I am an expert in the Home Affordable Foreclosure Alternatives (HAFA) program created by Treasury and mandated for implementation this year by 105+ servicers administering 90+% loans nationwide (Disclosure: I proposed a HAFA-like program to federal officials in early 2009 and my company AssetPlanUSA offers a HAFA Education and Certification program for real estate professionals).

I went to Mr. Malakouti’s office upon hearing he had closed several HAFA transactions. He was one of the first to do so since HAFA is still relatively new in the marketplace. I believe the best intelligence and insight about a program often comes from analyzing facts on individual deals under that program…and my meeting with Mr. Malakouti reinforced this belief.

Mr. Malakouti has a deep knowledge of short sales and HAFA and has drafted a memo for real estate professionals, lenders, and policy makers regarding HAFA. Here is his memo, verbatim for your convenience, along with a picture of Robert. ray

Early insights and critical feedback on HAFA by Robert Malakouti:

We have two type of HAFA short sale:

RASS (Request for approval of Short Sale). This type of HAFA Short Sale is initiated by the lenders. We are not talking about this type of HAFA in this article. Most of the Banks are not using the RASS HAFA short sale at this time.

ARASS (Alternate Request For Short Sale Approval). This type of HAFA Short Sale is when the property is already listed for short sale and the listing agent asks the lender to use HAFA guidelines for short sale. In this article we will discuss problems and short comings of the current HAFA guidelines.

1-Initiating ARASS HAFA. On my first HAFA short sale with SLS, I had really hard time processing my short sale request using HAFA (ARASS). It took almost 6 weeks before my request was accepted. I have two other short sale files that I am using HAFA for right now. I have been doing regular short sales for the past 19 years. Most of the Banks have not set up their HAFA programs yet or they are not using it. The listing agent should insist to use HAFA. More than 100 lenders and servicers have signed up for HAFA. If the Bank is telling you that they have not signed up to do it, do not believe it, and tell them that almost every lender and servicer has signed up. Tell the Bank that any lender or servicer who has signed up for HAMP (Home Affordable Modification Program) has also signed up for HAFA.

2- Borrower relocation money ($3,000). Right now most of HAFA short Sale is real estate agent initiated ARASS (Alternative Request for approval of Short Sale ). Later on, the banks will approach the sellers for
RASS (Request for approval of short sale). Agent should not forget to put $3000 fee of relocation in RASS or ARASS Form and of course on HUD1.

3- Second Lien problem. Right now the HAFA short sale will not pay more than $6,000 to get second lien release. Some Banks like Chase that are holding a second lien and the first lien holder is another bank, will not accept $6000 dollars to release their lien if they have sent the file to recovery (in house or out of the house collection agencies). This creates a huge problem in timing co-ordination of getting approval from both first and second lien-holders and closing. Some Banks including Chase still in their approval for second lien short pay off are holding the barrower in owner occupied cases liable for balance deficiency.

4- PMI. PMI is a big hurdle. It takes almost 4 weeks to get approval from PMI

5- Investor approval takes up to 15 days.

6- Title. The HAFA does not pay for delinquent HOA Fees and asks for sellers to provide clear title. I have not had any problems in my 3 HAFA deals at this point, but practically any bank can ask the seller to pay delinquent taxes (Requires that borrowers provide clear and marketable title)

7- Time line. Bank did not follow the time line in ARASS cases that I had. It did take almost 75 days to get ARASS approved.

Policy Suggestions:
IF HAFA IS GOING TO BE SUCCESSFUL THEN BANKS SHOULD FOLLOW A GUIDELINE WHERE SHORT SALE IS TREATED THE SAME WAY AS BANK OWNED PROPERTIES:

1- AS SOON AS THE HOMEWONER IS BEHIND THE PAYMENTS, BANK SHOULD SEND THEM A PRELIMINARY FINANCIAL EVALUATION FORM OUTLININNG ALL AVAILABLE ALTERNATIVES TO THEM. IF THE BORROWER IS NOT QUALIFIED FOR HAMP, THEN BANK SHOULD SEND THEM SHORT SALE AGREEMENT FOR RASS.

2- AS SOON AS SHORT SALE AGREEMENT IS SIGNED BY THE HOMEOWNER THEN THE BANK GETS ALL NECESSARY APPROVAL FROM INVESTOR AND PMI IF NECESSARY.

3- SECOND LIEN HOLDER MUST COMPLY WITH HAFA GUIDELINES AND MUST ACCEPT THE AMOUNT WHICH IS PERMITTED UNDER HAFA GUIDELINES. WE NEED SPECIAL FORM TO BE FILLED OUT BY THE FIRST LIEN HOLDER AND BE SENT TO THE SECOND LIEN HOLDER DEMANDING THAT SECOND LIEN HOLDER TO ACCEPT THE AMOUNT WHICH IS AUTHORIZED TO BE PAID TO THE SECOND LIEN HOLDER ACCORDING TO THE HAFA GUIDLINES.

4-CLEANING THE TITLE BY THE HOMEOWNER SHOULD BE REMOVED FROM THE GUIDELINES. IF THE BORROWER HAS TO CLEAN THE TITLE THEN WHO HAS TO PAY FOR DELIQUENT TAXES AND HOA LIEN. I THINK THESE TWO ITEMS SHOULD BE EXAMPT.

