Proposed Short Sale Guidelines (HAFA) – Part 3
So, we’ve gone over what properties qualify in the proposed guidelines, how the bank will qualify a seller to be in the program, and the rules and regulations the banks will have to follow if they choose to be in the program. Now, I’m gonna get down to the problems with this document and its implementation in the real world. (You know, the place where we can’t pay our mortgages with kittens and rainbows).
1. This program assumes that the banks are capable of meeting these timelines with the amount of faulty loans on their books. That, my friends, is just crazy talk. Some of the little banks may be able to meet the expectations outlined in this document, but the big boys will never be able to hold up their end of the bargain. First, these banks are horribly under staffed in their loss mitigation departments. Why? Well, who wants to work in a loss mitigation department? You get yelled at all day and get the joy of working with emotional train wrecks. Employee turn-over is extremely high in these departments. So, the banks will have to hire more employees to handle the amount of short sales that will be requested and processed. Where are the banks going to get the money to not only pay these new employees, but train them adequately to do the job effectively? Oh, that’s right, bail out money… cause we know the CEOs will not be foregoing their bonuses to make the banks work more smoothly. Another problem in the this arena is that the banks are being asked to hire more people to facilitate this program and the bank’s benefit is $1000 a transaction. Ummmm… $1000 a transaction does not offset the cost of an employee. It seems that from this perspective the banks have very little incentive to participate.
2. Yes, I said participate. This is an OPTIONAL program. Banks had until the end of December to alert the Treasury Department that they would be participating. I’m surprised we all didn’t get trampled in the mad rush to sign up. (sarcasm) Many of the larger banks are working on streamlining their own short sale process that is advantageous to their bank. Why on earth would they participate in a program that limited their ability to recuperate funds? Now, I’m not a business major, but I don’t think banks are in business to lose money. And at this point in history, they are trying to mitigate their losses. The $1000 participation bonus just isn’t enough incentive to take bigger losses by not being able to go after the defaulting borrower civilly. The guidelines state the the lien holders must fully release the borrower from future liability for the debt. At some point consumers need to held responsible for taking out risky loans. Houses are one of the few products that people purchase and expect to be able to sell it at a profit. When we buy a car, we expect to sell it at a loss. When we buy a tv, we expect to sell it at a loss. Investments are risky and there are no guarantees. Again, it just doesn’t make sense.
3. The banks are all expected to have the same standard process, the same documentation, and the same timeframes. We might as well all take jobs herding cats. Banks don’t even understand their own paperwork, much less buearocratic paperwork. And, what happens to all of the short sales that are currently in the system? Do we have to start all over?
4. One of my favorite guidelines is that REALTORS(R) will be expected to pay the cost of any contractors the banks hire to help facilitate the process. Well, thank you Treasury Department for telling the banks that they can no longer cut reasonable commissions, but allowing them to charge me to do THEIR job. Loss mitigation departments are already under staffed so we can safely assume that banks will need to hire contractors to facilitate these deals. And, Yay! I get to pay for that. Well, I’m here to tell you, I WON’T pay for a bank to hire someone else to do the job they should be doing. I didn’t give out the bad loan, I didn’t default on the mortgage, and I’m not responsible for the economy tanking.
5. The guidelines also state that transferring all of the documents through electronic means could be a problem. They haven’t quite worked this detail out, but I’m sure they will before the program really takes effect in April. (sarcasm)
6. One of the biggest problems I have is that banks will be establishing the minimum net they are willing to take on the property BEFORE the property is under contract. This can cause huge problems. I recently had a short sale where the bank insisted on a net. The purchase price had to be $410,000 to meet that net. The house appraised at $400,000. The bank demanded the purchaser pay more for the house than what it was worth by bringing $10,000 in cash to the table to make up for the difference. Isn’t this type of behavior what got us into this mess? The market bears what the market bears. I don’t see banks brushing up on market data and conditions for every area that they have loaned in. They are doing short sales to mitigate loss. That’s what they will do, regardless of how it effects the consumer.
7. One of the funnier guidelines in the document is that properties that can qualify for the HAFA program should have also applied for the HAMP program. The HAMP program is the loan modification program. What a successful program. (sarcasm) How many loans have been successfully remodified? How many homes have been saved from loan remodification? Maybe a handful. Loan remodification only allows to the banks to adjust their numbers and the borrower to postpone a short sale or foreclosure. It is not the end all, be all answer to our problems. It is band-aid.
These are the points that I see wrong with this document. I know that NAR and many designation and certifications for REALTORS(R) are touting this document as the glue that will bring the real estate market back together, but I can’t agree with them. I think this document gives false hope to consumers and REALTORS(R). I think it is pretty poorly thought out by individuals who aren’t dealing with the consumer side of short sales. I think the document means well, but all in all, it’s a waste of paper. I wanted to explain the document so that everyone would start thinking about what changes, if any, this will bring to the real estate market. Let me know your thoughts. I’d love to hear them!
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Thank You! Thank You! Thank You! You said it better than I ever could have!
Sarah good job with this series. I could not agree with you more, that fact that NAR and other organizations are endorsing this program makes me wonder at all if they read the 43 pages. This program is a nightmare for the home seller, buyer if they are an investor, the agent and the bank. So who does this help?
