Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Unintended Consequences of Treasury's HAFA Program


HAFA is just flawed legislation aimed at pacifying outrage rather than offering real solutions to the housing market.

Every six months or so, Washington's political will seems to coalesce in support of the only issue where there's true agreement across party lines: The housing market is still broken. Sadly, in my view, the Treasury Department's Home Affordable Foreclosure Alternatives Program, or "HAFA," is simply the latest in a series of flawed legislation aimed more at pacifying popular outrage rather than offering real, tangible solutions to the challenges facing the US housing market.

On April 5, HAFA became a law, representing the Federal government's latest assault against the depressed residential housing market. HAFA aims to provide options for homeowners unable to qualify for loan modifications through the Home Affordable Modification Program, or "HAMP," which was the last government-backed foreclosure prevention initiative.

Indeed, the foreclosure epidemic in this country remains a pressing issue, as recent data indicate that more than 5 million households are behind on their mortgage payments, with almost 3 million households 90 days or more delinquent but not yet in foreclosure.

HAFA attempts to step in where permanent modification via HAMP isn't a viable option, offering incentives to lenders, servicers, and distressed homeowners in the hopes that foreclosures can be cut off at the pass. The primary mechanisms HAFA promotes are short sales, where the lender allows the homeowner to sell his or her home for less than the mortgage amount, and deeds-in-lieu of foreclosure, or "DILs," where the homeowner hands the lender the keys cooperatively in exchange for the lender agreeing not to pursue back payments. These alternatives are believed to be less damaging to a homeowner's credit.

While some homeowners will be assisted by HAFA, each group affected by the legislation could see unintended consequences that mitigate the program's good intentions.

1. Distressed Homeowners

HAFA's primary goal is to help distressed homeowners. Noble enough, but will the program be effective? First, to incentivize homeowners to cooperate in short sales, Uncle Sam (read: taxpayers) is offering a $1,500 payment for "relocation assistance." This payment is on top of cash assistance lenders often provide short selling homeowners.

From my experience, however, the decision to short sell isn't typically one that's easily swayed by $1,500. If the government wants to help homeowners start over, every little bit helps. But if the aim is to encourage more short sales, this amount of money is but a drop in the bucket and successes will be few and far between.

Second, and almost more important, it's not even clear short selling truly benefits the homeowner in all cases. Even though the IRS revised rules that previously treated the forgiven loan as taxable income, many states are behind the ball. For example, in California, if a homeowner short sells his home for $400,000 with a $500,000 mortgage outstanding, at year end he could face $100,000 in additional taxable income. A proposed amendment to this law is in limbo because Governor Schwarzenegger has threatened to veto due to an unrelated provision in the bill. For those seeking to enter a short sale, tread lightly and seek tax counseling before agreeing to anything.
< Previous
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opin= =3D =3D3D ion about the performance of securities and financial markets by = the wr=3D iter=3D3D s whose articles appear on the site. The views expresse= d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi= a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web= site is intended to con=3D stitute a recom=3D3D mendation or advice address= ed to an individual investor =3D or category of inve=3D3D stors to purchase= , sell or hold any security, or to =3D take any action with re=3D3D spect t= o the prospective movement of the securit=3D ies markets or to solicit t=3D= 3D he purchase or sale of any security. Any inv=3D estment decisions must b= e made =3D3D by the reader either individually or in =3D consultation with = his or her invest=3D3D ment professional. Minyanville write=3D rs and staff= may trade or hold position=3D3D s in securities that are discuss=3D ed in = articles appearing on the website. Wr=3D3D iters of articles are requir=3D = ed to disclose whether they have a position in =3D3D any stock or fund disc= us=3D sed in an article, but are not permitted to disclos=3D3D e the size o= r direct=3D ion of the position. Nothing on this website is intende=3D3D d = to solicit bus=3D iness of any kind for a writer's business or fund. Mi= ny=3D3D anville mana=3D gement and staff as well as contributing writers wi= ll not respo=3D3D nd to em=3D ails or other communications requesting inves= tment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos