The Convoluted World Of Real Estate Handouts

24

Two weeks ago, we found our company in a position that, somehow, we had not dealt with in our years of buying real estate in Memphis and Dallas.  After having completed close to 800 transactions in the last 3 years, last week was the first time we had run into a closing where the seller used a government program to assist in the sale of the home.  Not only was a government program used, but the bank involved in the loan got into the act as well and in the end, let’s just say it was very advantageous for the seller.  I was shocked when my younger brother showed me the HUD where a seller participated in a government program to assist with the short sale and walked from the closing table with a $13,000+ check on a $36,000 sell price!  This was our government in action

HAMP And HAFA To The Rescue

There is no reason to get overly political here, so I will say on the front end that I do not care who was in office, who was leading the houses of Congress or who did or did not vote for something.  It is a screwed up mess no matter how you look at it and seems to follow a consistent theme in politics of doing too much to fix a little problem and in turn, causing bigger problems.

HAMP, which stands for Home Affordable Modification Program, was introduced during the initial housing crisis meltdown and was supposed to be an answer to the on-going and often escalating crisis.  From the beginning, HAMP was designed to incentivize mortgage servicers to modify existing home loans and assist owners with staying in their properties.  The program had many incentive programs for the servicers and mortgage providers including up to $1,000 for each modified loan and an additional $1,000 for every year that the loan stays current in the program (If that last sentence made you pause, just wait, I’ll get back to it).  They also included bonus payments of up to $1,500 for modified loans that were current when the modification took place.

Homeowners could get into the act as well by staying current on their payments.  The program was set up to address interest rates first as a way to rescue the homeowner.  If an interest rate adjustment doesn’t work, then the servicer can adjust the term of the loan and go out to 40 years (what???) and as a last resort a service can forebear against the amount of the loan and reduce principal.   For homeowners who have their loans modified under this program, there can be an additional $1,000 reduction in principal per year for five years provided that they stay current on their payments. 

Why in the world would they need to add that incentive?

They knew from the beginning what many economists were saying and proceeded anyway.  According to the National Taxpayers Union, HAMP has been grossly ineffective, as it has only assisted a small percentage of homeowners compared to the 3 to 4 million homeowners it was introduced to help.   In the same update, NTU points out that the Treasury expects upwards of 40% of the homeowners receiving funds will default.  Depending on the form of assistance, this will leave homeowners themselves further underwater, further in debt and further behind in terms of their credit rating – AFTER – the federal government has provided funding to modify their loan!

HAFA has so far proven no better, but you wouldn’t know that from the blog articles found thru a simple Google search.  HAFA or Home Affordable Foreclosure Alternative was started to help homeowners transition from homes they could not afford into homes they could.  Short sales were supposed to be only one component of this program, but it seems to be the ONLY avenue anyone uses.  What I wanted to know was how many homeowners the HAFA program had assisted?  The only number I found was from December 2010 that stated in the first year, 342 homeowners had completed a short sale of their property using the HAFA program.  In that same time period there were thousands if not hundreds of thousands of foreclosures.   Less than $4 million has been spent by the Treasury to assist homeowners.  While $4 million seems like an enormous amount of money, it divides into roughly $11,000 per transaction assisted.  Not a bad number considering that foreclosure losses are estimated to be greater than $60,000 per transaction.  (I could not find up to date numbers – maybe I’m not as good as I think at research?)

Unfortunately, when I search for updated numbers to help gauge the success of HAFA, all I can find are glowing reviews of how great it is from either real estate agents with CDPE licensing (Certified Distressed Property Expert) or CDPE licensing companies.  I have not been able to find any numbers indicating how many have actually been helped.  What I have been able to find is that the program has gone thru several “modifications” itself, no pun intended.  Well maybe a little one.

