Since inception The Home Affordable Modification Program (HAMP) has received much backlash from its overachieving promise from the Obama administration to help prevent foreclosure for 3 to 4 million homeowners across the country. Back and forth deliberation from lawmakers led the Treasury Department to announce enhancements to the program mid-March in the form of principal write-downs on underwater mortgages, an FHA negative equity refinancing program and temporary assistance for homeowners who have become unemployed. Despite the Treasury’s efforts to broaden HAMP’s scope and aid more distressed homeowners in avoiding foreclosure, many housing industry experts have still expressed concern over HAMPs potential to provide results close to the Treasury’s goals.

Earlier this year, Special Inspector General for the Troubled Asset Relief Program, Neil Barofsky, initiated an audit of the federal program as a result of lawmaker disappointment about the program’s effectiveness. According to Barofsky, only a year into the program, Treasury officials changed their outlook on HAMP’s numbers. Barofsky stated the administration now proclaims that 3 to 4 million distressed homeowners will be ‘offered’ help through HAMP, yet only 1.5 to 2 million will actually receive permanent relief over the entirety of the four-year program. Barofsky cites other inherent flaws such as the fact that the HAMP mod period only lasts for five years, after which a borrower’s payments will automatically increase, to the Treasury’s dismal performance in securing servicers to modify second liens, which holds 50 percent of at-risk borrowers, as additional reasons why HAMP has failed thus far.

As of April 30, of the 1.7 million delinquent borrowers the Treasury considers eligible for aid via HAMP, trial offers have been given to only 1.4 million and 1.2 million trial mod plans have been started. The problems lie within increasing HAMP’S conversion rate and turning those trial modifications into permanent relief.

Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office, stated, “The number of homeowners receiving significant relief through a mortgage modification continues to rise”. Caldwell’s claims are indeed true, as according to the Treasury Department’s April data, permanent modifications have been started for 299,092 struggling homeowners. Those figures show an increase of 68,000 or almost 13 percent over March. Of the nearly 300,000 permanent loan restructurings completed, 3,744 have been cancelled. Eighty-one of those cancellations occurred because the borrower paid off the loan, while remaining are the result of re-defaults. While HAMP may show signs of improvement with time, non-HAMP loan modifications continue to outweigh distressed loans modified under the HAMP program, adding to the HAMP skepticism.

HOPE NOW, the private sector alliance of mortgage servicers, investors, insurers, and nonprofit counselors, continues to report month after month, loan modifications that more than double in the amount of HAMP loan modifications. During January of this year, HOPENOW completed 99,499 proprietary loan modifications, almost double the amount of 50,364 permanent modifications finalized under HAMP during the same month. The subsequent month, February, HOPENOW again announced that its members finished over 95,000 proprietary loan modifications, almost double the 52, 905 modifications completed under HAMP during the same month. Of the proprietary loan modifications completed in January and February, 74 and 78 percent included a reduction of principal and interest payments respectively.

After increased success with securing loan modifications outnumbering HAMP’s permanent conversions, the Treasury Department decided to borrow a page out of HOPENOW’s book by expanding the use of principal write-downs as a part of HAMP, in addition to other revisions to the program. Assistant Secretary Michael S. Barr stressed that investors are concerned that negative equity could push homeowners to walk away from their mortgage, resulting in loses for both sides, and that principal write-downs could put borrowers in position for long-term performance.

However, chair of the housing subcommittee, Rep. Maxine Waters (D-California), recently voiced that the Treasury’s addition of a principal write-down piece to HAMP would cause may cause distressed homeowners and financial instructions to suffer together.. Waters stated, “Increasingly, I am unconvinced that these voluntary programs are going to provide the assistance that homeowners desperately need”. Waters cited Morgan Stanley’s recent strategic default earlier this year, involving five distressed office buildings in San Francisco. Waters proclaimed HAMPS principal write-downs will not provide any benefit if financial institutions are deeply underwater with their own real estate investments and increased amounts of principal write downs would cause many banks to go underwater.

However, FDIC Chairman Sheila Bair, threw her support behind HAMP stating that distressed borrowers with severely underwater mortgages, those whose loan-to-value rations are 150 percent and beyond, are more likely to default. On the other hands, Bair noted that models show that the odds of default are greatly reduced when the loan-to-value (LTV) ratio is brought to a lower level, closer to 100 percent, thus benefiting financial institutions two-fold.

According to the New York Fed’s economists, if a borrower’s monthly mortgage payment is reduced by 25 percent by cutting the interest rate only, the borrower is 11 percent less likely to default within one year of loan modification. However, if the monthly payment is lowered by the same 25 percent, this time by taking 25 percent off of the outstanding loan balance, along with a small interest rate cut, the chances that the borrower will  end up defaulting an additional time within one year of loan modification falls by a whopping 27 percent.

The report’s analysts also came to the conclusion that borrowers who have a loan-to-value ratio of 115 percent or higher, pose a 51 percent higher risk of entering re-default status after a modification. Yet and still, a 100 percent LTV ratio seems highly unlikely as many lenders are still on the fence about principal write-downs under HAMP.

First American CoreLogic estimates that more than 11 million borrowers owe more on their mortgage than the home‘s value, while JPMorgan Chase predicts making these underwater borrowers “even” to a loan-to- value ratio of 100 percent would carry an industry-wide price tag of $700 billion to $900 billion. In addition, the cost to Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) alone would be in the ballpark of $150 billion.

