Sense on Cents

Despite hundreds of billions of dollars in support of Freddie Mac, Fannie Mae, the Federal Housing Association, and mortgage modifications, our housing market continues to be swamped with an ever increasing wave of foreclosures. The shadow supply of homes overhanging the market is estimated to be in the realm of 15 month’s worth.  Last week, I wrote that Washington needed to address this issue in my post  “Washington Needs a New Housing Model.”

Thanks to our friends at 12th Street Capital, we learn today that Treasury will release a new plan next week to stem the wave of foreclosures. How might this work? Let’s navigate a release which came from the Mortgage Banker’s Association convention currently ongoing in San Diego. Housing Wire reports, Treasury to Announce New Program to Avoid Foreclosure:

The United States Department of the Treasury is launching, with an official announcement expected next week, a new program to help ailing borrowers escape foreclosure.

The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.

HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.

Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.

Borrowers will need to be Home Affordable Modification Program (HAMP)-eligible and Maggiano released some stats for the crowd’s consumption. 2,484,783 homeowners have requested information on HAMP. 757,955 HAMP plans were offered. 487,081 trials are underway.

Other additional [1] incentives to the short sale industry are nearly developed. The IRS will soon offer a 4506EZ form that will enable servicers to pre-fill out the information so that it only requires a borrower’s signature. It also will include softer language so as not put potential participants off.

For those unaware, a “short sale” entails a home being sold for less than the balance of the mortgage. The homeowner is not held responsible or liable for making up the difference between the proceeds generated by the sale and the mortgage balance. That difference is eaten by whomever ‘owns’ or is holding the mortgage. The owner or holder could be the originator if that entity never sold the mortgage. The owner or holder could be a trust on behalf of investors if the loan had been securitized.

What is the motivation to promote short sales rather than allowing the foreclosure process to run its course? Short sales may be short in terms of proceeds although they are not necessarily short in terms of time. That said, short sales typically do expedite the sale of a home. Short sales have typically occurred at a 10-20% discount to the market. Why? The homes have not been prepared for sale, meaning ‘dressed up.’

The monetary incentive provided to mortgage servicers to promote short sales will likely have a similar impact as the monetary incentive provided to modify mortgages. What has that impact been? Not much.

While many of Uncle Sam’s programs have been designed to buy time and allow the market and economy to recover, that approach has proven not to work so far in housing. Will this short sale program work to support housing? I doubt it.

I think what this program will look to achieve is to actually lessen the negative stigma associated with the term foreclosure. If Uncle Sam can say foreclosures are declining, he can then wave the flag as making progress on housing.  What he will be doing, however,  is merely ‘redefining’ foreclosure or in other words, ‘putting perfume on a pig.’

This program theoretically will negatively impact bank capital as banks will be forced to take a loss sooner rather than later on those mortgages they hold which are involved in short sales.

Aside from that development, real integrity in this process would include:

>> Add short sales to foreclosures as a more robust measure of housing supply stemming from delinquent mortgages.

>> Assess home prices along with rental rates to measure overall cost of housing.

LD