5-THERE SHOULD BE A LIST OF BANKS AND SERVICERS THAT HAVE SIGNED ON HAFA IN TREASURY OFFICIAL WEB SITE.

6- WHO IS PAYING FOR A TAX LIEN ON THE TITLE (IRS TAX LIEN)?

THIS APPROACH IS THE ONLY WAY THAT WE CAN HAVE SPEEDY HAFA AND CONTROL DAMAGE TO THE LENDERS. IF HAFA GUIDLINE IS CORRECTED,THEN WE WOULD HAVE VERY FEW FORECLOSURES AND BANKS DO NOT HAVE TO DEAL WITH COSTLY AND RISKY FORECLOSURES AND WILL NOT HAVE TO DEAL WITH REO PROPERTIES ANY MORE. SHORT SALE IS MORE COST EFFECTIVE AND INVOLVES LESS RISK AND LIABILITY FOR LENDERS. HAVING SAID ALL OF THE ABOVE, HAFA IS MUCH BETTER THAN REGULAR SHORT SALES. I STRONGLY RECOMMAND THAT EVERY AGENT WHO IS DOING SHORT SALE SHOULD TAKE CAR HAFA CERTIFICATION COURSE.

Here are some high level observations:

1. Short Sale Marketshare/Growth: Short Sales have quickly risen from being relatively rare a couple of years ago (so much so, that there is no Short Sale marketshare data available for the December 2008 period) to being about 25% of sales for December 2009.

Assuming these are ‘high quality’ Short Sales (where the sellers were educated about and properly addressed issues like ongoing legal obligation and tax impact), this is good news for both buyers and sellers, as well as mortgage loan investors. Sellers avoided foreclosure by selling properties pre-foreclosure, buyers picked up properties generally less physically distressed than most foreclosures are, and investors generally had to take a lower loss on non-performing loans.

2. Market supply ‘artificially’ low: As I’ve noted before, the Sacramento housing market definitely seems to have artificially constrained supply. The number of months of inventory for sale in Sacramento was only 3.3 months in December. Economists usually view a 6 month inventory as ‘normal’…so it is surprising to see a number so much below 6 months…when approximately 5million US families are behind on their mortgage.

On the other hand, given constrained resources this almost exclusive focus on home retention, which has come thus far at the expense of those that could not afford to keep ownership of their home, has been a little confusing to me, a former Chief People Officer who had to layoff over 7000 people between mid-2007 and mid-2008 due to the mortgage crisis. Most of these above mentioned responsible employees of my former mortgage bank employer, unfortunately fall into the latter category of families who would not be able to afford homes they once could, and I think we have missed the boat thus far on properly providing and supporting home and life transitions for these families.

My issue with the focus of government and bank programs thus far is not that they shouldn’t focus on helping every family in trouble first try to keep their home if they want…but on the public message and conversation we are having.

America is undergoing a fundamental shift in consumer behavior and economic activity today, and as Charles Darwin said, ‘It’s not the strongest species that survive, nor the most intelligent. It’s the ones most adaptable to change’.

Americans (myself included) need to adapt to the new economy…and if this means they need to sell their home and move…so be it. (Family), jobs and financial stability are more important, in my view, than holding onto a home one cannot afford.

Notwithstanding the above gap in proactive bank and government programs till date, let’s circle back to the issue of home retention first. Early results are in on government and bank home retention efforts…and performance thus far is viewed as below expectations. Only about 20% of the families in trouble have been provided a temporary modification (mod) yet…and conversion rates of these temporary mods to permanent mods are very low thus far. 2 things should be noted before one judge’s the above too soon:

1. The number of loan modifications attempted (this is where progress starts - with a step in the right direction) is significantly larger than in the previous year/s and under the previous administration/team

2. In some ways, the problem isn’t the number of people in trial mods. While lots of effort is and will be put on solving the current problem (hopefully successfully) of converting the 75% or so performing trial mods into permanent ones (except where there was mis-statement of income, which is not kosher in my view), the real issue is improperly set expectations…and lack of enough alternate modification programs (addressing the diversity in situation among those in trouble right now).

A key flaw in most loan modifications offered today including HAMP is highlighted by the article I am including below on a recent by the New York Federal Reserve Bank: they do not address the issue of negative equity.

Since 25% of US homeowners have negative equity today, and since our national goal is to do more to help those in trouble who want to retain their home,  I thought I’d resurface a simple loan modification proposal I first introduced in an April 2009 blog….which I believe could significantly expand the success of our home retention efforts.

Responsible Second Chances: A break today in exchange for some of tomorrow’s upside

For every American family who is unable to afford the payment on their primary residence, I would offer them a one page loan modification with the following terms:

1.    Reduction in loan principal down to current market value.
2.    30 year fixed mortgage at current historically low market rates.
3.    25% of any equity appreciation from the written down loan principal (the remaining 75% would go back to the investor taking the loss on the principal write-down today)…thereby reducing the bite of the loss of principal taken today.

4.    Requirement that if the borrower misses more than 3 mortgage payments again and is unable to reinstate their loan, they would voluntarily exit the property within 6 months of falling behind…either via a Short Sale or Voluntary Foreclosure.

