The Convoluted World Of Real Estate Handouts
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
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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 â 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.