March 9, 2010 - Beginning on April 5th, the next big bank bailout to be paid for by taxpayers will launch. The official name it has been given by the Obama administration is the Home Affordability Foreclosure Alternative (HAFA) program. Unofficially, it can be referred to as Cash of Keys. The program is being paid for by taxpayers and it provides money to mortgage servicers and to troubled homeowners. But the biggest beneficiaries of the program are likely to be lenders who are getting bailed out a second time. The only real difference this time is that the government is attempting to disguise the program as something else.
The basic premise behind HAFA is totally different from other government programs which are designed to try to keep troubled homeowners in their houses. In fact, HAFA is all about getting those same people out of their houses quickly; either through a short sale or a deed-in-lieu.
For the unindoctrinated, a short sale happens when a home owner sells their property for less than they owe on it. A deed-in-lieu is when the homeowner signs over their property to the bank without going through the foreclosure process.
Under HAFA, everyone involved in the foreclosure process will get paid. Banks who hold the first mortgage on a property will receive the bulk of the proceeds from a short sale, but will not be the only beneficiaries. These same banks will receive a $1,000 payment from the government for agreeing to the short sale.
Up to $3,000 in additional government incentives will be available to second lien holders, including banks that provided second loans. In a foreclosure, second lien holders are traditionally wiped out. Additionally, the person selling the home will receive $1,500 for relocation expenses. In a traditional short sale, the seller receives nothing in most cases.
How many banks will actually participate in HAFA is questionable. The program requires participating banks to offer short sales or deed-in-lieu to anyone who doesn’t qualify for a loan modification. Participating banks will also have to agree not to pursue legal action against borrowers after the short sale is completed. This could be a tough sell since in many states borrowers may be held accountable by a court for the entire amount they owe even after a foreclosure has taken place.
Another issue for banks is that because HAFA would speed up the short sale approval process, it would force banks to write off the bad debt associated with properties being sold much more quickly. This could cause problems for investors by deflating bank earnings.
HAFA does do some things for certain homeowners that will be attractive to sellers. The question is, should taxpayers be required to pay for the program? Regardless of your answer, the question appears to be moot since the government plans to launch HAFA next month.
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