Monday, November 30, 2009

Administration quietly announces short sale plan

Since the housing news was dominated today by the administrations announcement of their displeasure for the low number of HAMP trial modifications going permanent the "foreclosure alternative" plan received little press. There is no mention of it on FinancialStability.gov or MakingHomeAffordable.gov, the only place it can be found is on the servicer specific website HMPAdmin.com. Clearly the administration wants the public to focus on the fact that they are trying to keep everyone in "their" homes while quietly planning for the reality that many could never afford the homes they bought over the long term. People are clearly overleveraged and getting out from under their debt through a short sale or deed-in-lieu is a smart move for both sides. The houses maintain their value better because they are occupied and the borrower reduces their debt load and reduces the time before they are able to get another home through FHA or the GSE by cooperating with a short sale.

The high level details from the
press release (My comments added in red):

Foreclosure Alternatives
The HAFA program simplifies and streamlines the use of short sale and DIL options by incorporating the following unique features:

Complements HAMP by providing viable alternatives for borrowers who
are HAMP eligible. In other words, borrowers who are eligible for HAMP but smart enough to realize it isn't in their best interest.

Utilizes borrower financial and hardship information collected in conjunction with HAMP, eliminating the need for additional eligibility analysis.

Allows the borrower to receive pre-approved short sale terms prior to the property listing. Extremely important point, this turns short sales from the nightmare they are now into a smooth transaction. Short sale prices will improve as a result and transaction volume should go up.

Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement. Clearly a win by the NAR, the max commission is set at 6%. In many places in California 5% is pretty much max. Investors will be getting 1% less in California as agents will be sure to be smart enough to be asking for 6%. The listing agent will probably get that particular bonus right now with inventory so low there is no reason to up the selling office commission.

Requires that borrowers be fully released from future liability for the debt. A clear win for borrowers, especially in many of the recourse states or who refinanced in places like California which allows recourse on refinances. Borrowers will be much more likely to participate if they realize after the sale is done they are out from under their massive debt. Like the commission deal point this one comes at a cost to investors.

Provides financial incentives to borrowers, servicers, and investors. Borrowers get $1,500 for completing a short sale, Servicers get $1,000, investors only get money for settling junior liens, up to $1,000.

One may ask what is in it for the investor since several of these deal points take money from them. The loss will most likely be less in the above scenario over a foreclosure. Since it takes so long to foreclose that is many months the investors money is tied up with no return. Also the house will most likely not be maintained once it is clear foreclosure is inevitable. Then there is the turn around time for getting the house onto market once it is foreclosed. All add up to increasing the investors loss.

This is the best program I've seen yet from the Administration because it deals with the reality of the market. It has tremendous potential of reducing the overhang of "shadow inventory" on the market. The only downside I have seen so far in a quick skim of all the documentation is that the program doesn't officially start until next April though services may opt to start sooner. I think with the political pressure being brought on servicers to reduce foreclosures and the desire for servicers to please both their investors and regulators this program could become a home run and could be a real beginning of the end of the housing crisis.

5 comments:

Sean said...

I think you're being overly optimistic about this "plan."

It makes short sales less desirable for lenders. If your're the 1st lien, why would you take a significant haircut when the borrower and his/his agent are not taking a haircut, and if you might do better at Trustee Sale? If you're the junior lien holder, why would you take only $3k, when you are likely owed $100k-$500k and you're being asked to give up recourse rights? As it is, junior lienholders are preventing short sales even when offered $10k or $20k in many cases.

For regulated lenders holding the loans or the pass through certificates on their books, approving the short sale also equals a recognized loss, whereas the current Wizard of OZ accounting rules for mark to fantasy accounting let you carry the full loan value basically until you hold the foreclosure auction. So Treasury has created its own clustefuck of contradictory incentives there.

Finally, it opens up a whole new frontier of fraud, for many of the people who borrowed the money using fraud or lender enabled lies in the first place.

