HAFA... predictable results

Obciously, HAFA hasn't been such a 'game changer' as my team had predicted over a year ago.  Unfortunately, something happened to my 'HAFA prediction' that I posted in April 2010... (luckily it was re-posted here so I could copy and paste it below) so I am posting it again below.  If you want my updated prediction on HAFA for 2011 based on the revised guidelines that go into effect 2/1/2011... HERE IT IS.

 

What the HAFA is going on? - Top 5 Reasons Why HAFA Won't 'Revolutionaize' The Industry

I am totally surprised, shocked and amazed at how many people have fallen into the; "government will fix everything" trap.  These are people who are normally completely rationale and sane individuals who don't like government butting into their lives, but for some reason, common sense has left them when they begin to talk about HAFA.

Now, don't go off pouting and getting offended just yet (unless you really want to, then please, go now), because I am going to lay out 5 logical points as to why you should not 'expect' much from HAFA... and as you know, keeping expectations low is the best way to not get burned or upset when things don't turn out how you wanted them to (trust me, I am an optimist... but I also realize that nothing is EVER as good or bad as it first seems).

Let me say this so my position is clear, I think HAFA is AWESOME for the seller... full release of liability and $3K to move out... but unfortunately it is not going to work on a large scale for the reasons I've written below.

Without further adieu, the top 5 reasons why HAFA won't 'revolutionize' the industry:

 

1.  HAFA only applies to primary residence homes that are occupied, where the first lien was originated prior to 1/1/09 and the seller's payment is less than 31% of their gross income.

2.  First lender gets reimbursed $1,500 plus another possible $2K (max).

3.  Junior liens get a max of 6% of their UPB (unpaid principal balance) or $6K aggregate, whichever is less.

4.  Banks must set a 'minimum net' amount before they entertain a HAFA short sale and they have 10 days to approve/deny a short sale offer.

5.  HAMP...

 

Ok, so maybe those 5 without further clarification don't seem so bad... let me draw some more info out of your brain (this 'logic' is already in your head, let's just use the old noodle to connect the dots here):

1. HAFA only applies to primary residence homes that are occupied, where the first lien was originated prior to 1/1/09 and the seller's payment is less than 31% of their gross income. 

The fact that second home and investment properties are excluded cuts out quit a few short sales from being included in HAFA... did you know that owner occupied homes have lower 'default rate'?  Owner occupied - 4.5% vs 5.5% for second homes and 6.5% investment properties and to top them all were 'straw buyers' or owner occupied that were now 'investment' at 7%.  Granted, most residential mortgages in the U.S. are Owner Occupied loans, this part of HAFA will still exclude at least 15%-20% of all short sales.

2.  First lender gets reimbursed $1,500 plus another possible $2K (max).

First, let me explain how the first lender 'may qualify' for the extra $2K (max).  The only way they would get the 'extra' money is if there are any junior liens, the first lender has to 'pay them off' to get them to agree to release their lien to do the short sale. 

With HAFA, the first lender will receive $1 from the Federal Government for every $3 they allow the junior lien to have from the sale of the property.  Obviously, there are limits and strings attached.  The aggregate total that can be paid to junior liens is $6K (so, if there is a second and a third, they have to share the $6K).  Oh, and the junior liens can only get a max of 6% of their unpaid principal balance (UPB).

Now, let's put YOU in the shoes of the first lender for a moment.  If you are owed a boat load of money (let's say $400K) and the government is willing to give you $3,500 to comply with their new 'program' (which requires you to pre-approve a price in 30 days, approve an offer in 10... when you can't even currently do it in 4 months), how easy would that be? 

To top it off, if you (remember, we're still pretending you are the first lender) have Mortgage Insurance (whether it be lender paid or borrower paid) your insurer also has to agree to release ALL liability (meaning, they can't come after the seller after the close of escrow, they can't ask for any cash contribution at closing and they can't ask the seller to take an unsecured note for any portion of their loss).  How easy would that be to pull off? (For those who haven't done too many short sales... the MI company will often ask for cash at closing, an unsecured note or start trying to collect after the sale if the seller received a release of lien only).

Oh yeah, and if there is a second lien, if they don't release their liability... then you (as the first lender) don't get anything from the Federal Government and the seller doesn't get their $3K for moving expenses and it is no longer a 'HAFA Short Sale'.

