Last week I posted comments on the Home Affordable Foreclosure Alternatives program which is taking effect on April 5th. I was not very complimentary and in fact was pessimistic as to its impacts on the economy. While those negative sentiments may still prove true, I have since then taken a closer look at the program and spoken extensively with lenders, real estate agents, and upside-down borrowers. From this, I must now admit I see a lot to like in HAFA… if the lenders will cooperate.

HAFA has two parts: First an attempted Short Sale and then, if that fails, a Deed in Lieu of Foreclosure.  Since it was designed as an add-on to the Home Affordable Modification Program (HAMP), the particpation requirements are the same: principal residence, first-lien mortgage, serious delinquency, unpaid balance under $729,750, and a mortgage payment over 31 percent of gross income.  If a borrower fails a modification or is denied a modification under HAMP, then they can enter the HAFA program and their lender must participate. 

Short Sale - There are several benefits to pursuing a Short Sale through HAFA compared with doing so outside of the Program: 1) Lenders will pre-approve what will be an acceptable sale price;  2) The Application must be considered within 30 days; 3) Up to $3,000 is provided to satisfy the liens of junior lenders (juniors must release their liens); 4) Borrowers can get $1,500 in moving assistance; 5) Real Estate Agents get commission protection; and most importantly 6) No Deficiency judgment is allowed against the borrower.  These are all very good benefits that will both speed up short sales and improve the market.  The downside is whether lenders will actually cooperate with the HAFA program. They are only compelled to consider the Short Sale Application, they are not compelled to approve it.  Nevertheless, cooperation may grow as lenders realize that it is in their own best interests to get the Short Sales done and remove upside down properties from the market faster.

Deed In Lieu - This is an important addition as well.  Currently, if a short sale fails, the property goes into foreclosure with  all of the negative consequences of credit damage, job impact, and depending upon the State, potential recourse liability.  The HAFA Deed in Lieu program eliminates this.  The 1st lender will accept a Deed transferring ownership of the property to the lender. Any junior lenders must agree to release their liens and any recourse. if this occurs, foreclosure and all of its impacts are avoided.

Will all of the benefits of HAFA work? We’ll all have to wait and see how the Lenders respond.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

As readers of my Blog know, there has been very, very little help provided by any government programs that theoretically are to help troubled homeowners keep their homes.  Even less help has been provided by the lenders.  The original Hope For Homeowners program failed to get lender cooperation. This was followed last year with the Home Affordable Mortgage Program (”HAMP”) which also has failed to deliver any substantial help to upside down borrowers.  And now, effective April 5th, the government will open their newest program, the Home Affordable Foreclosure Alternatives Program (”HAFA”).  Significantly, this Program is being introduced as a part of the HAMP program but it has nothing to do with helping people keep their homes. Rather, it is designed to assist lenders in getting the existing owners out through a short sale or deed in lieu of foreclosure. 

The sad reality of HAFA is that it effectively gives the lenders what they wanted… a politically correct reason to deny modifications (which they don’t want to do) and a faster way of getting the existing owners out (which they do want to do). So, for upside-down owners, there’s no help in HAFA.  But for our economy, the results may be even worse.

Today’s real estate market, especially in California, is operating on an artificial economy.  The lenders are holding back putting all of their foreclosed properties on the market. This keeps the supply down and keeps prices up.  The lenders could put more properties on the market but that increase in supply would cause prices to fall since demand by buyers is not growing. The result of this is that the lenders have been slowing down the foreclosure process so they don’t get more properties that they’ll just hold back.  But since all of these must eventually get sold, this means that it will be many years before our real estate economy is not driven by the lender’s inventory of foreclosed homes. And, thanks to HAFA, it may now get much worse.

Under the rules of HAFA, all lenders that participate in the HAMP program must participate in HAFA. This means that if a lender denies a homeowner a modification under HAMP or the modification fails or is not accepted, the lender must offer the homeowner a short sale or a deed in lieu of foreclosure and our government (we the taxpayers) will pay the lenders and borrowers to participate.  This will speed up the change of ownership.  But what will be the effect on the already over-supplied real estate economy?

According to the lending industry information service, Mortgage News Daily, as of the end of 2009, only 4.3% of all HAMP modifications resulted in permanent loan modifications. Over a million trial modifications are in process. Unless the permanent modification numbers increase dramatically, we could be facing an additional 950,000 short sales and foreclosures coming on the market.  This would be a disaster as these get added to the already over-supply driving down the values of property. Existing buyers, investors, and lenders would be scared away from an unstable market and the problems in the economy would become even worse.

Is there any solution?  Well if the objective is to help people keep their homes through loan modification, then there needs to be a way to compel lenders to reduce principal amounts owed. If lenders continue to refuse, then Congress should pass the Chapter 13 Bankruptcy Reform which the Senate shut down last year. Alternatively, compel lenders (particularly BofA) to waive deficiency recourse so that everyone can move on.

Sadly, there remained no Hope for Homeowners in that program and Making Home Affordable has not made homes more affordable. HAFA gives up on the hope of helping owners stay and instead will only help owners go. Unfortunately, this may hurt us all.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.

California law requires that property owners must return the tenant’s security within three weeks from the time the tenant vacates and document any deductions. When ownership is transferred to another, the former owner is required to either transfer the deposits to the new owner or return them to the tenant.  But what happens when the property is foreclosed and the former owner that collected the security deposits is gone or even bankrupt?

Under California Civil Code Section 1950.5, a successor owner is jointly liable with the former owner to retun the deposits once the tenant vacates. The idea is that the innocent tenant’s right to the deposit should be protected and that any disputes over this are between the current and prior owner, not then tenant.  There is an ambiguity being argued by lenders that this obligation is extinguished by the foreclosure just as is the rental agreement itself.  This may be held to be true where the post-foreclosure owner treats the rental agreement as extinguished. In that case, the tenant similarly has no obligation to pay the rent and so the situation may become a wash.  But the result is reasonably different where the new owner treats the rental agreement as continuing and actually collects rent.  There, most likely, the law will protect the tenant.

Despite the above-stated ambiguity, all perties acquiring property through a foreclosure must anticipate that they will likely be liable for the tenat’s security deposit that was collected by the former owner. Further, they should make sure that they have a new rentail agreement signed by the tenant if the rental is to continue.

If you have any questions concerning your rights and obligations concerning real property, foreclosure, or any related issues, please feel free to contact me at sjbeede@bpelaw.com or contact my office at 916 966-2260 for a confidential appointment by phone or in person.