Despite charges of failure by lawmakers and other market observers, HAMP’s complete success will remain to be seen as analysis is ongoing. HAMP may not be the solution for every distressed borrower; the program has done a huge part in minimizing foreclosures. While it is true that the amount of trail and permanent modifications lag behind the Treasury’s projection’s for the program, it may be too soon to determine the four-year program’s ultimate success.

Article 2 - What impact is expected from HAFA (Home Affordable Foreclosure Alternatives program) on the real estate market?
1011 WC

After unfavorable results from the Home Affordable Modification Program (HAMP), many real estate industry insiders voiced ambivalence when the Treasury Department announced and released guidelines for a new Federal Government Program, the Home Affordable Foreclosure Alternatives Program (HAFA). Implemented on April 5, 2010, HAFA aims to aid distressed homeowners who fail to qualify for a loan modification under HAMP. The program provides short sale and deed-in-lieu (DIL) options, as well as financial incentives for servicers and borrowers who utilize the HAFA program as a foreclosure alternative.

The Treasury Department raised financial incentives for HAFA participation in late March. Currently, borrowers may receive $3,000 in relocation assistance, and servicers get $1,500 to cover administrative and processing costs for a short sale or deed-in-lieu completed under the HAFA program. Additionally, investors receive as much as $2,000 for allowing a total of up to $6,000 in short sale proceeds to be dispersed to subordinate lien holders.

With tempting, but arguably meager, financial incentives and the amount of households 90 days or more delinquent across the country dwelling in the millions, HAFA sounds like a viable alternative. However, while HAFA will indeed support some borrowers, distressed homeowners, mortgage servicers and taxpayers may all experience inadvertent consequences from HAFA’s good intentions.

Distressed Homeowners

The primary goal of the HAFA program is to help distressed homeowners exercise their options to avoid foreclosure and take the softest hit to their credit history. The financial incentives provided by the Treasury Department to encourage distressed homeowners to choose HAFA as a foreclosure alternative more than will sit on top of cash assistance lenders often offer short selling homeowners. All of these incentives would make short sales seem like the answer to a distressed homeowner’s prayer for relief.

However, many distressed homeowners seeking relief from HAFA may not be clear if short selling truly benefits them out of all cases. Even though the IRS amended rules which previously dealt with the absolved loan as taxable income, many states have fallen behind. For example, in California, if a homeowner short sells her home for $300,000 with a $400,000 mortgage outstanding, at the end of the year she could end up with $80,000 in additional taxable income. Proposed amendments to this law and others like it remain in limbo due to unrelated provisions in the bill. So for those seeking to enter a short sale under HAFA as a foreclosure alternative, there may be unforeseen effects even after reaching and settling a short sale agreement.

Mortgage Servicers

HAFA also aims to provide further incentives for lenders and mortgage servicers who collect payments and manage modification and/or foreclosure proceedings on behalf of lenders, all in hopes to avoid foreclosure. Lenders and servicers receive a $1,500 bonus for each short sale and up to $6,000 to second lien holders. Second lien holders can easily influence short sales by commanding payoffs first lien holders may not be willing or able to make. While the Government would like to think a token payment will prompt second lien holders to oblige, in actuality, the provided financial incentive may not be sufficient enough to cajole second lien holders’ to cooperate.

Additionally, contrary to making the short sale process more efficient, HAFA actually may make the foreclosure process even more arduous than its current condition. Time consuming tasks like supplementary borrower notifications, a required HAMP review of every file and other obstacles to finishing foreclosures may clog the short sales and DILs pipeline adding to the backlog of distressed homes working their way through the system already.

Taxpayers

Of course Realtors supported HAFA legislation because more short sales equal more transactions and more commissions in the biggest downward slump for the housing industry in history. A 5 percent commission has become the effective rule and a trend which, many members of the NAR claim, is causing commission shrinkage with even non-distressed housing markets. To combat commission compressions, The National Association of Realtors (NAR) lobbied forcefully for to include a provision for the HAFA program that would prevent lenders from decreasing a Realtor’s commission. In a short sale falling under 6% of the sales price, taxpayers will bear the burden of handing lenders, servicers and homeowners money, on top of mandates that real estate agents earn a minimum commission on each transaction.

Early Reactions

In spite of speculation, some companies provided positive feedback in the infancy of the HAFA program. Not even a full week after HAFA’s implementation, Loan Resolution Corporation (LRC), a  pre-foreclosure asset manager that acts as a vendor for banks implementing HAFA based out of Scottsdale, Arizona, stated it anticipates a tremendous surge in short sales to follow the recent implementation of the new program.
The company said, “We found that a lot of short sale offers were being withheld from our clients so that they could be submitted to us under the new HAFA rules,” said Travis Hamel Olsen, COO of LRC. “There is definitely substantial interest from the public about this program—this gives them a graceful way to exit the property.”

The big question is if small handouts across many transactions are enough produce any change? Ultimately, the above mentioned consequences will only be experienced to the extent of the program’s definite success. The treasury department expects the HAFA program to promote the administration’s proclaimed policy to increase home prices and whereas the latest Campbell Surveys have showed that  short sales accounted for 18.6 percent of the housing market, property values continue to fall as the volume of distressed properties climbs above fifty percent, HAFA’s positive sentiments have yet to be felt.

While some analysts are still o the fence whether HAFA will flood the market with new short sales increasing the backlog of distressed homes working their way through the system or completely fail and advance the delay of the inevitable normalization of the market, the rising number of foreclosures in this country is simply too large to ignore. On the large scheme of things, provided HAFA still has a few loops to work out, the program is a step in the right direction.