HAFA, HAMP and other assorted worthless acronyms….

Okay, I’ve got to admit, it’s been one of those days, but I can’t stand by and not say what I’m thinking about this new “short sale” program.    I’m already hearing a lot of Realtors and others saying, “This is great news!”    Well, hold on a minute…..

I’m going to go through some of the main points of the HAMP Update that was issued yesterday and that our President spoke about today.    You can find the entire thing at Hamp Update if you want to read it for yourself.  If you want to read the entire directive, you can find that at Directive.   The bold and italicized portions are quotes from the official documents.   The regular print is my thoughts…….

Supplemental Directive 09-09 provides guidance to servicers
There’s the first clue that something’s not going to go well.   It provides guidance. 

The definition of guidance according to Wikipedia is: Advice (opinion), an opinion or recommendation offered as a guide to action, conduct. 

See where the problem is?   It’s guidance, it’s not mandatory.   So, Uncle Sam can say, “Now, Mr. Banker, you really should do this……”    And the Banker can say, “(Well, we really shouldn’t print that.)”

provides servicers with the option to determine the extent to which short sales or deeds-in-lieu will be offered under this program.  (This is actually from the Directive).    

It provides options.   It allows the servicer to determine the extent to which they offer them under this program.

So, once again, what do we have?   We have Uncle Sam saying, “Now, Mr. Banker, it would be really nice if you did this……”   And the Banker can say, “____________________.”

The effective date of this Supplemental Directive is April 5, 2010.
Excuse me, but what the heck is the rush for?   I mean, they rolled out the HASP refi program to lenders the day that they made it public to consumers so we were getting calls on it before we even knew what was what.    Now they are giving the banks four months to decide whether they want to participate?    Why not next Monday?

With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.
I think that right there is one of the biggest reasons you will find this program will not be successful.    If Mr. Banker accepts a short sale, he’s giving up the possibility of getting any additional money from the borrower ever.    If he waits and does a foreclosure, depending on the rules in the state they are in and whether it was a refi or a purchase, the “non-recourse” vs. “recourse” rulings might allow them to go after Mr. Borrower for the difference.

Allows the borrower to receive pre-approved short sale terms prior to the property listing.
What’s with this nice wording?   It allows them to receive that?  Well, guess what, they were already allowed to receive it, if Mr. Banker would give it to them.    But how many Mr. Bankers out there were willing to “preapprove” a short sale?   If you’ve heard of one, speak up……

I didn’t think so.  I don’t know any bankers in their Wall Street frame of mind who would agree to a price before the house has even been put on the market.    So, this isn’t worth the paper it’s printed on.

Moving on…..

Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement.
This is obviously a point of contention with a lot of real estate professionals.   I’d like to ask someone to explain to me the difference between:

1. A seller (not a bank) who lists their house at a 6% commission and then when an offer comes in, during the negotiations says, “I’ll take $XXX,XXX for the house if you, Mr. Realtor, will come down to 5% on your commission.
2. A Bank (on a short sale) who says to the seller and the listing agent, “The only way we’ll agree to accept $XXX,XXX for a sales price and therefore a loss of $XX,XXX is if you agree to throw in 1% of your commissions.

What’s the difference?   Aren’t we crossing a dangerous line when the government is dictating to parties in a transaction what the rules are?   And how is the government going to enforce this?

Servicers must evaluate a borrower for a HAMP modification prior to any consideration being given to HAFA options
Okay, let’s look at some timelines here.   Borrower is 30 days late on their payment, approaches their lender and asks for a modification.    They need to compile a whole bunch of documentation (took one of my customers 3 weeks!) and by then they are close to 2 months behind.    They submit the documentation and it takes XX days to process.    By then they are three months behind.    When does the foreclosure department start watching that property?     They then get denied for the HAMP modification and now they go to the short sale HAFA people.     Then they have to market the property and try to find a buyer?    How long is the bank going to hold off before they initiate foreclosure proceedings?

Sounds like it’s still a long drawn out convuluted mess to me.

Moving on…..

Servicers must consider possible HAMP eligible borrowers for HAFA within 30 calendar days of the date the borrower:

• Does not qualify for a Trial Period Plan;
• Does not successfully complete a Trial Period Plan;
• Is delinquent on a HAMP modification by missing at least two consecutive payments; or
• Requests a short sale or DIL.

Tell me if I’m reading to much into the wording, but once again, it says, servicers must consider them within 30 days.   It doesn’t say them must make a decision, it doesn’t say they must act on them, just consider them.    I’ve “considered” running a marathon but there isn’t a chance that I’ll ever actually do it.

If the servicer has not already discussed a short sale or DIL with the borrower, the servicer must proactively notify the borrower in writing of the availability of these options and allow the borrower 14 calendar days from the date of the notification to contact the servicer by verbal or written communication and request consideration under HAFA.
So, the lender has to let the borrower know this option is available and then the borrower has 14 days to say they want to be considered?    Do you have any idea how much mail the borrower is probably already getting from their lender?   Who says that there’s a realistic chance they are going to open and read it on time?   What does verbal request mean?   Could John Smith walk into the nearest Bank of America branch and tell the teller, “I want to do a short sale?”   Does that qualify?    A lot of noise and fury signifying nothing.

