Policy Shift: Making Home Salable
SERVICING MANAGEMENT - July 2009.
Recent changes to the federal foreclosure-avoidance plan indicate the Treasury is learning what servicers already knew: Not ever home can be saved
In mid May, the Treasury Department once again enlarged its Making Home Affordable program (MHA). What is notable about this latest addition - another set of incentives and guidance for short sales and deeds-in-lieu of foreclosure - is that it represents a departure from the Obama administration’s stance, up to this point, that every mortgage is salvageable.
Until Secretary Tim Geithner’s announcement of the foreclosure alternative incentives, MHA had centered on simply one objective: home retention. Whether by modifying a loan or refinancing a borrower into a new loan, the government’s plan seemed to ignore the fact that home retention is not always a possibility. And while most servicers were aware of this, MHA focused so heavily on keeping the current borrower in his or her home that any decision to do otherwise was almost looked at as a failure regardless of a borrower’s specific circumstance. Decisions on short sales and deeds-in-lieu continued but were not promoted
“I think the Treasury’s initial focus was the right focus”, comments National Quick Sale President Rich Rollins, referring to the emphasis on home retention. Rollins sits on the HOPE NOW - organized committee that advises the Treasury on its servicing related initiatives.
“But as we found out, that was no silver bullet,” Rollins continues. “There doesn’t seem to be, no matter what kind of program they come out with, a long term solution.”
Rollins does, however, praise the Treasury for its responsiveness, saying the MHA architects have been very willing to listen to industry concerns. Under the new program details, servicers, borrowers and junior lien holders are all eligible to receive incentives for the successful completion of short sales or deeds-in-lieu. Servicers can receive up to $1000 for each short sale or deed-in-lieu, and borrowers’ relocation expenses can be compensated up to $1500. For subordinate lien holders the Treasury will match half the costs of releasing claims, up to a total contribution of $1000.
The Treasury’s initiative extends beyond financial compensation. The department hopes to standardize the sometimes rocky short-sale process by streamlining documentation and setting parameters around the length of time that borrowers can try marketing their homes. Horror stories abound regarding short sales that, for lack of coordination or lack of lender support take months to complete. It is common for both property buyers and sellers to linger in uncertainty as the many pieces are organized.
“These are critical steps in stemming the foreclosure crisis and stabilizing the housing market, both of which are critical to our economic recovery,” Geithner said in a statement announcing MHA’s expansion. Just having the mandates in place, however, is no guarantee that servicers will be able to comply, Rollins points out, specifying the Treasury rule that servicers must respond to borrowers within 10 days of a short sale offer.
That’s a bold statement, because there is no magic pixie dust to spread across portfolios to give people more skill set than they ever had before,” he says. Although a 10-day response time frame has been proven achievable, it is not the industry norm.
DepotPoint Inc. President and CEO Prakash Kondepudi views the expansion as the first pragmatic adjustment made to a well-intentioned - but fundamentally flawed - program.
This is a realization that not every homeowner will meet [Home Affordable Modification] criteria, ” he says. “I think everybody in the industry understands that, but there was no structured program in recognition of that”.
Incentive suitability
But junior lien holders, whose refusal to release claims is often the reason short-sale transactions fail, will likely remain a sticking point, despite the Treasury’s cost-sharing approach, sources say.
“The problem, in my mind, is the second lien holders, who have the least amount of interest in the property but control 100 percent of the deal,” notes TJ Culbertson CEO of ShortSense, a company that provides an online database of short sales. Although he believes the incentives are a step in the right direction, Culbertson says they are insufficient to spark real participation.
“Just saying $1000, max, across the board to lien holders isn’t going to work,” he says, pointing out that foreclosures will remain a favorable option in high cost areas. Culbertson suggests that the Treasury take a page out of the government sponsored enterprises’ playbook and set incentives based on regional trends.
“Why don’t they apply the same logic to the [MHA] plan?” he asks.
Junior lien holders were releasing their claims to the tune of $.03 to $.05 on the dollar during the second half of 2008. DepotPoint’s Kondepudi adds. On a$60,000 note, that equals a payout of between $2000 and $3000.
“In scenarios where junior lien holders are not relevant or where they agree to participate, newly MHA-empowered short sales will be joining a bloated inventory. The total housing inventory at the end of April included 3.97 million existing homes available for sale, representing a 10.2 month supply at the current sales pace, according to data from the National Association of Realtors (NAR). The broader implications of an influx of distressed properties may include a delay in turning around the larger housing market, analysts point out. Distressed homes are typically selling for 20% less than traditional homes, NAR says.
“Whether a foreclosure or a short sale, it’s still a distressed property, often priced at a discount to homes around it, placing downward pressure on other homes,” points out Amy Bohutinsky, vice president of communications for real estate data provider Zillow.
The percentage of first time home buyers declined in April, NAR data show, but those buyers still make up a large portion of today’s purchasing community. And the property types that first time buyers usually gravitate toward are the discounted, distressed ones. In April nearly half of all existing home sales (45%) were sales of distressed properties according to NAR data.
“It appears that for investors and first-time home buyers, they’re starting to step up in areas where there are high volumes of distressed properties”, Bohutinsky says. “People tend to be taking advantage of these in some of the hardest-hit areas, and they tend to be investors and first time home buyers who are seeing these as bargains.”
Other factors - namely the Federal Housing Administration’s recent decision to allow the $8000 first-time home buyer tax credit to be used for down payments - may drive more new buyers to the market. The domino effect that will likely result is that homeowners, who have been sitting on the sidelines because of the market conditions, will be compelled to try to sell their homes, Zillow’s research shows.
Almost one-third of homeowners say they would be at least “somewhat likely” to put their homes on the market if they saw evidence of a market turnaround, the company’s Q1 Homeowners Confidence Survey found. When asked to describe evidence of a turnaround, 71% of respondents noted increased sales in their neighborhoods, Bohutinsky says.
We’re starting to see increasing home sales in some areas, and if we see a couple more months of it, it would indicate that a whole bunch of people could be likely to put their homes up for sale,” she adds. “If there’s this flood o new inventory that comes on the market just as things start to improve, it could send the market back down again.”