Following it’s unveiling, it was revised in 2011 to make it “easier” for lenders and servicers to participate.  Changes were also made to clarify the guidelines to help lenders and servicers comply.  In 2012, it was revised to  make it “easier” for lenders and servicers to participate.  Changes were also made to clarify the guidelines to help lenders and servicers comply.  No I did not accidentally repeat a sentence.  Apparently, they are still trying to figure out how to make this program work and they determined that they simply were making it too stringent for homeowners, servicers and mortgage providers.  So to alleviate the problems the second time around, they made some new changes.  And wouldn’t you know it, the first thing they changed was:

You no longer have to verify income for eligibility

This means that people whose incomes were deemed too high no longer have to state their income, which by default makes them eligible.  Within three months additional rules were changed AGAIN, allowing for non owner-occupied properties to qualify for the program and requiring lenders to respond faster and more affirmatively to short sale requests.  It also removed what had been considered a major stumbling block and that was limiting junior lien payouts.  The payout cap was raised to $8,500 to prevent junior lien holders from nixing a deal.  In addition, they introduced rules to make a HAFA short sale “less damaging” to your credit than a regular short sale or foreclosure.  That is right, if you let the government help you, we’ll make sure your credit is not dinged as severe!  But that is not it, they even offer to pay a homeowner $3,000 to help cover moving expenses.

Just to make sure we all understand, they are paying homeowners to walk away and paying lenders to assist them and making it less harmful to their credit scores and deciding not to check income and paying junior liens to not stop the process and paying the homeowners expenses for all their trouble…all of which runs counter to basic, fundamental economics 101!

A Serious Lack Of Transparent Information

I am not a researcher and apparently there are no cliff notes available on any of these programs (I looked).  But I do know how to use Google and I am not scared off by the reading and researching process.  What I found very interesting was how the real estate professional world viewed these two programs.  One, HAMP, seems to have no lack of disgruntled bloggers ready to tear the program down and send it packing.  It clearly has not reached it’s original goal of helping millions of homeowners keep their homes and has done nothing to stem the tide of foreclosures.  According to Reasoning.org less than $2 billion of the $29.7 billion allocated to this program has been used.  Originally the program was going to modify $75 Billion in loans and clearly that is not happening.  Meanwhile, in some parts of the country, foreclosure filings are up almost 300% year over year and in most of the country, foreclosure notices far outnumber foreclosure actions.

On the other hand, HAFA continues to receive glowing reviews and has blogs and articles written all over the web extolling the virtues of this program.  Not only is the program great, but if you are a realtor, you can even get certified as a HAFA specialists.  This is just one more certification that you can pay $XXX dollars to list after your name.  Don’t get me wrong, I am all for better education and continuing education.  I just found it odd, that while I could not find any numbers or any writers actually quoting the numbers of people that HAFA has assisted, I could find plenty of info. on all the changes and how they help real estate agents get more business as well as plenty of courses to get certified from $99 to $175.

It seems HAFA has spawned a whole new industry of educators looking to cash in on the millions of dollars that will be spent becoming an officially certified specialist.  It took less than one hour to realize that lobbies wanted to kill programs designed to help homeowners stay in their homes and promote those that would generate transactional fees.  Far be it from me to criticize anyone from trying to capitalize on the programs that the government is developing, but it is certainly disingenuous, in my opinion, to harp on the ones you don’t like because they do not generate ancillary incomes for others, while promoting those that do.

Tying It All Together

Anyone who argues that government, regardless of administration or political affiliation, has the right answers in a free market economy may not understand how a free market works.  It is unfortunate that people do dumb things and take risks and allow themselves to get into precarious situations.  In my opinion, people overwhelmingly created the early problems of the housing market.  Either borrowing too much, using risky loan products or taking on too much risk.  I can speak to all of those personally!  Home ownership reached a high in the mid-2000’s of 69% and today is back to levels not seen since the 1960’s of 65% and expected to head even lower.  That is only a swing of 4% and you see the carnage it leaves behind.