[...] Proposed Short Sale Guidelines (HAFA) – Part 3 – I have read all three parts, this is a good summary and I recommend everyone real all [...]
Awesome series! This should be shared with every Realtor and Broker around.
Note: Isn’t it amazing how most “fixes” that the government comes up with that are abbreviated by 4 letters (e.g. HAFA and HVCC) are synonymous with another set of four letters the first one being “S”
thanks for sharing, I’m with you, I don’t think this is going to help the process at all. The short sale market is ugly.
Ms. Stelmok,
I stumbled across your blog and I appreciate the tongue-in-cheek style of your first post on this topic and your direct communication throughout. Your mild cynicism no doubt serves you well.
I’ve been trying to better understand the likely impact of the HAFA program. After carefully dissecting an unrelated program from Treasury (PPIP), I’ve concluded that policy direction can be better inferred from careful analysis than reliance upon casual observation or Treasury’s public statements. In the case of PPIP, I concluded the program amounted to a stunning scheme to prop up asset prices at taxpayer expense (many subtle details; I won’t bore you).
My question on HAFA requires just a few points to set up. As you probably know, Treasury quietly announced on 12/24/09 that they would provide unlimited backstop to Fannie/Freddie losses thru 2012. I understand that you believe the program is optional for lenders, and presumably there’s no language you can find that would strong arm note holders into arriving at Minimum Net Proceed calculations that might be characterized as “fire sale” pricing. But what if Fannie/Freddie engaged in such pricing behavior? Could they not move the market substantially based on their share of loans? I cannot find a listing of participating lenders; however Freddie’s last quarterly 10Q statement referenced the HAFA program—it is clear they’ll be participating.
I am fully aware that Treasury’s strategy so far (across the entire debt crisis) has been to support asset prices and do anything to delay price discovery. However, if they were to shift strategy, for whatever reason, to force market clearing pricing, could they use HAFA to substantially move market prices? My understanding is that there are nearly 3/4 million homes in the HAMP pipeline now, most of them likely to be eligible for HAFA. With resets on ALT A and option ARMs ramping up, the deluge of supply could eventually be quite large. Given Fannie/Freddie have a large portion of loans, could they not be a major price setter?
I’m interested in whether you’d place any merit in the questions I’ve outlined above. To the extent that you do, do you see anyway to confirm the possibility before it obvious to everyone? Is there sufficient wiggle room under the plan to derive fire sale pricing, if a lender was willing to do so? Of course such a lender would be insane, unless others paid for their losses, and they had other reasons to expedite write-downs.
Thanks,
Wade
Great post. I just quoted my favorite line from you “it’s a bunch of crap” in my own blog post about HAFA. Great stuff & great blog!
While I think HAFA is going to be a very rough go, just like HAMP is. I do think that it is going to be here with us at least for the next 18 months. The third party venders for the lenders are really going to be like the companies that do REO work for the lenders and if you want to have Bank Directed HAFA short sales, this is where they are coming from. If you don’t want to pay a portion of you commission I completely understand. Just think that it is going to happen and that a lot of short sales may be done this way.
The real question is how many short sale borrowers are going to continue to pay a monthly mortgage payment up to 31% of gross income during the short sale process? I am not sure how many are going to do this knowing they are losing the house to short sale and only going to get $1500 at best at the end of the process.
Larry – How do you think the large banks will handle the new timelines? From the bank reps that i’ve talked to, they can’t. The expense is too great. No one seems to be able to find a list of banks that have signed up to participate as a 1st lien. I can find a list of banks that signed up to participate as the 2nd lien holder. I do think we will hear about the program for at least 18 months, just like we’ve heard about HAMP, but I don’t see it helping very many consumers… just like HAMP. Defaulting borrower’s qualify for the program, so the 31% gross monthly income mortgage payment doesn’t play a roll. The borrower just has to have a monthly mortgage payment that exceeds 31% of their gross monthly income. This program is lacking, in delivery and function. It is not the answer to the problem. It is a pretty little distractor.
Wade – The last thing I want to see is “fire sale” prices! That only hurts local economies worse. Homes should sell at market value. Would “fire sale” prices fuel the real estate market in the short term? Yes. But it would be devastating in the long term. It puts even more people in the whole in terms of lost home value, tax revenues go down, more people have to short sale; it’s a vicious cycle. Fannie and Freddie also reference the HAMP Program. However, that program has been a big fat fail, as well. It is up the individual banks to facilitate the short sale. Not to mention, if a defaulting loan is Fannie or Freddie, I am finding the short sale time line actually increases. It is far easier to work a short sale that is not Fannie or Freddie at this point. Going back to prices, the last entity that should be setting prices is the government or any government agency. We might as well live in a communist country if that’s the way things are going. Again, “fire sale” pricing just to move the inventory isn’t the answer; well, it isn’t a smart answer. At this moment, in my market, we are not having a problem moving the inventory. We have a problem moving it in a timely manner. Other states have laws that prevent short sales from happening in a timely manner or make foreclosure a difficult and lengthy process. Virginia does not fall into this category. I just don’t see any good way to implement this program in it’s current state. In the last 2 months, I have seen some larger banks make their short sake process a little easier and faster. It took us 6 years to get into this mess, it’s going to take at least 4 more years to get out of it. IMO
I appreciate your comments. They definitely made me think!
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