The Home Affordable Modification Program (HAMP) was created pretty early on in the housing and economic crisis. It was created to help people stay in their home by making their payment more affordable. The effort was laudable. How could anyone not be in favor of keeping people in their home? What it doesn’t address, through no fault of its own, is whether or not the people want to stay in their home.
Say I bought my home in 2006 for $500,000 and put $50,000 down, and I got a loan for $450,000 at 7% for 30 years. I could afford the payment, and I paid on time. Fast forward to 2009. I am not making the bonuses I was in 2006, and my wife’s hours have been cut so our family income is not what it was. It seems that the HAMP program was made for me. Now comes the real question. Do I want to stay in the house? I owe essentially $450,000 on my home. From 2006 through 2009 the value of my home decreased from $500,000 to $240,000. I now owe $450,000 on an asset that is worth $240,000. Even if I were offered a mod to 3% and the term extended to 40 years do I really want continue to pay on a loan when the asset is worth about half of what I owe?
Granted that there are folks that didn’t buy their home as an investment but rather as a homestead. A place they felt they would stay for years to come. Maybe the schools are the best or the home is close to other family members, there are a variety of reasons. Those are the folks who have kept up their modifications through the trial period and into the permanent status. They may continue to pay, but as many areas are still seeing price stagnation and even continued decline, it will be interesting to note what the recidivism rate is on the permanent modifications in a couple of years. Some people started a trial modification because they initially hoped that things would get better and they would stay in the home. Some got on a trial modification simply to buy time. Some people stopped making their payments and it was months before they were offered a solution if they qualified for one.
More time goes by in getting approved for the modification and all the while they are not making a payment. They get a trial modification, and they make one payment and realize that they still can’t afford the home or decide it makes more sense to leave and rent a home on their street identical to their own for half of what they are paying now. In many cases, after that first trial modification payment is missed, it will take six to twelve months before a sheriff would ever come to their door to lock them out. In the meantime, they are saving the money that would have gone to payments and using it to consume, pay off other debts or even sock it away. The HAMP program has helped a lot of people who want to stay in their home but the continued decline of values before, during and after its inception prevented it from being the answer for most.
Then comes the Home Affordable Foreclosure Alternatives (HAFA) program. In recognition of the fact that some borrowers simply could not make payments even if the payment were lower, whether through job loss or a reduction in income, a more dignified exit strategy was created. HAFA offers a solution for those folks: short sale. It’s where the home is marketed and the lender agrees to accept the proceeds of a market value sale as satisfying the debt for less than what is owed. HAFA also offers a deed in lieu (DIL) of foreclosure, where the lender and borrower agree it would be better for both if the borrower deeds the property back to the lender, thereby saving the lender the time and expense of going through the foreclosure process. Once again, the concept is good, almost a no-brainer. It took a few months to put together and when rolled out, lenders and servicers were encouraged to go back to the borrowers who didn’t qualify for HAMP, were unable to complete a HAMP modification or didn’t accept one. What that means is borrowers who haven’t been making their payments for the last however many months while they are working on HAMP have a program available if they can’t afford, don’t want or don’t qualify for a HAMP modification.
Remember, they haven’t been making their payments through this entire process (well, maybe a payment or two), and it will take some time to “pre-approve” a short sale as values have to be obtained and reconciled. Then you put the house on the market and have another three or four months waiting for a buyer. If you find a buyer who is willing to pay the pre-approved price, which is not an easy task in this market, you proceed to closing which may take another 45-60 days and then the government will give you $3,000 to help you move. That’s a big win for the borrower as they have not been making payments for anywhere from six to 18 months. And the lender is prohibited from seeking the deficiency on the short sale. And your credit is not hit as hard as a foreclosure. And you get a $3,000 kicker.
A DIL is the shorter version, without the marketing or closing time, and it’s great for the folks, who have a place to go right then. Maybe a home they can rent for a lot less is available now or perhaps they are relocating for a job. They still get the benefits of reduced credit impact, protection from deficiency collection and a $3,000 moving allowance. Another big win for the borrower. HAFA will be more successful than HAMP because people want the end result. Simply put, there are far more people who want to get out from under the obligation rather than have a smaller payment.
Now, there are issues. Although HAFA provides for a little money to go to a junior lien if one exists, insiders are reporting that the juniors are not just rolling over and accepting what the plan calls for. This can delay a deal at best and kill a deal at worst. It is too early to tell what the success rate of the HAFA program will be but I am betting it will be far better than HAMP.
HAMP is a band-aid. HAFA is an exit strategy.
Cary Sternberg is president of Excellen REO, an asset management firm and subsidiary of Titanium Holdings.