I believe a fundamentally stable market will and can correct it-self and that by simply delaying inevitable failures only prolongs our housing misery.  Government programs prove time and time again to be much less effective than originally planned and far more susceptible to fraud and abuse.  Those who expose the problems with these programs point to trouble with policing compliance and the difficulty with maintaining progress with such large programs.   It leads people like myself to wonder why government throws money at a problem too big to fix instead of strengthening lending guidelines to prevent the problem in the first place.  I’m afraid that my grandchildren will be asking the same questions of their government programs many years from now.

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About Author

In 2005, Chris Clothier (G+) began working with other investors and has since helped hundreds of investors purchase over 2,300 properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

24 Comments

  1. Thanks for all that detail, especially wading through Google and trying to find what is and isn’t there. Regarding basic, fundamental economics 101, I have learned that governments try to claim it doesn’t really exist! When congress tries to run its own bank and cafeteria, and both are shutdown due to going bankrupt, it should be a sign that they can’t handle anything bigger. I’m nowhere near close to any of these programs, and yet I already feel the temptation of “if someone else gets to walk away with cash in their pocket whether or not they were truly in need, then I deserve a cut.” It can be very hard to resist this, even knowing that this type of bailing out can’t be good for us in the long run.

    • Chris Clothier

      Hey Greg –

      Thanks for taking the time to read and comment on the article. Again, I’m not going to wade too deep into politics because each of us has our own views and most are extremely passionate, but like you, I don;t think government programs are the answer.

      I will say that I find it amusing that common sense ideas are considered too extreme by both sides of the political field. Regulating the mortgage industry seems like a no-brainer to me and making it an absolute requirement that an 80% mortgage is the best you can get on an owner-occupied property is one example of that regulation. But those on the right would argue that more regulation is not needed while the left would argue that requiring 20% down would disenfranchise some people so instead we won’t regulate and we’ll allow essentially no money out-of-pocket home buying.

      We are 1 generation removed from a time when a 50% mortgage was considered risky and home owners valued OWNING instead of OWING.

      Thanks for reading –

      Chris

  2. Chris:

    Terrific post. You really put it all together.

    Today the Treasury PR people remind us that despite the problems they’ve still helped nearly a million people modify, but at what cost? On a dollar-for-dollar basis, the taxpayers have a right to ask.

    The simple truth is that the folks at Treasury who designed these programs, especially HAMP, did not know how the housing financial industry works.

    Two specifics:

    • The original HAMP program failed to recognize that about half of all defaulting homeowners have a second mortgage. Second lien holders received no incentive to forgive defaulting homeowners and their intransigence stalled modification efforts. A fix for the problem was added into the program months after it launched summer, but second liens remained a challenge. A year later, a new version of HAMP was launched that doubled the amount paid to lenders that help modify second mortgages.

    • Re-defaults were a critical measure of the program, since previous efforts had high re-default rates. When Fitch Ratings projected half of HAMP’s modifications would result in re-defaults, Treasury trotted out data that they had to admit was wrong in an effort to save face.
    For the first year, the HAMP program was implemented in a poisonous environment that got worse when Treasury started pointing fingers at individual lenders in an attempt to make them cooperate. It didn’t work and not much progress was made until HAMP underwent a total overhaul in early 2010.

    Treasury raised hopes high with the widely publicized estimates of how many people would be helped, but in the end the HAMP program raised false hopes among millions more than were helped, many of who when through the lengthy and involved HAMP process only to lose their homes anyway.

    I guess the lesson is that asking the Treasury Department to design and implement a housing program makes about as much sense asking your banker to operate your real estate business. We fought at war at NAR ten years ago to keep banks out of the real estate business and Congress agreed with us. Apparently the bureaucrats at Treasury didn’t get the message.

    Steve

    • “I guess the lesson is that asking the Treasury Department to design and implement a housing program makes about as much sense asking your banker to operate your real estate business.”

      Now that is one nugget of true wisdom. We must stop assuming our government understands all aspects of the businesses they try to regulate.