Prior to approving a borrower to participate in a HAFA short sale, the servicer must determine the minimum acceptable net proceeds (minimum net) that the investor will accept from the transaction.
You know, I have to say that I like the concept of the “minimum net” for a lender.   It’s the practice of it that I have a hard time with.     Does the lender say, “The first $XXX,XXX wins?”   Or do they say, “We’ll take 95% of the list price – but then we determine what you list it at?”   Or how does that work?    Help me here……

Approval or Disapproval of Sale. Within ten business days of receipt of the RASS and all required attachments, the servicer must indicate its approval or disapproval of the proposed sale by signing the appropriate section of the RASS and mailing it to the borrower.
If this actually happens and is actually enforced, I think it would be a good thing.   Basically, you’d be looking at 13 days from acceptance of the offer by the seller to knowing whether the lender would accept it.    That would, if it actually happened, be a good thing.

But, devil’s advocate time, what’s the likelihood that would happen?   If the banks can’t get an answer in 3 to 5 months now, what makes you think they’ll suddently be staffed well enough to do it in 14 days?   Seriously?

In the Deed in Lieu of Foreclosure section:
Marketable Title. The borrower must be able to convey clear, marketable title to the servicer or investor. The requirements for extinguishment of subordinate liens as described in the Release of Subordinate Liens section of this Supplemental Directive apply to DIL transactions.  
Okay, what’s the missing part on this one?   For a borrower to do a deed in lieu, they have to get their second mortgage holder to agree to walk away with nothing.     Good luck with that one.

Suspension of Foreclosure Sales. At the servicer’s discretion, the servicer may initiate foreclosure or continue with an existing foreclosure proceeding during the HAFA process, but may not complete a foreclosure sale:

• While determining the borrower’s eligibility and qualification for HAMP or HAFA. 
• While awaiting the timely return of a fully executed SSA.
• During the term of a fully executed SSA.
• Pending transfer of property ownership based on an approved sales contract per the RASS or Alternative RASS.
• Pending transfer of property ownership via a DIL by the date specified in the SSA or DIL Agreement.

A couple of important things to note on this one:   At the servicer’s discretion, they can start a foreclosure, but they can’t complete it.    So, if a SSA (Short Sale Agreement) is for 120 days, they can start foreclosure on day 5 and complete it on day 121?    What’s the average marketing time for single family residences right now?      Yeah, I thought so.

While awaiting the timely return – does that mean on day 15 they can do it?

Moving on….
In the section about Payment Forebearance:
Servicers must develop a written policy in accordance with investor requirements
So, the government is suggesting that they do one thing (lower payments to 31% of income) but the servicers have to develop a policy in accordance with investor requirements.    Guess who trumps who on this one?    Yeah, my bet is on Wall St. too.

The servicer, on behalf of the investor, will authorize the settlement agent to allow up to an aggregate of $3,000 of the gross sale proceeds as payment(s) to subordinate mortgage/lien holder(s) in exchange for a lien release and full release of borrower liability. Each lien holder, in order of priority, may be paid three percent (3%) of the unpaid principal balance of their loan, until the $3,000 aggregate cap is reached.
Okay, let’s look at some math here, a lender did an 80/20 back in 2006 and it’s now up for a short sale.   The property value has fallen by 25% (I’m being generous) so the 20% has no equity and the 80% is 5% under.    The governemnt is now saying that the first mortgage lender can say, “Here, Mr. Second Mortgage Lender, you get $3,000, go away, write off your 20% second mortgage and don’t ever talk to the borrower again because they are done with you.”  

How readily do you think second mortgage investors are going to agree with that?    Yeah, I thought so too.

Servicer Incentive. The servicer will be paid $1,000 to cover administrative and processing costs for a short sale or DIL completed in accordance with the requirements of HAFA and the applicable documents.

Ooohhhh, so if Mr. Banker agrees to take a $50,000 haircut on a particular loan that’s on their books, the Treasury is going to give them $1,000.    That’s exciting!

As a condition to receiving the incentive payments offered through HAFA, servicers are required to provide periodic HAFA loan level data to Fannie Mae, in its capacity as program administrator.

This is interesting – Fannie Mae is the administrator.   I feel better now.   They have done a very good job of underwriting and handling their portfolio, so I’m sure it will all work out just fine……

And one final lowlight…..

Servicers must comply with the HAFA short sale and DIL requirements specified in this Supplemental Directive and any subsequent policy guidance. Servicers must have adequate staffing and resources for responding to borrower requests for participation, for receiving and processing HAFA documents in accordance with program guidelines and for ensuring that inquiries and complaints about HAFA receive fair consideration, along with timely and appropriate response and resolution.
Treasury has selected Freddie Mac to serve as its compliance agent for HAFA.

Two points on this one – it says that servicers must comply but it doesn’t cite any sort of enforcement or teeth in the rulings.   Also, it’s got Freddie Mac as the compliance agent.   So we’ve got Freddie auditing Fannie?   Aren’t these the two companies that the government had to take control of because they were going to crash and burn?

Second point – it says the servicers must have adequate staffing.   How?   With what funding?   I hate to break it to you folks, but these departments aren’t about making money and as we’ve all seen demonstrated on Wall St, if it ain’t about making money, they aren’t all that interested. 

So, long and short of it, (and thank you for reading this far), here’s how I see this new HAFA program:

• A decent idea
• With a couple of good points.
• But not very well thought out.
• And with absolutely no teeth in it.

So this is going to go the same way that HAMP did.   it’s going to take up a lot of time, energy, money and press and not make a substantial difference in the housing market or in the credit/foreclosure mess that is deepening rather than getting better.

What’s it going to take?    Systemic and Substantial Deleveraging – on many levels.

I’m working on some columns for our new site, All Markets Considered laying out my thoughts on how to accomplish that (and you thought this was a long post?)

Keep in touch, and I’ll do the same.

Tom Vanderwell

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