HAMP, HAFA and other stuff…

In the land of Government acronyms HAMP and HAFA loom large these days. Both are part of the government effort to help distressed homeowners. HAMP stands for Home Affordable Modification Program, which was the program introduced to encourage banks to work with distressed homeowners to modify their existing mortgages, rather than go through a foreclosure. HAMP has worked, but not as well as the lawmakers had hoped. Many people just couldn’t work out qa loan modification or couldn’t even meet the obligations of the modified loans; so, HAFA, the Home Affordable Foreclosure Alternatives Program was introduced You can read the entire government document about the HAFA program at - http://tiny.cc/6Ie45. It’s a tough read.

The main reason that HAMP failed is that many lenders see it as to their advantage to just take the house back through foreclosure, rather than work with borrowers to modify the loans. There is also the issue of second mortgages on many homes, which makes the whole loan modification process more difficult. A secondary reason for the lack of success with HAMP is that the lenders just weren’t ramped up to deal with the processes involved in working through loan modifications and the incentives offered to do that didn’t make it worth their while.

HAFA was created to deal with the reality that HAMP is failing to have the impact that was expected. HAFA starts with the assumption that a HAMP effort was made and that it just didn’t work out, for a variety of reasons. So, HAFA tries to provide incentives to the lenders to do a short sale or a deed in lieu with the borrower, rather than go through the foreclosure process. The idea is that foreclosures have costs that may be avoided, if the lender allows the borrower to sell off the place at its current market value as payment for the debt or accepts the deed as payment in full for the debt. The idea with either avenue is that the borrower gets to walk away without any further obligation to the lender. It still impacts the borrowers credit score, since it will still be shown as less than full payment of the debt for credit purposes; however, it may have less impact on the homeowners credit than a full-blown foreclosure would.

So, will HAFA work any better than HAMP? One cannot be blamed for being skeptical. This is still a program that asks an otherwise greedy lender to do something in the favor of the delinquent borrower – not something that they have been inclined to do in the past. Certainly the lenders have a case that the borrower should have done a better job of figuring out what he/she could afford before they got themselves into the loan. Many times that is likely true; however, in these tough economic times, with high unemployment, it is easy to see how many two-income families could have gotten themselves in over their heads, if one income is lost or reduced significantly. What the lenders really lacked (and still lack) is the staff to do the work to evaluate each case on its own merits.

One reason that HAFA might have a hard time being successful is that it introduces even more paperwork for the homeowners and the lenders to have to deal with to use the process. The Supplemental Directive from the government that introduces and explains HAFA is 46 pages long, if that gives you any idea how complex and lengthy the process may be. Will it work? We shall see. I’ll report back here in a few months. HAFA really doesn’t kick off until April of 2010, so there’s time for more modifications before then.