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.
HAFA also tries to further incentivize lenders and mortgage servicers (who collect payments and administer modification and/or foreclosure proceedings on behalf of lenders) to avoid foreclosure. Lenders and servicers receive a $1,000 bonus for each short sale and Uncle Sam (read: taxpayers) will cough up $1,000 to second lien holders in order to get them to play ball. Second lien holders can gum up short sales by demanding payoffs first lien holders aren't willing to make. Washington hopes this token payment will encourage second lien holders to cooperate, but in reality a mere $1,000 may not be enough to coax second lien holders to take their lumps.
In addition to making short sales more palatable, HAFA makes the foreclosure process even more onerous than it already is. Additional notification to borrowers, a required HAMP review of each file and other hurdles to completing foreclosure aim to push more lenders in the direction of short sales or DILs.
3. Non-Distressed Homeowners
Some of HAFA's major impacts, to the extent it is successful of course, will be felt by homeowners seemingly untouched by the legislation: non-distressed homeowners.
While the government wants to delay foreclosures, short sales flooding the market could put downward pressure on home prices. For each successful short sale or DIL, that's one additional home dumped onto the market. Currently short sales are viewed by many buyers as not worth the hassle and that they shouldn't be treated as true supply. If word gets out, however, that lenders are actually cooperating, short sales may lose their negative stigma and start to more strongly impact prices.
Mortgage-paying homeowners could see their property values continue to fall thanks to government efforts to speed short sales to market.
4. Once Again, Taxpayer Loss Is Realtor Gain
No analysis of HAFA would be complete without mention of the National Association of Realtors, or "NAR," which continues to demonstrate it's lobbying prowess.
In addition to supporting the legislation because more short sales means more transactions and more commissions for Realtors, the NAR lobbied aggressively for the inclusion of a provision preventing lenders from lowering a Realtor's commission in a short sale below 6% of the sales price. In distressed transactions, a 5% commission has become the defacto rule, a trend which, much to the NAR's chagrin, is causing commission compression across even non-distressed housing markets.
Thus, HAFA hands lenders, servicers, and homeowners taxpayer dollars, even as it mandates that real estate agents earn more money on each transaction.
So how will it all end? Ultimately, the aforementioned effects will only be felt to the extent the program is an actual success. Will small handouts across many transactions cause actual change?
Will HAFA promote Washington's stated policy of propping up home prices? Will flooding the market with new short sales add to the backlog of distressed homes working their way through the system or fail and further delay the inevitable normalization of the market?
Time, of course, will be the true arbiter of the debate, but I'll be monitoring the program's successes... and failures.
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