    • Chris Clothier

      Steve –

      Excellent input and great points. I think it’s important to remember the extremely volatile environment that existed when these programs were introduced. That does not excuse the problems, but I think knee-jerk reaction is a great way to describe a lot of government programs that are produced as answers to problems. A little more time spent understanding the problem and laser-focusing on a solution instead of a shotgun approach may have produced better results. Is that not what we say about so many programs?

      Thanks for reading and commenting.

  3. I don’t think rules like “80% only” are the answer. I really think that for certain investors or situations, 10% down would qualify, but for others that should not be possible. Investors that have been buying rentals for several years and established a good track record should be given more leeway while others that are new should not. But this would all require a much more extensive version of underwriting from the banks. Why do all this when you can lobby to have simpler rules that become subject to targeted manipulation.

    I was kind of shocked to hear a co-worker at my old job getting a house for 5% down. I thought I had been a responsible person by buying my first personal residence with 20% down on a 20-year loan. But today I feel like mandating everyone, even investors buying properties with rock solid fundamentals, being required to buy with 25% when you are on your 5th loan, seems kind of cookie cutter to me. If someone has bought and sold many properties with success, then they should be afforded latitude. Those are the people that know how to use leverage. For others that don’t, perhaps 50% down is appropriate.

  4. Jeff Brown

    Stellar effort, Chris. You said — “After having completed close to 800 transactions in the last 3 years . . . ” That’s an incredible business success story.

    Tell me, did you build that?

    • Chris Clothier

      Jeff –

      I almost started to answer you seriously….

      And then I re-read your comment! Yes we did build this business, but thankfully I had roads to help get me to and from all of those houses.

      Thanks for reading the article – All the best to you in your business.

      Chris

      • Those roads did a pretty good job, Chris…. I’m glad they created the internet and BiggerPockets too . . . saved me all the work, and countless hours I might have spent doing it myself.

        Ok, now I can walk away with Jeff.

        • Chris Clothier

          No….Don’t walk away. Let’s just talk about the actual article – the rest is just us having fun with recent news…all with respect and no real menace at all.

          I seriously want to know if there are statistics out there showing these programs working as opposed to letting the market dictate a solution? I don’t know because I could not find the data and had to draw my own conclusions based on what I was reading and seeing.

  5. Gotta admit, I chuckled at the comments.

    Chris,
    Not discounting the 20% down idea, but what about VA programs that have a extremely small default of 2%? They are no money down.

    Jason

    • Chris Clothier

      Jason –

      I wasn’t advocating any one program, just highlighting that there are (what I consider) common sense steps to reduce the number of foreclosures and fast run up in housing demand. But, every “solution” wold have problems from both sides of the political spectrum.

      As far as VA programs, I would agree with what Jeff stated and point out that the VA program is not for the general public. That was designed to help military families buy homes. Geared toward a very small percentage of Americans. I wouldn’t consider that a lack of regulation that would lead to foreclosures.

      • No worries. I wasn’t shooting down the 20% idea, merely playing devils advocate. I agree, there are no quick solutions, but often the logical solution doesn’t work as intended. That said, I believe that investors have a better head on their shoulders when it comes to recovery ideas. Shame we don’t have a collective voice.

        Jason

  6. I ran across this article while searching for more information on HAFA. My home is currently being submitted for HAFA and we have already received an offer on our home. It is in Florida and WAY underwater. We have a justifiable financial hardship. I am a veteran of the Iraq War. My mortgage is not a VA loan.

    Once we have finally cleared the HAFA process and close, we plan on moving in with family to save money, pay down bills incurred due to costly home repairs over the years, and finally find a rental home. I have learned after 6 years that home ownership requires you to have substantial cash on hand for repairs and other things in life that may occur. It’s much easier to simply rent.

    Our conventional loan was obtained with no money down because BofA was offering a first time home buyer program if I took a 4 hour class. I had to borrow $6K to pay for closing costs on my current home. It is on 2BR/1BA, but our family has grown.

    If it wasn’t for HAFA, I would be paying for repairs for years to come for a home that is simply outside of my current affordability. None of these repairs came out in any home inspection.