Why do I think the program above would help many not being helped today? Here’s why:

1.    It addresses the issue of negative equity…which is critical, per the article and study mentioned below
2.    It is ‘economically’ the right answer (in effect, any family that can afford their home today at current values and mortgage rates, gets to keep it)
3.    It addresses the issue of moral hazard: there’s no free lunch in America (at least not for long). The family gives up 75% future equity appreciation in exchange for the investor taking a significant loss on the loan today (via the principal write-down). This should largely eliminate, in my view, the need to collect financial hardship documentation…which is a key reason many mods are not becoming permanent today.
4.    It is simple to understand, unlike the HAMP program…which does not result in a principal reduction, as many borrowers applying for HAMP mistakenly believe it does.

5.    It addresses the issue of what happens if the loan goes bad again…which is important for the investor who is making a big compromise today.

Implementability

It is likely my proposal is not implementable in many parts of the private market…particularly the securitized loan market. However, it could be implemented for government sponsored and owned enterprises…Fannie Mae, Freddie Mac and FHA…which represent a large part of the market.

Article from DSNews.com: Fed Study Finds Principal Writedowns Minimize Risk of Redefault

Servicers who lower distressed homeowners’ mortgage payments by reducing the principal balance, as opposed to just making interest rate adjustments, are much more likely to see the payments keep coming in and ward off a redefault, according to a new study published by the Federal Reserve Bank of New York.

The economists found a definite pattern among modifications made since December 2005 that suggests “an intention among servicers to make the loans more affordable, while not losing any of the underlying principle.” However, their analysis shows that modifications that trim off some of the loan balance have higher rates of success and “can double the reduction in re-default rates.”

While principal writedowns essentially mean the lender or investor must eat a loss, many analysts argue that it’s a smaller loss than comes with the eventual foreclosure and the price tag of a nonperforming asset in today’s housing market, already swollen with REO inventories and vacant properties.

According to the New York Fed’s economists, when a borrower’s monthly mortgage payment is cut by 25 percent by reducing the interest rate only, the borrower is 11 percent less likely to default within one year.
But, if the monthly payment is lowered by the same 25 percent, this time by shaving 25 percent off of the outstanding loan balance, coupled with a small interest rate cut, the chances that the borrower will defaulting again within one year drops by nearly 27 percent.

The report’s authors also concluded that borrowers who have a loan-to-value (LTV) ratio of 115 percent or higher – meaning they owe 15 percent or more than their homes are worth – pose a 51 percent higher risk of redefaulting after a modification.

According to a blog by Wall Street Journal reporter Nick Timiraos, the findings of the New York Fed paper could have big implications on the administration’s Home Affordable Modification Program (HAMP). Timiraos explained that while the program doesn’t preclude principal forgiveness on the part of lenders, HAMP’s primary push is on lowering interest rates and extending the loan term to bring monthly payments down – exactly the types of modifications that the Fed report says have a higher chance of becoming delinquent again.

The Congressional Oversight Panel and the special inspector general for the Troubled Asset Relief Program (TARP) have criticized the government’s mortgage modification efforts on numerous occasions for not addressing the issue of negative equity, which would ultimately involve trimming LTV ratios by shaving off outstanding mortgage balances.

A growing number of mortgage experts and foreclosure counselors agree with the federal watchdogs and the New York Fed economists that principal reduction is a powerful incentive for borrowers to keep up with their restructured payments, particularly now, when such a large number of mortgages are underwater.
First American CoreLogic says that nearly 10.7 million, or 23 percent, of the residential mortgages in the United States had negative equity at the end of the third quarter of 2009, with the homeowner owing more on the home than it was worth.

A modification is only worthwhile if it induces borrowers who would otherwise default to continue paying, the New York Fed’s economists noted, and they argue in their analysis that borrowers with positive equity in their properties have a strong incentive to keep current on their mortgage, since delinquency and foreclosure will ultimately lead to a loss of the asset.

“In fact,” they wrote, “borrowers with positive equity (that is, borrowers whose house is worth more than the balance on their mortgage) should rarely default, since refinancing the mortgage or selling the property are better options than foreclosure, which may cause the borrower to lose [their] equity.”

This reduction in affordable rental housing is bad news for the City’s lowest income residents, and generally bad news for our society…as housing costs are most families’ single largest expense…and increasing rents without similar increases in earnings….mean the poor continually get “squeezed”….thereby perpetuating a cycle of financial and personal hardship which makes it difficult for families to lift themselves out of poverty into financial stability and growth.

I have been a keen observer of the situation in NYC, as the affordable housing reality on the ground is similar in my hometown of Los Angeles. Here too, affordable housing stock has not kept up with the need for such housing….and the situation has gotten worse (not better) over the past decade.

Not since the end of the 2nd world war – when a lot of the workforce housing that supported the war was converted into affordable housing for lower income families – has affordable housing been created en masse across the USA. And today…I believe history has presented this country and government with another such opportunity…to try to make a big dent in “solving” our affordable housing needs, particularly in high cost urban areas such as Los Angeles and NYC.

As it did back in the 1940’s, the US federal government today either directly or indirectly “owns” or will own a large number of vacant and foreclosed properties. An example of this indirect ownership are the over 100,000 foreclosures estimated to currently be on the balance sheets of Fannie Mae and Freddie Mac. In fact, some have estimated the total “shadow inventory” of current and future foreclosed properties (not yet listed on the market) to be as high as 7 million properties nationwide.

