by Calculated Risk on 3/25/2010 01:28:00 PM
Thursday, March 25, 2010
IMPORTANT note from CR: The following is from long time reader Shnaps (the views are his). Shnaps has been working in the mortgage industry in various capacities "since people were extending the antennas on their mobile phones". Shnaps currently serves in a key role related to HAMP at one of the largest non-prime mortgage servicers in the Nation.
Shnaps offered to write a couple of posts from the viewpoint of a servicer.
Several readers reacted negatively to Shnaps previous post. Shnaps writes: "Most HAMP applicants ARE hurting, no doubt. But that shouldn't justfy a free pass for the minority of applicants who are just trying to take advantage. That was the point of the post."
One might suppose that after the abject failure that HAMP has proven to be at modifying mortgages for ’millions’ of struggling homeowners, the US Treasury might have learned something before rolling out ‘HAFA’. This scheme was briefly known, in its conceptual stage, as FAP(!) - short for ‘Foreclosure Avoidance Program’. It eventually was redubbed HAFA - which is short for ‘Home Affordable Foreclosure Alternatives’. Whatever they call it, the program’s purported goal is to help (millions?) of Americans avoid the horror of foreclosure via the slightly-less -awful ‘deed-in-lieu’ alternative.
For those just tuning in and asking “What is a ‘deed-in-lieu’?” - allow me to explain. This term is used to describe a situation in which a mortgagor voluntarily turns over the deed to the mortgaged property to the mortgagee ‘in lieu’ of a foreclosure. It’s different than the mortgagee taking ownership via foreclosure in two key ways: first, in the sense that it is ‘voluntary’, and also in that a deed transferred in this manner would come subject to any other liens. So for this to happen, realistically – there better not be any other liens. The other option HAFA incentivizes is similar – the so-called ‘short-sale’, which basically amounts to the borrower doing the bank’s customary post-foreclosure task of liquidating the collateral for them. In exchange, the borrower may receive $1500 “walkin’ around money”, forgiveness of any deficiency balance remaining, and a less-severe hit to their credit record as the cherry on top.
Sound like a good deal for the borrower? Eh, maybe. In most cases, the biggest incentive for them is that by going the HAFA route they might get back in the credit game a couple years earlier than they would by doing nothing (and being foreclosed upon).
Now if you think the borrowers have a rather minimal incentive to participate in HAFA, get a load of the, uh, not so tasty treat that HAFA wishes to serve up to second-lien holders. In a foreclosure, people seem to be fond of pointing out that such subordinate liens ‘get nothing’ insofar as their lien interest in the property is extinguished. However, that party’s claim to the money that they are owed is not otherwise diminished. For some reason, the HAFA scheme thinks that second lien holders should not only release their lien, but also waive their right to collect on the money they are owed. In exchange, they may receive as much as $3000, which might cover their administrative cost of participating in the program - provided they do enough of these deals. Hello!? This is the reason the entire program is a non-starter – virtually all of the borrowers who might be interested in this program have huge second liens.
Not that it matters, but for those wondering ‘How about the party servicing the first mortgage? What’s in it for them?’ In short: A thousand bucks, a potentially shortened timeline to liquidation, and perhaps diminished risk that the property will end up trashed. That’s not bad – except that with short-sales come tremendous opportunities for fraud in the form of collusion, and non-arms-length transactions, leading to such unwanted outcomes such as ‘flopping’.
I really don’t ‘get’ HAFA at all. I have to assume it is just being rolled out to make HAMP look like a relative success.
CR Note: This was from Shnaps who works for one of the largest non-prime mortgage servicers in the U.S. My view is HAFA will help with the process, but as I noted before, the 2nd liens are a huge stumbling block.