With the participation of Fannie Mae and Freddie Mac in HAMP and HAFA the number of loan modifications and smooth instead of treacherous short sale solutions will go up. Of course the first impact is on the borrowers. It will be a more compassionate outcome for them. But what about society? Where do the rest of us come out when these loan mods and short sales take place versus foreclosures?
I contend that everyone is better off. Let's examine why.
- Foreclosures weaken the institutions that do the foreclosures compared with the HAMP and HAFA programs. That's what the programs are actually designed to do, that is ameliorate the damage to the lenders. Let's get under the hood and see why. HAMP (that's the loan modification program) will only allow a loan modification if and only if the borrower is a good risk at the reduced interest rate. And the reduced interest rate is never reduced below what the prospective "hit" the lender would, by its own calculations or a formula supplied by the Fed based on an algorithm that is designed to assure the lender a least-damaging outcome--versus a foreclosure. What happens is the lender gets BPOs. Real estate brokers go out and develop an opinion of what the home might sell for if put on the market under various conditions such as foreclosure. Then once the lender has enough opinions it decides what value the home is actually likely to bring if it is foreclosed. This gives the lender a present value number which is what it will not go below in offering an interest rate reduction to the borrower. But it will not offer that rate reduction if the borrower has not proved income that is at least 31% of what would be the PIMI for that loan. Thus the lender is changing a bad situation into one that is less threatening.
- By making the lenders more resilient we are making the whole of society more resilient and will work our way out of the crisis sooner than we would if we allowed the troubled loans to go into foreclosure.
- When the borrower does not qualify for the loan modification, the next step is convincing them to go for the short sale instead of being belligerent and allowing the property to go into foreclosure. Lenders get much less if a property goes into foreclosure, and the lender had much more in expenses versus getting the borrower to maintain the home while it is being shown to prospective buyers and eventually sold for the best price it can get, albeit for less than the mortgage balance. What is the trade off the lender gives to get this cooperation? In many states the lender has a right to collect the deficiency of what it cannot collect if it settles for less than 100 cents on the dollar whether through short sale or foreclosure. But under HAFA it gives up that right. What would it do with that right ordinarily? Ordinarily it would not do too much since the borrowers have no money. That's why they are unable to pay. Maybe if the borrowers come into money collection actions will get some of it but the expenses involved in unsuccessful collection actions usually discourage most lenders from doing anything but selling the accounts to collection companies for pennies on the dollar. Of course there's a profit for those companies if they can collect a dime and they paid only six cents by hounding the borrower. But the six cents hardly helps the original lender versus gaining cooperation. Why is that? Usually the difference in what the lender gets from a short sale versus a foreclosure is tens of thousands of dollars. It's a wise trade off.
- Again, if our financial institutions come out better, it's better for everyone. But if our citizens can extricate themselves. and move on with their lives, it's better for everyone too. When the world is crashing around them it's impossible to be contributing members of society. All they can do is worry and be in grief over their misfortune. Once the "surgery" is complete they may lick their wounds for years but eventually they can become productive again.
- I would also point out that even though often what got many of the borrowers in trouble was buying more than they could afford by taking on exotic financing. Our entire society began to wrongly make assumptions that there was no such thing as a bubble when it comes to residential real estate even though history has proved otherwise. It has been the public at large, and our representatives in Congress that have overlooked what went on, because they have assumed the same "facts." The weren't facts. They were delusions.
- While we're on the subject there are those who decry Fannie and Freddy ever getting into buying any of these loans and blame these two institutions for the trouble of the entire social and economic fabric that brought this situation on. That is unfair because Fannie and Freddie were among the last to join the fray when it came to securitizing them. They only did so as "business" seemed to go away. They were Johnie Come Latelies in buying and securitizing the exotic loans today collectively called sub-prime. They were not the trend setter. The fact that Fannie and Freddie were responsible to make a profit for shareholders is what got them into the mess. By contrast Ginnie Mae, which is responsible for FHA and VA loans had their normal course of nonperforming loans throughout the period, admittedly more than 20% down conventional loans, but not disproportionate growth during the same period. (Some people would say FHA specializes in sub-prime loans and relative to the highly documented conventional loans of yester -year and what we are getting back to in the conventional market, it's true.) And Ginnie Mae is entirely owned by the government. So much for those who accuse the socialistic trends wherein now the government has taken over Fannie and Freddie.
- I think the major problem with the takeover is that now they will be politicized beyond what they have before, and before they ran one of the most concerted lobbying machines Washington has ever been set upon. Since Fannie and Freddie still have a lobbying mentality, but now are owned and shouldn't, they will anyway, and big trouble looms in the future.
Howard Prager is a Realtor in Colorado Springs, CO affiliated with Keller Williams Hope Realty with a specialty in distressed real estate. He was a property disposition broker for HUD, a receiver for the courts, is certified as an SFR (Short Sale Foreclosure Resource) by the National Association of Realtors, certified as a CDPE (Certified Distressed Property Expert) by the Distressed Property Institute; certified as a REDS (Real Estate Divorce Specialist) by the Real Estate Divorce Specialists. A HAFA resource for including an immediate self-help self-qualification algorithm is located at http://programhafa.org. Howard Prager's main domain is http://howardprager.com where advice to other real estate professionals and the public about short sales in Colorado as well as divorce related real estate transaction information can be found.
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