Many housing market observers, myself included, believe this shadow inventory presents significant ongoing risks to the housing market. In other words, as this shadow inventory turns into actual properties listed for sale on the market, it is likely to drive imbalances in real estate demand vs. supply…thereby resulting in declining home prices…which will present risks to millions of homeowners as well as the broader US housing and economic recovery.

Given the above, perhaps it makes sense for the government to come up with a creatively designed program (i.e., one that minimizes/eliminates taxpayer burden) to convert a large number of the properties they either own or will own (directly or indirectly) into affordable housing? Fannie Mae and Freddie Mac REO’s are one good candidate for this type of policy/strategy…as are REO’s owned by the FHA and other governmental agencies.

If we could design the right program and policy to achieve this, it could have enormous social and economic benefits for the US….including helping move the ball forward on a key goal of de-concentrating poverty outside traditionally large, generally poorly maintained, and often crime-ridden public housing developments (aka “projects”) nationwide.

Is this just a dreamer’s dream…or can and will it become reality?

As City Adds Housing for Poor, Market Subtracts It

By MANNY FERNANDEZ; October 15, 2009

Mayor Michael R. Bloomberg is closing in on a milestone: building or preserving 165,000 city-financed apartments and houses for low-, moderate- and middle-income families, the goal of a $7.5 billion housing plan he announced in 2002 and expanded in 2005.
It has already financed the creation or preservation of 94,000 units, including 72,000 for low-income households, city officials say.
But those efforts have been overwhelmed by a far larger number — the 200,000 apartments affordable to low-income renters that New York City has lost over all, because of market forces, during the mayor’s tenure.
The shrinking supply of these apartments, highlighted by researchers at New York University, illustrates not only the increasing strain that housing costs have had on this city of renters, but also the limits of the mayor’s success in providing the city’s poor with reasonable places to live. While the mayor’s plan has put thousands of low-income families in new or rehabilitated buildings and helped stabilize neighborhoods, it has been nearly drowned out by the twin waves of gentrification and rent deregulation.
“We’re losing units even with additions to the stock under the mayor’s housing plan,” said Victor Bach, a senior housing policy analyst for the Community Service Society, a nonprofit antipoverty group, and a member of a panel that advised the Bloomberg administration on housing in 2002. “I’m not knocking the plan. I’m just saying it hasn’t done much to stop the hemorrhaging of lower-rent units across the city.”
Including public housing, the number of apartments considered affordable to low-income households — those earning less than 80 percent of the city’s median income, or less than $37,000 — decreased to 991,592 from 1,189,962, a drop of nearly 17 percent, from 2002 to 2008. About 42 percent of the city’s households fit in that income category in 2008.
The data were supplied by the Furman Center for Real Estate and Urban Policy at New York University, which analyzed the city’s Housing and Vacancy Survey from 2002, 2005 and 2008. The center and other housing experts consider an apartment affordable if it costs no more than 30 percent of a family’s income, or about $925 a month for a family earning $37,000.
Although the numbers present a gloomy picture, they did contain a glimmer of hope. The worst years were between 2002 and 2005, when the city lost affordable apartments at the highest rate of the mayor’s tenure. In the next three years, as the mayor’s plan took hold, the city actually gained about 8,000.

Click here for the rest of the article: As City Adds Housing for Poor, Market Subtracts It

While we do believe this is a better time than we’ve seen for a long time for first time home buyers and buyers of lower priced homes to purchase homes due to increased home price affordability, historically low mortgage rates, and a significant first time home buyer tax credit, we do not believe this is the market bottom.

Instead we believe there is likely further downside for home prices, particularly higher priced “jumbo” homes, due to the following key factors which we believe will drive significant increases in housing supply in the future:

1.    Unemployment: Increases in the number of people who will need to sell their home – either through foreclosure or (hopefully) a more favorable foreclosure alternative such as a Short Sale (which is one of our specialities) – because they lost their jobs and were not able to replace the lost income adequately or in the same geographic location. We do not believe we have seen the impact of all the layoffs that started in Q4 2008 and are continuing today in the housing market yet for a variety of reasons including the fact that many people continue to make their mortgage payments for several months after experiencing a layoff (by using up their cash reserves/savings)

2.    Option ARM Resets: Increases in the number of people who will find themselves unable to afford their mortgage payments due to scheduled payment re-sets on their adjustable rate mortgages, particularly Option ARM’s

3.    State Foreclosure Moratoriums and Home Ownership Transfer Delays Resulting from Implementation of the Government’s Loan Modification Programs: Increases in the number of homes listed for sale as state foreclosure moratoriums start to expire, and as people who were unable to qualify for or succeed at a loan modification under the Government’s Making Home Affordable Program move and sell their home.

We’re not sure exactly how the above will play out in the “official numbers”, particularly the “median home price” data most often quoted and published….as the impact is likely to be highest on homes that are typically far “above the median”. However, while the jumbo market may not be reflected appropriately in median numbers….the actual changes (for those going through them either as a client or professional) will likely be very real for a lot of people, particularly on the Coasts and in our home market of Los Angeles.

