Did It Just Get Easier for a Short Sale
Considering refinancing your home for those summer improvements? Probably not going to happen. (Patrick Hajzler/sxu)
Maybe, kind-of, sorta.
It is true that on Monday, April 5, the Home Affordable Foreclosure Alternatives (HAFA) went into effect and all the rhetoric would make you believe it is a great-great thing. But, we’ll see.
The Good About Home Affordable Foreclosure Alternative Plan
There is a lot in the HAFA program that gives you something to be excited about.
- Quick Response – The policy states that seller’s have three days to get information to lender and they have 14 days to give a response on the short sale status.
- Pre-Contract Short Sale Approval – One of my biggest pet-peeves with short sales right now is that the seller has to wait until they have an offer to find out if the bank will approve them for a short sale. However, HAFA is designed to change that. The bank will have to approve the short-sale prior to listing and provide the seller with an approved “net percentage” of the loan that they must receive for the deal to go through. Combined with the first point this could be a major improvement to short sales.
- Incentive to Perform – The seller, lender, and junior lien holders all have the chance to receive cash for performing the short sale.
- Ends Duplicate Contacts – To qualify for HAFA you have to attempt to modify your mortgage through the HAMP loan modification program. However, if you are unable to modify the loan, the information you provided is to be used again in your HAFA evaluation.
- One Stop Documents – One of the biggest challenges right now is that every servicer has their own little nuance to the short sale process. However anyone under the HAMP program would be required to use a standardized format for the transaction. Making it easier for real estate professionals – and their clients – get the proper paperwork to the bank at the right time.
It has some benefits, and I think if done right it could assist some of the upside down home owners that are currently facing foreclosure.
The Bad About Home Affordable Foreclosure Alternative
The “bad” in this plan is equally as taxing to me. I’m struggling with a lot of the pieces of it. It sounds too good to be true, so you know what that means.
- Who Will Take Part? – I’ve heard this referred to as a “law” by more than one person and they are wrong. It is simply a directive from the Office of the Housing and Urban Development and that limits its effectiveness. Those that are currently part of the HAMP program are being required to add HAFA — a list of 114 lenders nationwide. By comparison, there are 641 FHA lenders in the state of Ohio alone.
Is it really going to be easier? (Andrew Beierle/sxu)
- Why Wouldn’t You Take Part? – Ahh, we talked about how rosy this little piece of legislation sounds. But buried down deep in the document is a provision that allows any junior-lien holders to only recover $6,000 in the transaction. And they have no ability to go back and recover that loss. Let’s consider a house in California for example where seeing 100% appreciation on real estate wasn’t uncommon. If I bought my house for $100,000 and have a second mortgage of $75,000 that second mortgage which was guaranteed by the house will only be able to receive up to 6% or $6,000 total. This is going to play out in one of two ways:
- Second Mortgage Death – There is already very limited “cash-out refinance” options available to home owners, but this will effectively kill the entire second mortgage market. Want to add the addition on your house? There will be no second loan to make it happen. Looking to add a Home Equity Line of Credit? Those will disappear.
- Rates Will Reflect Risk – There is no such-thing as free lunch. The investment will always reflect the risk in the transaction. If I have a chance to lose the majority of my investment if you stop making payments — you can be certain the interest rates are going to be sky-high. In essence even if they continue offering second mortgages, it will essentially kill the secondary mortgage market.
- Investor Guidelines – A provision for those taking part in the program allows them to include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation to determine if they’ll take part in HAFA. In essence, as long as the investor is consistent with its applications it could go entirely against HAFA. And even within the same bank there is going to be numerous different investors, so I did a deal with Bank of America last week with investor A, this week with investor B it could be an entirely different ball game.
- Was It Really Necessary? – Rewind to late 2008 and early 2009, and the short sale departments are overwhelmed and the banks are not really considering short sales to be a priority. It like trying to put out a fire with a kinked garden hose, just not happening. However, just in the last 3-4 months, I’ve seen amazing improvements within the lender market on responsiveness when it comes to short sales.
There is going to be fall-out from this program and I fear that it will be reflected in higher interest rates for purchase loans and a the extinction of the second-mortgage market.
Toby’s Thoughts
I don’t look at this with a lot of excitement. We heard the same rhetoric in 2007, 2008, and 2009 for other “saviors” to the house’s cycle.
Trust me, I would love to see this work. It has some very interesting pieces that I think would help get these short sale transaction completed and moved back into a viable part of the community.
But, any time the government is involved I fear the bill has more bark than bite.
And right now, we have all the barking we can take.