    My point is that while I am no fan of government programs, HAFA is actually allowing us to move on respectfully with our lives without the stigma of foreclosure. I know people who have walked away from their mortgages and I told everyone I would never do that. I am trying to do it the right way.

    The effectiveness of HAFA is yet to be seen but at least we are being allowed to gracefully exit from a bad investment and move on to help the economy in the long run. With the money I will save after moving out, I will be able to afford a better home for less money thus helping out the rentee escaping foreclosure on their home.

    I used to be like a lot of people and against these programs but guilting people into staying in mortgages that banks will not provide any assistance does not help the economy move on in my opinion.

    • Chris Clothier

      Brian –

      Thanks for taking the time to read and write a response on the article. You do a really good job of highlighting a major point of the article and that is the lack of numbers on the HAFA program pointing to its success. Instead, we have a lot of information encouraging more to participate and extolling the features of the program such as additional money for agents, additional help for the home owner to relocate and reduced credit hits against the home owner.

      I could not care less about the program, what I want to know are transparent numbers. If the gov. wants to help individuals and offer incentives, I have no problem, but I want to know EXACTLY how much has gone to the program and EXACTLY how many homeowners have been helped. Otherwise, it is a program that will be taken advantage of and in the end helps relatively few people compared to the size of the program.

      Remember, in the scenario I encountered, a homeowner had their home sold using a program that assisted with the short-sale and she received a rather large check…equal to 1/3 of the sale price – at the closing table. I never said that was wrong – it just got me looking for information on the success of the program and I could not find any.

      Again, I am really thankful that you took the time to comment.

      • From what my realtor has told me, Banks want to get rid of any distressed properties as fast as possible. While they will not actively seek out people for HAMP or HAFA modifications, they are more likely than ever to approve short sales so they can move on. Foreclosures costs anywhere from $60k to $100k per home so it is more economical for them to approve the short sale. I think a lot of people do not look at the short sale option and think that foreclosure is their only alternative. Maybe this is why HAFA is getting so much attention lately because the government is trying to stem the tide of foreclosures. But you have to really look back a few years to see why people felt that there was no other way and that is because the Banks were steadfastly holding onto the mortgages with reckless regard for the overall big picture.

        There will be more foreclosures coming as the banks have revamped their processes. I said it last year to someone that it won’t be until at least 2015 that the market starts to truly recover.

        However the longer people are kept afloat instead of allowed to sink it is only going to stagnate the problem. People need an exit and HAFA gracefully provides that. You just have to be patient. I could have just walked away from my home but that’s unethical and wrong. Heck, I’d sure be saving tons of money by doing that.

        Finally, there has to be a balance. While I am appreciative that the HAFA eligibility requirements have been eased, it makes it easier. I don’t think it is so easy to abuse HAFA given the amount of documentation you have to provide. You also have to sit down and formulate a financial hardship letter. It took me a week to write one and I have a Bachelors degree in Computer Science. Along with that, your credit report is pulled, bank statements are provided, etc… You could abuse it I guess if you went to strictly cash only but that’s hard in today’s society.

        I don’t think HAFA has reached so many people because people have not been educated so much on HAFA as they have on HAMP, which has been the big push from the banks.. modify the mortgage a little longer yet the banks know that half will default anyways. Wouldn’t it make sense to just go the HAFA route anyways?

  7. Chris Clothier

    Brian –

    All good points, but your story still does not answer to the biggest complaint. Transparency.

    HAFA was instituted to work in conjunction and at the same time as the HAMP program. However, it accomplishes the exact same thing that was already happening in the marketplace. A short-sale. The article points out that short-sales cost lending institutions less money than a foreclosure. BUT…and this is a key point, HAMP is not a program leading to foreclosures. It is a program encouraging banks to WORK with homeowners to keep them in homes. Why was it not working? Why did the Treasury have to create a program that already existed in the free-marketplace? Be transparent with the data and show us what the problems were. Without knowing the data, it is perfectly reasonable to assume that it did not work because banks were not reducing mortgages, but reducing payments by lowering rates and extending terms. Neither of those fixes encourage homeowners to stay for the long-term and that answers why 40% of HAMP homes default. My assumptions could be wrong, but we don’t know.