High-End Homes Frozen Out of Budding Housing Rebound (Wall Street Journal; August 3, 2009)
By NICK TIMIRAOS and JAMES R. HAGERTY

KENILWORTH, Ill. — Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.

Signs of the divide are visible across the country, including in suburban Chicago. In middle-class Schaumburg, Ill., which had a median income of $65,000 in 2007, sales were up 41% in June from the depressed level of a year earlier and bidding wars have broken out on some properties. “I can’t even tell you how many I’ve been in over the last two months,” says Joe Stacy, a local real-estate agent.

But 25 miles away in the affluent town of Kenilworth, with a median income of $230,000, home sales have stalled. While there are 65 homes on the market, just 13 have sold this year. “We’re extremely oversupplied,” says Sherry Molitor, a local real-estate agent. “Sellers are struggling to realize that we’re back to 2001-02 prices.”

The divide between the mass market and the high-end — generally defined as homes that cost above $750,000 — partly reflects the effects of Washington’s housing-rescue plan, which is producing winners and losers.

Policymakers have helped spur sales of lower-priced homes by offering first-time buyers a federal tax credit of as much as $8,000, by driving mortgage rates to near 50-year lows and by expanding the mission of the Federal Housing Administration, which will guarantee mortgages for consumers buying homes with down payments as low as 3.5%.

Click here for the full article: http://online.wsj.com/article/SB124924069909799645.html

Real Estate Company Creates “Opportunity for All” Scholarship Program for Public Housing Residents

HausAngeles to Donate 10% to 20% of Commissions Via Housing Authority of L.A.

Ray Mathoda with Rudolph Montiel, HACLA’s CEO and President with a copy of the first “Opportunity for All” check in the amount of $3641

HausAngeles, a Los Angeles, California-based real estate consulting and transaction services provider, today announced its creation of a scholarship program – entitled “Opportunity for All” — for residents of Los Angeles public housing. The program will be funded by the donation of 10 to 20 percent of HausAngeles’ real estate commissions and will be administered by HACLA (the Housing Authority of the City of Los Angeles), which owns or administers approximately 50,000 units of Section 8 and Public Housing for the City of Los Angeles.

Rayman Mathoda, founder and CEO of HausAngeles and also a HACLA commissioner, said “After spending one-on-one time talking to both children and adults who live in public housing because of my role with HACLA, I realized that many of these residents – who live right in our ‘back yard’ – have access to very little opportunity in comparison to other L.A. residents. Since we conceived of HausAngeles as a socially conscious company, we decided that donating a percentage of our commissions in a manner that would create tangible impact in our own community would be a great way to give back.”

Adds Mathoda: “Real estate commissions grow proportional to the transaction size, so we have decided to donate 10% of our commission for transactions under $1 million, 15% for transactions between $1 and $2 million, and 20% for transactions above $2 million. We are hoping this program will appeal to buyers and sellers who will view this as a way of creating a real opportunity for those in need, without having to reach into their own pockets to do it.”

Any individual, family, or organization that sells or purchases property in Los Angeles can opt into the program. When the transaction closes, HausAngeles donates a portion of its commission towards the creation of the scholarships, the first round of which will be given in early 2010. Scholarships will be awarded after the completion of a competitive application and review and selection process, which will be jointly conducted by HausAngeles and HACLA. Any resident – child, youth or adult – of a City of Los Angeles public housing development managed by HACLA is eligible to apply.

“We are extremely pleased that HausAngeles is helping fill a considerable gap in available scholarships for residents of affordable housing in Los Angeles,” said Rudolf C. Montiel, President and CEO of HACLA. “While HACLA has provided scholarships to residents for the last twelve years, and assisted in providing youth programs through its non-profit, Kid’s Progress Inc., our ability to adequately support these valuable programs has been severely limited in the last two to three years due to lack of funding. HausAngeles’ efforts to make a difference in our residents’ lives via the Opportunity for All program could not be more timely or welcome.”

Many real estate professionals shy away from having these types of discussions with their clients, as they fear their clients will delay their home transaction…which delays when the real estate professional will make money. However, we try our best to educate our clients so their understanding of the market is consistent with ours…and they make their real estate decisions with “open eyes”. While this does result in some delaying their real estate transactions…we feel this is the right approach to our business and will benefit us long term, by creating a relationship of trust with our clients.

The truth is that home price and whether or not “the market has hit bottom” is not the only factor that home buyers do or should consider when deciding to buy a home, particularly one they plan to live in. There are many other factors that influence when and where a person buys their primary residence including life issues (”I recently got a divorce and really want to settle into a place that is mine, and where my daughter can go to a good school”), financing issues (”I know mortgage rates are historically low right now so I am OK with buying now even if there’s a risk that prices will go down in the next year or two. I don’t plan to sell for many years…and think I will be OK long term as the market is already way down from it’s 2006 peak”) and other issues such as the type of home a person or family wants to live in (”I’ve been looking for a while and haven’t liked anything. I love this new construction condo and want to live in it now”).

Similar considerations also effect investors’ decision making, particularly for those investors that plan to purchase several properties during this down cycle. For some, it makes sense to “start averaging in” by buying properties now….while also leveraging the low mortgage rates available on conforming balance investor loans.

In any event, noone - including me or any real estate professional - can accurately predict the future…so all we are doing is sharing the best educated guess we can make based on what we do know.