So #2 take out AT LEAST another 20%-30% of the Non-GSE loans... so we are down to about 50%-65%.

3.  Junior liens get a max of 6% of their UPB (unpaid principal balance) or $6K aggregate, whichever is less.

Wow... I don't know where to start, but let's just reiterate what I mentioned above... the second lender can KILL the deal and they can demand one simple thing which would make this a 'non-HAFA' short sale... that one thing could be A) $2,000 contribution from the seller B) an unsecured note for $10K or C) refuse to release their liability.  How many second lenders are willing to release their lien AND liability for 6% of their UPB?  Not too many, in fact, the trend has been for most to expect 10%-30% of their UPB and EVEN THEN REFUSE TO RELEASE LIABILITY!!

So, are junior liens going to jumping up and down for joy?  Again, let's role play (it's fun)... this time, let's say YOU are a junior lien holder and you lent $100K as a HELOC on a home.  The seller is doing a HAFA short sale (per the first lender) and you are offered $6K to "release your lien and release the seller of all liability".  Hmm, what should you do?  Should you tell the seller you want an additional $4K at closing so you can get at least 10% of your UPB back?  Do you tell the seller no and let the first foreclose and then sell the collection rights for $7K to a collection company?

You see, it's not a better solution for most junior liens, therefore, they aren't all 'giddy' and excited for HAFA... especially since they have now become accustomed to getting 10% of their UPB ...WITHOUT the government being involved.

4.  Banks must set a 'minimum net' amount before they entertain a HAFA short sale and they have 10 days to approve/deny a short sale offer.

That part about the "10 days to approve" has agents SO EXCITED... but having worked closely with the banks and having my partner as a former asset manager and loss mitigator, he has explained to me EXACTLY how the banks will EASILY side step these 'rules', then take 4-5 months to do a short sale and STILL get paid their $1,500-$3,500 from the government.  Hold on to your hats:

The first lender gets to determine their own fair market value and their own 'formula' for setting their 'minimum net' amount (which, by the way,  they can't ADJUST UP for 120 days... but they can adjust it down at any time) and they have to approve any offer that will net them that preset amount (or more) within 10 days of receiving the offer and estimated HUD-1. 

So... if you were a lender and didn't want to get stuck with a low ball offer and a low payoff vs. fair market value, what would you do?  You would probably A) set your opinion of market value a little high and B) write your formula for figuring the net payoff at 94% of the 'inflated market value' that you came up with. 

If you were a lender, why would you do this? 

Simple.  Lenders are not 'obligated' by HAFA to accept a short sale below their 'preset net payoff', but the lender has the right to accept a LOWER payoff if they choose to.  You see, if I'm a lender and have a minimum net number set at $120K, but there is an offer that will net my bank $110K, I don't HAVE TO accept it, but I CAN ACCEPT it, if I so choose. 

By doing this, banks can 'deny' any offer that they want (because only 'crazy' high offers will come in above their number, which would obligate them to accept their offer in order to remain in compliance with HAFA) and they can accept the offer that they want to, after they have taken their sweet time to run their numbers and figure out the true market value.

This won't necessarily 'disqualify' many short sale from HAFA, but it will not be 1-2 months to do a short sale with HAFA as many agents had hoped.

5.  HAMP...

I don't think I need to say much here.  Have you seen the numbers on HAMP (the government's loan mod program)?  Is this some kind of joke?  I thought I had heard some guy say that, "4 million homeowner will be saved from foreclosure through HAMP".  From HAMPs beginnings in May 2009 to Oct 2009... they did 5K mods.  In 10 months (May 09 through Mar 10) 170K mods were approved through HAMP... even if we take the accelerated rate of the last couple months (optimistically- 45K a month), it will take the Federal Government 7+ years to reach the 4 million mark.

This alone should be enough of a track record to teach agents (and homeowners) to not 'expect' too much from the government or from banks/lenders.  Government isn't in a position to help much (they have no clue what they are doing with loan mods... and short sales) and the banks don't care about people, but they do care about money (as they should, they are a heartless entity who's purpose it is to make more money).  So the sooner we (real estate professionals) accept the 'players' for who they are and learn to turn to our own genius to come up with solutions and to solve problems and become educated in what's going on in the game of 'short sales', the sooner we will see a change in our market...

 

Trent Chapman

http://www.TheShortSaleGenius.com