More than a year after the federal government rolled out a national program to help streamline the short sale process, few home owners are benefiting from it, and REALTORS® wonder whether it will ever gain traction.
The Home Affordable Foreclosure Alternatives program, known as HAFA, has disbursed just $9.5 million out of $4.1 billion from April 2010 to December 2010, according to a Government Accounting Office report in March. Through May of this year, only 8,541 short sales were completed nationwide through HAFA.
HAFA offers a short sale option to home owners who don’t qualify for a loan modification. If approved, the difference between what the house sells for and the loan balance is forgiven.
The majority of short sales are still handled through individual lenders’ programs because HAFA doesn’t allow lenders to collect on the loan balance, and incentives — including $1,500 to the lender — aren’t enough to entice banks to go along with the program.
HAFA expires at the end of next year, and by then, the U.S. Department of the Treasury hopes to help more home owners by having a standardized process and uniform documents for lenders, said Laurie Maggiano, director of policy for the department’s Homeownership Preservation Office.
It’s a gargantuan task that Maggiano likens to turning the Titanic on a dime.
“It’s not a rowboat. It is a very complex machine. It takes time to get these processes ingrained,” she said. “It is beginning to happen.”
The government’s Home Affordable Foreclosure Alternatives program was meant to give home owners an alternative if they don’t qualify for a loan modification.
But most banks are unwilling to go along with HAFA short sales, in part because the program forgives the home owner’s loan balance. Lenders, in some circumstances, would much rather try to recoup their money.
Experts say incentives the program offers — including $1,500 to the lender — aren’t enough to make some banks want to participate.
There were just 320 HAFA short sales pending last September. Currently, there are 18,000 pending nationwide.
“Is it where we want to be? No,” said Laurie Maggiano, director of policy for U.S. Department of the Treasury’s Homeownership Preservation Office.
Ellen Mahoney, president of Complete Title Services’ loss-mitigation division in Birmingham, said the majority of short sales are put through banks’ programs. That way, lenders avoid HAFA’s rule that won’t allow them to force home owners to repay part of the loan balance. “If the borrower is collectable, I don’t see the banks wanting the little enticement from the treasury,” Mahoney said.
Mike Sher, associate broker for Max Broock REALTORS® in Bloomfield Hills, said he’s doing more HAFA short sales lately. “With them, everything is black and white. You either are eligible, or you aren’t.”
HAFA requires home owners to have lived in the home in the last 12 months, have a financial hardship and have a first mortgage less than $729,750, obtained before Jan. 1, 2009. When home owners don’t qualify, lenders will usually try to put them through their own short sale program.
“One of the big benefits of the program is they go in and assess the value of the property and they give you the price,” Sher said. “So when you get an offer you’ve already done three-fourths of your work.”
In addition to the $1,500 incentive to the lender, HAFA offers home owners $3,000 to help with moving expenses, and $2,000 to the investors who hold the loan.
The HAFA program expires at the end of next year and by then, the U.S. Treasury hopes to have a model process and uniform documents that banks could use to speed the process and avoid greater losses that come with foreclosure.
Program changes could be announced as early as this week. The policy changes grew out of meetings with 50-60 representatives from the real estate and banking industries this spring, Maggiano said.
She said changes to the year-old program include easing eligibility requirements that industry players have said would widen appeal.
Not being able to force borrowers to repay part of the loan balance is a huge stumbling block to getting more lenders on board. Another is the $6,000 cap on claims from second lien holders.
Maggiano said that while the first mortgage holder receives 65 to 80 cents on the dollar after the property is sold, the second and other lien holders get less than 6%, and they want to retain the rights to go after home owners for more. But the change is not likely to happen, she said.
“We don’t want taxpayer dollars going to a transaction where a borrower still has contingent liability,” Maggiano said.
The help will come too late for home owners like Celso Martinez, who would have been happy to benefit from a program like HAFA.
The 44-year-old bought a Royal Oak bungalow in 2008 for $164,000, then lost his job and moved to Collierville, Tenn., for a new one last fall. He spent almost 10 years in Michigan, working at the General Motors Tech Center in Warren.
Laid off, Martinez exhausted his savings and unemployment benefits trying to keep up with the mortgage, but he fell behind. He got a short sale offer of $80,000 this spring, but his bank rejected it. He got another offer in June for $104,500, but that didn’t go through, either.
The house is now for sale at $102,500, but as a foreclosure.
“It was my first time buying a home, living the American dream,” said the native of El Salvador. “But it isn’t as good as it sounds. Now I am kind of messed up with bad credit for seven years.”
His REALTOR®, Janet Graham with Hall & Hunter in Birmingham, tried hard to sell the home. There were 87 showings. “It is just not right,” she said. “They don’t see all the energy that goes into trying to make these situations right.”
What lenders say
It is estimated that lenders and servicers may lose $375 million this year on short sale transactions, according to a May short sale report from CoreLogic, a data firm.
Lenders do a lot more loan modifications than short sales.
At Chase, a major Michigan lender, the breakdown is about 60% modifications to 20% short sales, said spokeswoman Mary Kay Bean.
The bank has an average response time of 30 days from request to approval on the transactions and has completed more HAFA short sales than any other lender, with 2,686 through May. It has completed 120,000 short sales using its own process nationwide since June 2009.
“When a modification isn’t possible, we approve appropriate short sales for customers because they provide a better outcome for the borrower, the bank, the investor, and the neighborhood than a foreclosure would,” Bean said.
Jason Root, a loss mitigation director for Freddie Mac who specializes in short sale policy, said one of the biggest obstacles he’s seeing is when the second lien holder wants more than the $6,000 cap imposed by HAFA.
“If the second wants more than the cap allows, those will automatically move to a regular short sale,” he said. “We are constantly looking at those to see which part of the HAFA is stopping them from getting done. We have met a few times with the Treasury Department to troubleshoot that.”
Freddie Mac and Fannie Mae purchase loans from lenders, then repackage and sell them to investors. Together, they guarantee about 70% of conventional loans written in the country.