It is much too early to gauge the success of HAFA, the administration's Home Affordable Foreclosure Alternatives program. HAFA guidelines and standard forms were first released in November of 2009. The effective date was April 5, 2010, although participating lenders were free to adopt the program ahead of that date. The November guidelines were revised on March 26, 2010. (You know something is going on if guidelines need to be revised even before the program becomes effective.)
The idea behind HAFA has been to bring uniformity, predictability, and order to the short sale process. Up until now it has pretty much been the antithesis of all those things, with different servicers following different procedures and a general lack of standards and/or accountability.
No one expects the imposition of HAFA rules to bring order out of chaos overnight. Or even in a month or two. As many have pointed out: you will still have the same people with the same levels (or lack) of competence and the same work habits. How much change can a new set of rules bring about? Nonetheless, hope springs eternal; and just about everyone with any degree of involvement is rooting for a good outcome.
The success of HAFA, though, will not depend solely on the implementation of procedures. A great deal will also depend on the cooperation and participation of parties that, so far, have provided some of the greatest impediments to successful short sales. I refer to junior lien holders.
Frequently – not always, of course – a person seeking a short sale will have more than one loan against the property. A typical example might involve a house now worth $300,000 (after sale costs) that has a $350,000 first mortgage and a $50,000 second. For a sale to occur, not only will the first mortgage holder have to take less than is owed, but also the second will have to relinquish its lien holder status.
What incentive might the second have to do this? Money, of course. For some amount of money – certainly it will be less than the full amount owed – the holder of the junior lien may be willing to give up its lien holder rights. What amount of money that will be is a matter of negotiation; and that discussion is frequently the sticking point in a large percentage of short sale transactions.
Naturally, the second wants to discount as little as possible. On the other hand, the senior lien holder doesn't want the junior to benefit at its expense. Every dollar that goes to the second could have gone to the first. Refer to the example above. The first mortgage holder might say, “I won't allow more than $5,000 of the sale proceeds to go to the holder of the second.” Whereas the holder of the second might refuse to release the lien unless he receives $10,000. Unlike most transactions, the negotiations here are not between buyer and seller, but between existing mortgage holders.
Under the original November, 2009 guidelines, the HAFA program gave first mortgage holders an incentive – on a $1 for $3 ratio – to allow for junior lien holders (in aggregate) to be paid off up to a total of $3,000 or 3% of the loan amount(s), whichever would be less. Thus a senior lien holder might have allowed a $3,000 payoff to a junior whose note amount was $100,000. The senior would have received $1,000 from the Treasury for doing this.
The March, 2010 revision to the guidelines increased the amount from 3% to 6%, or $3,000 to $6,000, whichever would be less. The incentive for the first mortgage holder, still at $1 for $3, would now be a maximum of $2,000.
That is all well and good, but the big question still remains. Will 6 cents on the dollar be sufficient to persuade junior lien holders to write off their notes? (HAFA requires that the borrowers receive a complete release of liability.)
To be sure, 6 cents on the dollar is better than nothing, but more than a few junior lien holders might have reason to believe that their notes are worth more than that. Other parties – debt collectors, for example – might be willing to give them 8 or 10 cents on the dollar.
This is much more than a small part of the home mortgage mess. A January, 2010, Bloomberg article indicated that none of the lenders who hold a combined $1.05 trillion of home-equity debt have yet been willing to sign on to an administrative plan for second mortgage modifications. Four major banks (Bank of America, Citi, JP Morgan, and Wells Fargo) hold some $477 billion in junior lien mortgages. Certainly, these are worth less than book value; but whether they have lost value to the extent suggested by HAFA guidelines is another question.
In December, 2009, testimony before Congress, Laura Goodman, Senior Managing Director of Amherst Securities, forcefully stated that the administration would have to “address the second lien problem head on.” She was talking in particular about issues related to principal reduction, but the point is the same with respect to short sales. If second liens need to be written down, the Treasury is going to have to find a palatable way to make that happen. It seems unlikely that the present HAFA guidelines will achieve that.