Please see below an article from the San Francisco Chronicle which I think is a good read for anyone considering buying or selling real estate in the near term. This represents a more pessimistic view of the market than is generally discussed in the media…but a lot of what the author is talking about makes sense to me.

Signs of more trouble ahead for housing market

Carolyn Said, Chronicle Staff Writer

Tuesday, May 26, 2009

Warren Buffett and Alan Greenspan say the housing market is near bottom.

Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month.

But an array of serious pending issues undercuts the turnaround theorists.

To be sure, an end to the precipitous collapse that triggered a foreclosure avalanche and wiped out more than $6 trillion of home equity nationwide, not to mention setting off a worldwide economic collapse, would be something to celebrate. And several recent market barometers - diminishing inventory, increasing buyer competition, slowing price depreciation, rising builder confidence - lend credence to the idea that real estate could soon rebound.

A healthy housing market has a decent balance between supply and demand. While at a quick glance those components appear to be stabilizing, on closer look there are numerous factors that are likely to weaken demand and deluge the market with supply in coming months.

On the demand side, the surge in joblessness, still-high home prices, the credit crunch and a dearth of move-up buyers cut into the pool of potential home buyers.

On the supply side, an assortment of factors seems poised to trigger new waves of foreclosures that will continue to bloat inventory. They include the expiration of foreclosure moratoriums, more underwater “walk-away” homeowners, pending recasts of option ARM loans, rising delinquencies in prime and Alt-A loans, and soft sales of high-end homes.

Here’s a link to the full article:

Signs of more trouble ahead for housing market (SF Chronicle, May 26, 2009)

Full details on the program are not available yet, and I admit I am biased in my enthusiastic response to this policy change as I have been advocating for exactly such a change over the last 6 months and feel/felt so strongly about this program/policy that I have focused a major part of my time and business on Servicer Offered Short Sales.

I will say more once the government releases further details, but in the meantime here’s a memo I sent to key local and national policy makers and influencers in mid-April on exactly this topic. This would be a good read for anyone seeking to understand the rationale for and potential benefits of the new ‘Foreclosure Alternatives’ program.

To: Key Local (Los Angeles) and National Policy Makers and Influencers
From: Ray Mathoda, Founder and CEO, HausAngeles, Inc.
Date: April 15, 2009
Re: Closing the (Large) Gap in our National Foreclosure Prevention & Loss Mitigation Initiatives with Systematic Servicer Initiated Short Sales

I applaud the leadership and efforts of the Obama administration, FDIC and Treasury Department to help consumers, stem foreclosures and stabilize the housing market. Providing responsible homeowners a viable opportunity to stay in their home via an expanded set of loan modification and refinance options designed to lower their monthly housing costs significantly is a welcome and necessary development. Current government and non-government led initiatives in isolation however will prove insufficient in preventing a large number of avoidable foreclosures.

The purpose of this memo is to propose and request your support for a foreclosure prevention solution that simultaneously mitigates investor losses for a currently unaddressed large segment of troubled borrowers: systematic servicer initiated short sales.

Despite generous concessions to payments and loan terms, systematic modification efforts will continue to fail to help those troubled homeowners who are not offered, do not qualify for, or fail a loan modification. The fact is that our collective public and private sector efforts to help troubled homeowners have been focused on providing borrowers with two primary resolution options: loan modification or foreclosure. As a result, those that don’t qualify for or succeed at a loan modification remain “in limbo and uncertainty” until they are foreclosed on and are either offered a small cash payment (typically $1000) to vacate the property or evicted involuntarily.

I strongly believe it is not only possible to significantly mitigate the adverse impact of a likely foreclosure for these millions of responsible homeowners who cannot realistically expect to retain ownership of their homes; it is our responsibility to attempt to do so.

How many troubled homeowners will face foreclosure despite the Obama Loan Modification Plan?
According to the Congressional Oversight Panel’s March Oversight Report, an estimated 1 in 9 US homeowners is likely to be in foreclosure over the next few years. This equates to approximately 10+ million possible foreclosures. Assuming the Obama modification program successfully provides a loan modification for the 3-4 million homeowners it is expected to help, this leaves us with approximately 6-7 million likely foreclosures.

What is a short sale and why is it better than foreclosure?
A short sale is simply the process whereby property ownership is transferred by a borrower to a third party with the servicer and investor’s approval when the loan amount is in excess of the sale proceeds from the property. In short sales, a “deficiency” is created in the amount of this difference and if/when this deficiency is forgiven, it has historically been treated as taxable income resulting in an IRS obligation.

There are three key factors which make short sales a compelling alternative to foreclosure today:

• Scale and scope of the foreclosure issue and its adverse impact on the housing market: The likely number of foreclosures we will face in the coming years is very high (6-7 million as noted above). Foreclosures have a demonstrated and well understood significantly adverse impact on both the communities in which they occur as well as the overall housing market. As a result, there is a macro-economic rationale for preventing as many foreclosures as realistically feasible.

• Tax law: The Mortgage Forgiveness Debt Relief Act of 2007 temporarily changed the tax rules such that most troubled borrowers in owner occupied properties can complete a short sale before January 1, 2010 without incurring a large IRS obligation related to the deficiency.

• Declining home price environment and related investor incentives: We continue to have a (rapidly) declining home price environment in many regions with high numbers of at-risk borrowers. In this type of environment, short sales can help significantly reduce the negative externalities associated with foreclosures, which have the potential to destroy entire neighborhoods.

The potential savings here are material enough that it is possible to create programs that re-invest a portion of these savings to help troubled borrowers relocate to rental housing. I am aware of and personally involved with at least one pilot program which offers borrowers cash payments of between $5,000 and $15,000 for cooperating with their servicer to complete a timely short sale.
Here is an illustration of the investor savings possible due to short sales: The Case Schiller index shows home prices declined at a 26% rate between January 2008 and January 2009 in Los Angeles . This translates to an approximately 2% monthly decline in home prices. Assuming the timing of home sale is accelerated by 6 months for a $200,000 home, the related savings on home price depreciation are approximately 12% of the property value or $24,000. This does not include the 10% - 20% discount attributable to “bank-owned” sales (i.e. distressed sellers) or the savings to investors through expenses avoided by preventing foreclosure which can also be significant.

The below summarizes at a high level, the key benefits of a short sale relative to foreclosure for key stakeholders including consumers, the housing market, investors, and servicers.

Key Stakeholder Benefit of Short Sale vs. Foreclosure

Borrowers (Consumers)
• Avoid emotional and reputational pain of foreclosure
• Credit impact reduced to 2-3 years vs. 5-7 years
• No continuing financial or tax obligation when deficiency forgiven/ not pursued on purchase money owner occupied homes
• Note: Deficiency can and should be treated differently for investors and owners of 2nd/vacation homes, and tax consequences are different for such homes, as well as in the case of cash out mortgages

Investors
• Lower losses due to reduction in duration between loan going delinquent and property disposition (see example above)
• Lower losses due to savings on foreclosure related expenses (e.g., legal, home maintenance/rehab)

Servicers
• Reduction in servicer advances (i.e., reduced liquidity stress and interest expenses on advances)
US Housing Market & Economy
• Home prices stabilize at higher level as property sold is not physically distressed

Don’t we already have short sales? How is this different?
Due to increasing realtor-driven consumer education on the borrower benefits described above, short sales are being attempted by more and more troubled borrowers. Whereas a year ago there were almost no successful short sales, I would estimate that of total distressed residential properties sold in any given month 5-10% are likely short sales and the remaining 90-95% are foreclosures. As a percentage of total short sales attempted, I have heard anecdotally (many times) that a majority fail. The practical reality on the ground is that servicers and investors just aren’t set up to make efficient, timely, economic decisions on short sales where the likely alternative is foreclosure.

While improved borrower requested short sale processes and timelines would help, that issue is not the focus of this memo. In order to do this right, I believe servicers must offer and approve short sales systematically and in bulk right at the time a ‘no’ loan modification decision is made, or a previously executed loan modification fails. While it is perfectly logical that a short sale would be offered to every troubled borrower as an option to foreclosure, this ‘common sense’ solution is not in place today.

It should be noted that the suggested process of systematizing, standardizing and bulk-offering this ‘make sense’ solution is no different than the evolution of our loan modification policies and efforts as a nation over the past year or so since FDIC Chairwoman Shiela Bair led an attempt to conduct bulk modifications at Indymac Bank after the institution was put into FDIC conservatorship.

Why would government leadership and support be helpful and/or necessary?
I believe government leadership and support would increase the total number of troubled borrowers who are ultimately able to avoid foreclosure, accelerate the pace at which these borrowers are helped, and reduce servicer and non-profit foreclosure prevention counseling and process expenses as follows:

• Borrower education and communication: By helping troubled borrowers understand that short sales are a legitimate option that should be considered if a loan modification is not offered or fails. Many troubled borrowers are so inundated by a variety of third parties – some well intentioned, many not – including their servicer constantly calling them that they stop listening to or trusting anyone who contacts them.

• Deficiency related contractual and tax issues: By eliminating uncertainty and creating simple standards regarding how the deficiency created in a short sale is treated contractually and from a tax standpoint by borrower type/situation (e.g., in the case of responsible owner occupied borrowers, investors and/or owners of 2nd/vacation homes). This is a critical issue that will require communication and coordination with investors and is unlikely to be resolved properly without government intervention (e.g., in the systematic short sale pilot program I am familiar with, the contractual language regarding the deficiency leaves the servicer the option of pursuing the deficiency even though there is no intention of doing so in the case of owner occupied borrowers). Finally, state tax laws are not always consistent with federal tax law, and only the government can resolve these differences effectively in a fair and expedient manner.

• Standardization: There is a critical need to maintain as much standardization as possible in both program guidelines and related forms/documentation requirements, and the government is the only stakeholder that can drive this much needed standardization effectively

• Augments the Administration’s Home Affordable Modification Guidelines: Although the Home Affordable Modification Program includes payments to servicers in the guidelines, there is no guidance for servicers as to how to execute meaningful numbers of short sales; this direction is required to minimize foreclosures

Disclaimer: This article is an opinion piece only. It should not be construed as legal or tax advice. Any individuals should contact their legal counsel, tax advisor and/or credit reporting agency to ensure they understand the legal, credit and tax implications of any decision they make.