A better plan would be to: (1) mandate that nonperforming loans must be put into the foreclosure process within 3 months of initial default and trustee sales or auctions must be held within 12 months of initial default, and (2) for regulated financial instituions, any nonperforming 1st loan must be marked down to 10% each month on the books beginning with the 3rd month of default, while junior loans must be marked down 10% each month beginning immediately upon default.

Effective Demand said...

Sean,

It is not often I am accused of being overly optimistic!

The key thing is that the investors are having a very tough time getting their hands on the homes to liquidate and get their cash out. The government (both state and federal) is interfering at every point and it is maximizing the investors loss. This is one of the ways the investors can get out from these toxic assets and they get the asset earlier in the process so it is in better condition than if it went through to foreclosure.

For the loss issue, many loans have been written down already.. especially those from the defunct lenders taken over by the regulated banks. This was down to maximize the tax loss because the tax rules allowed the banks to offset profits from previous years with losses the defunct lenders already recognized. The problem is again the lenders can't liquidate and get the money out. It is a non-performing asset with limited ways of maximizing the return. The short sale process will in many cases maximize the return, it is the best choice of the limited bad choices the government has given them.

The fraud part is a definite issue but that is always the case for everything but foreclosure. This plan doesn't change the fraud dimension much.

e.sean.mcloughlin said...

ED,

I have a question about the "investors." I assume we are talking about the pass through certificate holders who bought the MBS that these loans were pooled into. I've looked at the pooling and servicing agreements on some of these and they don't give the investor any way to liquidate, except to sell the certificate to some other shmuck. Right now they very, very infrequently trade at 50-60% of par value.

Most of those same agreements severely limit the right of the servicer to modify the loans in the pool - they basically have to keep the term, principal and rate the same or they violate the agreement. So the only way to get the nonperforming loans liquidated is to foreclose. For non-GSE backed loans, other than the moratoriums imposed and long since expired, there is no government interference holding up foreclosure sales. So why are servicers (banks) not pushing them through faster to auction? And why are "investors" not demanding it of the servicers?

Effective Demand said...

ESM,

"So why are servicers (banks) not pushing them through faster to auction? And why are "investors" not demanding it of the servicers?"

The answer to those questions is also the answer to why the administration has targetted the servicers and not the investors in the mortgage chain when trying to solve this problem. The servicer owns the right to collect payments and even modify mortgages according to the PSA's for the investor. What the administration has done is pressure the servicers (most of them are branches of large banks) to not foreclose, to ignore their fiduciary duty to the investors. They have also passed laws saying you can modify mortgages and you are indemnified from being sued by your investor as long as what you are doing is the highest net present value. They have completely stepped in between the contract of the two parties and redefined the terms.

The problem is the servicers want to stay in the servicing business so if they ignore their investors wishes the investor won't do business with them again. The servicers also want to stay in business period and have to listen to regulators who say don't foreclose and modify mortgages. They are literally between a rock and a hard place. I have no idea why there isn't more outrage about this breach of private party contracts. It is clear when push comes to shove the investors are supposed to take the loss not the homeowner. Not only is the investor supposed to take a loss they take the maximum loss possible since they can't get the asset to liquidate it.

I think the banks really want to foreclose on a bunch of homes that are clearly unmodifiable but are being held back. Back in June when all the various moratoriums dropped off trustee sales started spiking.. the regulators freaked and called all the servicers to a meeting. Trustee sales dropped back down and have been very regimented ever since. There is a de facto moratorium of "too many" trustee sales.. with "too many" defined by the regulators at any one point in time.


I think the banks are willing to modify a bunch of loans but I think they also want to foreclose on a bunch as well and they don't want to be seen favoring one side or the other and so we have this stasis in the market.

Sean said...

ED,

Thanks. This makes me hope that the investor lawsuit against Countrywide (which survived its first challenge in federal court and was remanded to state court) will succeed in a big way and scare the banks/servicers more than Obamaa/Geithner do. This nonmarket they've created is totally disfunctional above the $900k mark in SoCal.