    So they create HAFA to work in conjunction THIS program is NOT intended to keep owners in homes. It is intended to create home sales, plain and simple. Create an atmosphere where transactions take place and homes enter the market. Did we need HAFA? So far the data says no because short sales have not grown in the market yet (data does not support an uptick in short-sales because of the program).

    Would it have been better for your lender to lower your interest rate and reduce your principal so you have a payment that is affordable and you do not lose your home?

    None of this discussion is about the merit of the program. I just wanted someone to point out where the data on the success of these programs is released. I’m sure every single person who has used the HAFA program is going to say it is great, no question about that, but how many have benefited? How many of those people could have benefited using a similar rescue plan at less of a cost to taxpayers?

    There is not a question or even accusation against anyone who uses the programs, it is a simple question of transparency and reporting. When do we see if the money used on these programs has had maximum impact and effected as many people as possible – where the marketplace would not have helped?

    • > Why was it not working? Why did the Treasury have to create a program that already
      > existed in the free-marketplace?

      Because banks were overwhelmed with foreclosures that they ignored short sales. So to get the market moving faster, the Treasury put these timeline requirements on lenders to acknowledge short sales and move homes faster. It required a lot of lenders to get their act together.

      > Would it have been better for your lender to lower your interest rate and reduce your
      > principal so you have a payment that is affordable and you do not lose your home?

      Sure, except my loan does not meet the requirements because it is not a VA, FHA, or Fannie/Freddie Mac loan. It is a privately held loan. So that pretty much eliminates me for any HAMP or loan modification programs. Also the 31% requirement still exists. My paycheck pays for more than a mortgage and I would never have a mortgage that is 31% of my income because that would be reckless. Apparently they are targeting the sub-prime crowd with this percentage.

      > where the marketplace would not have helped?

      From my standpoint, the market wasn’t doing jack. Until the government stepped in and said, “Hey, you are going to do HAFA or else” well that’s when the wheels started turning at least in my direction. You are right, everyone is going to have a different point of view. I tried calling my bank several times over the past year and they said no to every modification request I made. So due dilligence was made on my part. The programs don’t reach enough people because of the requirements, so they feel they have no alternative but to foreclose. To stop this, HAFA was introduced. It’ll bring more buyers onto the market and allow sellers to get out of their underwater homes.

      My concern about HAFA is though that it will artificially drive up prices because short sales will now be a hot commodity. Again, we will see another minibubble. I’d like to buy again but probably won’t be able to because homes will be outside of my reach. Seems like a Catch-22, doesn’t it? I will have to rent for a while until I can either buy the home I am renting or buy a home within my price range. So much for moving on.

      There is no perfect solution. Maybe if the banks were more flexible we would see a better marketplace. Everyone is in it for themselves. It almost seems like unless the government were to do something, then we would still be in the same boat. Until HAFA, short sales were rarely the answer. Why does it have to be foreclosure or nothing?

      $1500 to incentivize a short sale is probably not enough for the banks and investors either.

  8. Hi Chris, Late to the party here, but interestingly the HAFA program has received yet another incarnation as the Making Home Affordable program (MHA). Our government just keeps pounding away at it. I ghost blog for an investor here in TX. Recently I heard a folksy front porch strummin’ type of radio ad and went to the website. Sure enough, when you Google “Home Affordable Foreclosure Alternatives” you get directed to “MHA.” Lipstick on a pig. Thanks for your impressive and informative articles.

    • Chris Clothier

      Jen –

      Thanks so much for taking time to read and even write a comment on the article. While I am sure that not all money spent on government programs is waste and some social safety nets are needed, these programs seem to have missed the mark.

      Thanks for your heads-up on the MHA program!

      All the best – Chris

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