Improving the Government’s Foreclosure Prevention Plan

This past week, the Obama administration made a few changes to the Making Home Affordable (MHA) program. “Within the next few months,” according to their website’s FAQ page, more incentives will be offered to assist homeowners in pre-foreclosure, especially those who are both unemployed and underwater. What do those changes mean for short sale investors?

The new program will involve lenders granting a forbearance for three to six months on the mortgage loans of certain unemployed borrowers who already qualify for the Home Affordable Modification Program (HAMP). After the forbearance period, the borrower will be considered for a permanent HAMP loan modification in order to avoid foreclosure.

In this scenario, forbearance means that lenders would be given an incentive to write down the principal of the mortgage loan if the value of the home is significantly less than the balance due on the loan. The forbearance would equal “some or all of the principal balance over 115 percent LTV as needed to bring the borrower’s payment to 31 percent of income.” If the borrower stays current on the payments after that, the amount of the forbearance would actually be forgiven over the following three years.

Although the cost of implementing these changes will be split between the private sector and the federal government, federal funds would come directly out of the unused portion of the Troubled Asset Relief Program (TARP) money, so we’re not adding even more to the national debt over this.

The idea behind all this is to reach out a little further to homeowners who are in trouble from no fault of their own. The government wants to find a way to stabilize the housing market by helping certain “responsible borrowers” while shying away from assistance to the undeserving. (I don’t personally think this makes a dent in stabilizing the real estate market, but I’ll have to save that for another post.)

How will this affect real estate investing, and the short sale niche in particular? Not much – and only because not many homeowners will actually qualify for the new workout plans.

Not every lender is participating in HAMP. That alone dramatically cuts the number of borrowers who might otherwise qualify for assistance. For example, the Washington Post says that Bank of America is completely on board with this – which is great news for former Countrywide borrowers - but their program only looks at borrowers who have 120 percent LTV or higher. Every lender will weigh the costs and benefits a little differently.

HAMP also allows lenders a little wiggle room for determining a borrower’s credit risk before deciding to modify any mortgage loan. That’s not good news for homeowners whose credit has been trashed by personal hardship or overconfident use of their credit cards.

Eligible borrowers will need to be able to prove that they’re receiving unemployment benefits. That counts out everyone who isn’t eligible due to self-employment or other reasons.

Finally, here’s a direct quote from MHA’s FAQ page:

“After the forbearance period, if the borrower cannot qualify for a HAMP modification their lender will be required to consider them for an alternative to foreclosure, such as a short sale or deed-in-lieu of foreclosure as part of the Home Affordable Foreclosure Alternatives Program (HAFA).”

As short sale investors, part of our job is to educate our clients about their options when facing foreclosure. (Read more about that in this post, if you haven’t already.) That means keeping up with new developments and understanding how they affect different people. Be able to explain things to your clients. Homeowners may have this new option on the table, but it isn’t for everyone.

So the short answer is this: your short sale business is going to be just fine. Keep fine-tuning your marketing strategy and your business systems, and just add these new factoids to your arsenal of knowledge as the local short sale expert.