpaid principal.
Other parties would receive incentives under the Treasury Department’s plan.
The servicer of the first mortgage, which acts as a go-between for the many parties involved in a short sale, would get $1,000 for each one that is completed. Borrowers would receive $1,500 to cover moving costs. The program is intended to help borrowers who do not qualify for the Home Affordable Modification Program, or who receive mods but redefaulted.
Since HAMP’s inception a year ago, 88,663 trial mods and 1,499 permanent mods have been canceled, according to the Treasury. As of Feb. 28, 168,703 households had permanent loan modifications and 835,194 were in a “trial,” so any of these 1 million borrowers who are unable to continue with loan modifications would be eligible for a short sale.
Some experts joke that short sales are a bit like herding cats, because there are several parties that must sign off on a deal. The holders of the first and second liens, the homebuyer, the seller and the mortgage insurer all have the power to kill a deal.
The Treasury program has garnered praise for attempting to streamline this cumbersome process.
“What Treasury did is put in a protocol…so they have a preapproved short sale,” said Ron Bergum, the chief executive of Prospect Mortgage LLC. “What this does is it makes the transaction mainstream, because there’s a protocol in place that the government has outlined.”
Olsen agreed. He said the program guidelines, which the Treasury released in November, have “done two very important things for the industry, which is attempt to standardize the short-sale process and provide structured time lines.”
In other words, HAFA dictates that certain things have to be done in certain amount of time. So, for example, a borrower has 14 calendar days to contact a servicer after they have been notified that they are eligible for a short sale.
Just as the largest servicers created their own in-house loan modification programs for borrowers who did not qualify for the government’s loan mod plan, the same is likely to hold true for short sales.
“HAFA will get the process started,” Olsen said.
Because it can cost the holder of the first mortgages $30,000 to $50,000 to foreclose on a home, plus carrying costs that equal 1% to 1.25% in lost value each month, short sales are often far less costly than foreclosure.
Other obstacles remain. Mortgage insurers, for example, are taking a similar approach as the second-lien holders. They also are asking defaulted borrowers to pay them out of pocket to cover a portion of their losses in exchange for signing off on a short sale, Olsen said.
The HAFA guidelines say a mortgage insurer must waive any right to collect additional sums from the borrower for a mortgage to be eligible for the program.
Tom Taggart, a spokesman for PMI Group Inc., a Walnut Creek, Calif., mortgage insurer, said most insurers are confident in the government’s short-sale process because borrowers have already been vetted. The main differences between HAFA and any other short sale are the borrower has been preapproved for a short sale because he or she has already been analyzed by the servicer for HAMP and turned down or fell out, and holders of second liens agree not to pursue the borrower later.
“We’ve never had any interest in going after a borrower that does not have the capacity to pay,” Taggart said. “What we’re interested in is seeking payments from borrowers who have the capacity to pay but choose not to. There has to be a level of responsibility.”
Joe Filoseta, the president and CEO of DepotPoint, a Bellevue, Wash., provider of default management technology, said servicers and investors are trying to identify borrowers who are the best candidates for short sales.
“You address the loans that are not held back by second-lien holders that won’t negotiate,” Filoseta said. “The existence of a second is not an end-all. There is a definable group of candidates that will not be hampered by non-negotiating second-lien holders. So let’s do those well and have the borrower exit with dignity.”
Nothing will come of this. Banks know that the longer they wait the more $$$ government will give.
Sorry all, and I apologize in advance if I offend someone’s feelings; I have to bang the drum again. In many cases, foreclosure is the BEST alternative for homeowners.
Foreclosure and Bankruptcy are SOLUTIONS, not problems. The problem is too much debt, foreclosure just gets you out of that problem.
Too often, people believe there is a pink pony out there waiting to save them and make the whole problem better without trashing their credit. It doesn’t happen, and a short sale isn’t much better than a foreclosure, they’re practically identical in their effect.
Joe and associated company in the article are talking their book. They want people to open up their finances so that they can extract even more. Many people are better off proceeding directly to foreclosure without passing GO.
Chuck
BTW, pay careful attention to what Tom Taggart says:
emphasis added
Trust me on this… if you have a job, or ever will have a job anytime in the REMAINDER OF YOUR LIFE, they do NOT consider you incapable of paying. Homeowners facing financial troubles take note, they will get you to sign a promissory note, which can only be discharged by bankruptcy, which most definitely IS worse than foreclosure or short sale.
Not about real estate but…
(Reuters) updated 4:41 a.m. PT, Thurs., March. 18, 2010
“NEW YORK – Bernard Madoff, the swindler who orchestrated a multibillion dollar fraud, was attacked by another inmate at the federal prison where he is serving a 150-year sentence, the Wall Street Journal reported, citing three people familiar with the matter.”
