Saturday, January 2, 2010

Now We Have HAFA within HAMP to Stem the Housing Crisis

In plainer language, we have the Home Affordable Foreclosure Alternatives Program, a new program announced on November 30, 2009, which is part of the Home Affordable Modification Program courtesy of the U.S. Treasury Department under Obama Administration.

Home Affordable Foreclosure Alternatives Program (HAFA)
(National Association of Realtors)

"On November 30, 2009, the Treasury Department released guidelines and forms for its new Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is part of the Home Affordable Modification Program (HAMP). HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP is available at

"HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which will issue their own versions of HAFA in coming weeks."

HAFA seems to be in response to the criticism that the administration's loan modification program (HAMP) is not working. The article lists the program features of HAFA in bullet points. They include:

  • Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
  • Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
  • Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
  • Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).
The 2nd bullet point looks like the result of lobbying effort by the realtors. But that aside, my question is: What's in it for investors?

Other than up to $1,000 for giving some scraps for the 2nd lien holders?

I think I know the answer.

Many investors who bought distressed mortgages may be already backstopped by FDIC. If a house is foreclosed or sold on a short-sale, and if the realized amount from foreclosure/short-sale is less than the amount the borrower owes on the house, the investors of the loan will receive 80 to 95% of the difference from FDIC under loss share agreement like the one FDIC has with the investors who purchased IndyMac. (FDIC is, by the way as you know, broke).

The kicker here is that these investors probably paid for a fraction on a dollar for these mortgages. If FDIC's asset liquidation is any indication, they are sold at anything from 3 cents on a dollar (non-performing) to 70 cents (performing) on a dollar.

Let's say here's a house in danger of foreclosure. The mortgage outstanding on the house is $500,000. The market value is determined to be $350,000. Now the investors agree to a short sale at that price. To compensate for the loss, FDIC will give $120,000 (80% of $150,000 loss) to the investors. But wait! These investors purchased this mortgage at $250,000 (50 cents on a dollar). So by agreeing to sell the house at $350,000, they will already have made $100,000. On top of that, FDIC will give another $120,000. Total of $220,000 profit on $250,000 investment. 88% return. The return would be much higher if they used leverage (PPIP anyone?).

With such a perverse incentive in place, investors don't have much interest in loan modification; they would rather foreclose and pocket the quick money than going through a slow process of loan modification. So now the government has stepped in again and is telling the servicers/investors to be a little less greedy; instead of foreclosing, how about short-sale? "You will still get compensated for your "loss", but it may just take a bit longer. It will make you look good in the eyes of distressed homeowners, you know, if you give the appearance of taking some hit ..."

Now, the next question is: Who are these investors?

Or put it another way: Do you know who owns your mortgage?

At this point, it is very safe to assume the bank who gave you the mortgage no longer owns it. It's been sold long time ago. Occasionally, you may get to know who owns your mortgage when there's a change of a loan servicer. Then you may get to know that your loan is actually owned by a bank other than the originating bank, Fannie Mae or Freddie Mac (the wards of the state who have just been given an unlimited ATM card by Uncle Sam), a hedge fund that manages billions of dollars, or that your loan has probably been turned into some kind of securities (MBS, CDO, squared, cubed, who knows) as you may see a combination of alphabets and numbers as the investor.

A hedge fund manager has this to say in a New York Times article ("U.S. Loan Effort Is Seen as Adding to Housing Woes" 1/1/2010) about "clearing the housing market" by allowing foreclosure and short sale:
“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”
Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.
Yes, that may be all true. But it is probably a good bet that his firm is invested in residential mortgages outright or in a securitized form, which they probably purchased on the cheap. He'd rather see his fat profit sooner than later, wouldn't you think?

So, again and again, the government is there for the big boys, making sure that they profit handsomely.

What will the distressed homeowners get after the short sale under this HAFA? No house, battered credit record, and $1500 for relocation. Oh and the peace of mind that the first lien holder cannot come after you for deficiency. No guarantee though of the 2nd lien holder...

Here's the link to the November 30, 2009 Supplemental Directive announcing HAFA within HAMP (27 pages of the total 43 pages are sample forms and exhibits).


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