So who – of the large number of people that aren’t able to make their currently monthly housing payments – should get to keep their home and who shouldn’t? This is more than a million dollar question and we’re having a helluva time as a nation trying to answer this question, in policy and in practice, fairly, systematically and timely.

There are currently a myriad home retention programs implemented across dozens of servicers nationwide, and if I had to pick one word to describe the current landscape of options made available to troubled borrowers, I would pick “complicated”.

I think if we could come up with a simple common sense rule of thumb to answer this key question, we would be much further ahead in stabilizing our housing market. So in the spirit of proposing solutions instead of criticizing current approaches, here’s my simple solution to this problem:

If you can afford the home you currently live in at its current market price with loan terms based on current (historically low) market housing rates….you should get to keep it. If you can’t, you should move on and find rental housing that you can afford based on your current financial reality.

How would I achieve the above if I were designing our national housing programs? I’d keep it pretty simple (although I acknowledge that making it so would be rather complicated and time consuming…with no guarantee of success):

1. Do principle write-downs to current market value for all troubled borrowers who can afford their home on current market terms…but in return for this (massive) accommodation…require them to give up 75% of future home equity appreciation back to the investors who took the loss resulting from the initial principal write-down…until the investors are made whole. After that point, allow the homeowner to keep any remaining equity upside.

2. Allow every other owner occupied troubled borrower to sell their property via a servicer offered short sale accompanied by a cash payment to help the family move to affordable rental housing. Forgive the “deficiency” for these borrowers including any tax that might be owed on the amount forgiven (most families in trouble can’t afford a hefty tax payment anyways, so this would only push them further into the hole)

3. Allow every other non-owner occupied borrower to sell their property via a servicer offered short sale, but with no cash payment and no automatic forgiveness of deficiency

Would we likely require a new governmental entity/group to track the details on the principal write-downs and resulting future home equity appreciation share on behalf of impacted investors? Yes.

Is this simple proposal difficult to gain agreement on? Yes…very difficult. But no more difficult than it will be to deal with the millions of avoidable foreclosures that we will experience otherwise.

The panel included 2 experienced industry leading REO brokers Patrick Bartolic and Earl Gervais, Ron Garber from Short Sale Plan, Todd Wilson from Prospect Mortgage and myself, was moderated by Art Acosta (another top REO agent and REO industry leader), and was a big success. The room – which was packed with 500+ of the (real estate) professionals most familiar with the emotional and practical human toll of foreclosures - was inspired by the vision of the panel and hungry for a foreclosure alternative that works!

While the panelists started by lauding the efforts of the Obama administration to try to help as many people as possible retain ownership of their homes via loan modifications that reduce their monthly housing costs significantly, they also acknowledged the practical reality on the ground: that many if not most families in trouble have experienced a significant reduction in their income and are unlikely to be able to continue to afford the homes they once thought they could.

The focus of the panel was on this segment of consumers who don’t qualify for or fail a loan modification and the solution presented was systematic, lender offered short sales. Such short sales are very different from the typical borrower-requested short sale seen in the market today, and most everyone in the room agreed this systematic emerging solution should be THE preferred alternative for troubled borrowers living in homes they cannot continue to afford.

As an ardent advocate for systematic short sales (As previously discussed on this very blog, I believe this program is THE missing loss mitigation and foreclosure prevention initiative in our current national approach to the housing crisis), I admit I was pleased to see how unanimously the room agreed this solution is necessary and likely inevitable.

There just aren’t a lot of practical housing crisis solutions available that can simultaneously benefit consumers, the US housing market, investors and servicers, and which don’t come with a heavy taxpayer price tag….except systematic short sales!

Systematic short sales like the ones described by the panel (i.e., those offered to all owner occupied borrowers who fail to qualify for or succeed at a loan modification right when the loan modification decision is made) reduce the emotional and credit impact for borrowers by preventing foreclosure while providing the borrower significant (non-taxpayer funded) financial assistance to help move to rental housing. By accelerating the timing of asset sale in a declining home price environment in a manner that is amicable for the borrower, such short sales help stabilize the housing market faster and at higher levels than foreclosures would. And finally, systematic short sales significantly reduce investor losses and servicer advances…..positively affecting a key pain point in the housing and financial markets today.

So why isn’t this ‘no-brainer’ solution already widespread in the industry? The panel discussed two key reasons. One, this is the first time in the nation’s history that circumstances (including tax law) have collided to make this a no-brainer solution for all involved including the consumer (e.g., prior to some 2007 amendments to tax law, consumers owed taxes on any deficiency forgiven by the lender in a short sale). Second, practically speaking servicers just aren’t set up (yet) to execute on this key opportunity from an organizational, process/techology, and policy/guideline standpoint.

So what’s next? It seemed pretty clear to all in the room that systematic short sales are the right answer. Key panel members – including me - stated they considered this a big policy and business opportunity and were working to help key servicers develop and implement systems, policies and procedures to implement this alternative. So stay tuned for more on that front.

The bottom-line for now, though, is good news in my view. Key REO industry leaders believe it is just a matter of time before systematic, lender offered short sales become a viable foreclosure alternative for borrowers in trouble who currently have no option but foreclosure…..and the REO realtors who deal with foreclosures every day are standing first in line hungry for this solution.

DISCLAIMER
This blog is intended to be a general discussion only and should not be considered legal or tax advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.