“…The former inmate, who served time on drug charges, said the dispute centered on money the assailant thought he was owed by Madoff.”
Here’s the link to the full article:
http://www.msnbc.msn.com/id/35925191/ns/business-us_business/?GT1=43001
Chuck
I disagree. I know at least 3 people that did short sales whose credit scores dropped less than 75 points and all still have FICO scores above 700. That doesnt happen with a foreclosure. I do agree that this no legislation will have little affect though.
BTW, They also all had the capacity to pay more and all got written releases of future liability for the deficiency. And yes I saw their credit reports a year after the short sale was completed.
The biggest problem now for the market is banks cannot absorb the losses necessary to clear their bad loans. The government can plead for them to modify or sell bad investments, but the moment they do that their capital structure takes the hit. If they don’t do anything, they can carry the bad paper at values that favor them. Again, that was why mark-to-market brought such disasters. So, the banks (and the goverment) just stall for time hoping that prioes come back and save them.
“Foreclosure and Bankruptcy are SOLUTIONS, not problems. The problem is too much debt, foreclosure just gets you out of that problem.”
Sure a foreclosure might be a great solution for the one person, but it often leaves the entire neighborhood worse off.
JP2,
“Sure a foreclosure might be a great solution for the one person, but it often leaves the entire neighborhood worse off.”
What you’re describing is called REALITY. Learn to live in it. Assets appreciate and DEPRECIATE over time.
JP2,
How is it you figure foreclosure leaves the neighborhood worse off? Whether delinquent, modified, shortsold or foreclosed, the current owner/borrower/tenant gets to live in the house for free or at reduced cost until ownership changes and they leave or are evicted.
Are you saying it’s “harmful” merely because it reduces comparable sales values to their actual, market based price? That’s simply revaluation of assets, neither helpful nor harmful, and of no consquence to those in the neighborhood who are not selling a house. And for each such outgoing resident of the neighborhood who might be considered “harmed” by selling a house for a lower price than they expected 2 years ago, you have an incoming resident who was “helped” by the lowering of prices.
I totally agree that foreclosure and bankrupcy are the solutions, not the problem, except for the total morons who underwrote the loans and junior loans in the first place, and the market participants who bought RMBS based on those loans. But guess what, they’ve all been handed BILLIONS of dollars in bailouts and Fed fueled profits, so make them eat their losses asap.
*yawn* fire up that camera Jim! 🙂
So if 2009 was the year of loan mods…
2010 is shaping up to be the year of short sales (after most of the loan mods fail)
Perhaps 2011 will FINALLY be the year of the foreclosure.
-Erica
> *yawn* fire up that camera Jim! <
Amen.
“*yawn* fire up that camera Jim!”
He will soon enough. 🙂
I for one am glad that this discussion is occurring (as well as all the walk-away posts on various sites this week).
I especially appreciate (and agree with) Chuck’s opinion, and very much value Anon (9:40) on the ground data on the effects of shorts on credit.
On the ground data is what JtR’s site does best (though his and contributors efforts).
(not that I don’t appreciate a good video)
Jeeman,
Has Jim video’d your place yet? Anxious to see your new RSF abode!!!
“Sure a foreclosure might be a great solution for the one person, but it often leaves the entire neighborhood worse off.”
This happens if the bank and the rest of the neighborhood are still suffering from the same delusion about the home’s value that the foreclosed owner did. Removing deadbeat borrowers who are living rent free and are almost certainly doing nothing to maintain the properties and reselling them at their true market value to new owners who are actually able to afford them can only help in the long run, by putting people in the homes who will have an interest in maintaining them and by bringing the neighborhood’s prices and expectations back into line with reality.
It will be tomorrow, late morning. Who knows how quickly JtR gets his videos up… 🙂
Re the foreclosure/neighborhood problem: We had one in our neighborhood. The sale/auction (I’m not sure which it was), was about 20-25% below what I would think market was. The buyer did some minor work to it and flipped it for a sizable profit at a price more in par with what sales go for in the area. So, it isn’t necessarily ruinous to the neighborhood. To be fair, the house is in a desirable spot, in a small neighborhood with only 40 homes, fairly expensive.
I thought ‘Exiting with Dignity’ was the new Walmart program to sell coffins…
Second what Chuck Ponzi said.
People who think foreclosures “ruin” neighborhoods (A.K.A.: lower property values) haven’t come to terms with the fact that prices seen during the 2001-2006 timeframe were NOT REAL — they were **BUBBLE** prices caused by loose lending and mortgage fraud. Now, the fraud is being wrung out, and the prices caused by the fraud are slowly melting away to what is realistic based on **organic buyers** who intend to live in the houses and make them their homes (not “investments”).