Failed HAMP may benefit from HAFA

Smart Real Estate News & Commentary by Chris McLaughlin July 22, 2010 

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Failed HAMP may benefit from HAFA

With the amount of canceled trial modifications in the Home Affordable Modification Program (HAMP) passing permanent conversions, some are anticipating that the Home Affordable Foreclosure Alternatives (HAFA) program will be more effective in keeping homeowners out of foreclosure.  As you’ll recall, HAFA was designed to give borrowers who failed to make those payments a chance at a short sale or deed-in-lieu of foreclosure.  Based on survey data of the eight largest HAMP participants, the Treasury found that 45% of the canceled trials from HAMP are in an alternate modification. More failed HAMP modifications could enter HAFA after falling into delinquency after the conversion into permanent status.

For modifications that have been permanent for more than six months, 6% have fallen into 60-plus day delinquency again. The default rate, or the percentage of modified loans that are now 90 or more days delinquent, is less than 2% at six months after the conversion. Cary Sternberg, president of Excellen REO, an asset management firm and subsidiary of Titanium Solutions, said that HAMP was designed for those who want to stay in their home, but as prices continue to deteriorate, more homeowners are looking for a way out, either through short sale or deed-in-lieu.  “Then comes HAFA. In recognition of the fact that some borrowers simply could not make payments even if the payment were lower, a more dignified exit strategy was created,” Sternberg said.  “It is too early to tell what the success rate of the HAFA program will be, but I am betting it will be far better than HAMP,” Sternberg said. “HAMP is a Band-Aid, HAFA is an exit strategy.”

Dodd-Frank Act bad for business

Surprise!  The Dodd-Frank Act signed yesterday by President Barack Obama could have a range of unintended consequences on the mortgage securitization market, according to various commentaries.  Standard & Poor’s (S&P) president Deven Sharma warned the legislation could expose rating agencies to greater liability for — and lawsuits over — ratings of mortgage-backed deals.  According to Barclays Capital analyst Joseph Astorina, Moody’s Investors Service, Fitch Ratings and S&P “have instinctively pulled back from the new issue securitization market until they are better able to asses this new liability.”  The law’s reforms concerning securitization are designed to remove the incentive of the “originate-to-distribute” model, according to a client alert from law firm K&L Gates. 

Other “unintended” consequences cannot be known until the legislation is enforced, noted accounting firm Deloitte in commentary.  “By way of example, a driving element of the law has been to address the ‘too big to fail’ issue, reducing the risk that large firms might take excessive risk because they are in effect guaranteed to be bailed out in the event of a failure,” the firm said. “But because this is an extremely complicated problem, no one actually knows what the consequences of the new law will be — the new systemic regulator will probably make this a central issue as it sharpens its mandate in the coming months.”

Jobless claims up

The Labor Department says there were 464,000 initial jobless claims filed in the week ended July 17, up 37,000 from a revised 427,000 the previous week.  The number of claims was much higher than expected. A consensus estimate of economists surveyed by Briefing.com expected new claims to rise to 445,000.  The 4-week moving average of initial claims, which is calculated to smooth out volatility, was 456,000, up 1,250 from the previous week’s revised average of 454,750.  The government also said 4,487,000 people filed continuing claims in the week ended July 10, the most recent data available. That’s down 223,000 from the preceding week’s upwardly revised 4,710,000 claims.  Economists surveyed by Briefing.com expected ongoing claims to edge lower to 4,600,000 from the unrevised 4,681,000 in the previous week.  The 4-week moving average for ongoing claims fell by 21,500 to 4,567,000 from the preceding week’s revised 4,588,500.

Commercial real estate coming back?

Analysts have been warning for months that commercial real estate could be the next shoe to drop in the subprime mortgage collapse that came to a head in 2008, but there may be some good signs in the thawing of securitization markets and indications that investors are ready to come to auction when properties are on the block.  Marc Halle, managing director of real estate investments for Prudential Financial executives, acknowledged that distressed conditions are likely to intensify in the market but does not expect to see “wholesale foreclosures.” Instead, real estate investment trusts could become a more attractive asset class in a slowing economy as interest rates stay low and REIT dividends remain solid.  The banks are expected to launch $1.4 billion in two offerings of commercial mortgage-backed securities, according to a report Wednesday in the Wall Street Journal, which cited sources familar with the planned sales. 

The offerings pale in comparison to the more than $1 trillion coming due in maturing debt over the next five years, but offer some glimpse that Wall Street may be getting back on board.  Uncertainty among borrowers regarding whether banks will go back to more normalized lending practices is at the root of criticism against the Frank-Dodd financial regulations that President Obama signed Wednesday.  Banking analyst Dick Bove, at Rochdale Securities, said there is a persistent rumor that the Federal Reserve is looking at loosening capital requirements. Bove, a harsh critic of the new law, said that would be a welcome development.  “It demonstrates that the Fed understands that it must help the banks so that the banks can help the economy,” Bove said in a note to clients. “It implies that the Fed will not be very hasty in putting into effect the onerous rules being mandated by the banking legislation. If the Fed truly understands this, the outlook for banking and, more importantly, the economy is beginning to change in a positive manner.”  Banks themselves have been voicing some slightly encouraging sentiment regarding the direction of commercial real estate.

20% of Americans suffered major economic loss

The new Economic Security Index, constructed by Yale political scientist Jacob Hacker and a team of researchers, estimates that 20% of Americans suffered a significant economic loss last year – the highest level in the past 25 years.  The Index looks at the interaction of three key variables that have a direct bearing on a person’s economic security: income loss, medical expenses and debt.  The ESI defines people as economically insecure when their situation meets two criteria. First, within a year’s time they have lost 25% or more of their available gross income. Available gross income is the money they have left over after paying for medical costs and debt. Second, they don’t have enough in an emergency fund or other liquid reserves to make up the difference.  According to the index, which tracks Census Bureau data since 1985, 12.2% of Americans were economically insecure in 1985. By 2009, Hacker and his team estimate that 20.4% of Americans could be classified that way. The actual number of people affected increased by more than half, from 28 million in 1985 to roughly 46 million by 2007, the last year for which hard numbers were available.  In the past, some economists, such as Stephen Rose of the moderate-progressive think tank The Third Way, have conducted research that counters the broadly negative view about how the middle class has fared economically over the years.

Now for our real estate education section…

How to Price Any Property for Maximum Profits

Although the classic definition of the “right price” is whatever a willing buyer is willing to pay a willing seller (yes, we know it’s redundant), pricing is also a value proposition. In order to price a property for maximum profits, it’s essential to understand how to communicate and evaluate the value proposition to both the buyer and the bank.

What to Measure

1. Capacity – Any given area or builder has a set capacity. The more less capacity, the higher the price assuming demand is in place. During the height of the real estate boom, savvy builders capitalized on desirable locale’s by creating a sense of urgency related to capacity…often to the detriment of the eventual buyers who later learned there was a glut of unsold condo’s or other properties waiting in the sideline. However, despite the recent decline in real estate, many markets and specific neighborhoods remain highly desirable with limited capacity.

2. First Offering – Closely related to capacity is the concept of “first offering”. Face it, everyone likes something that is “brand new” but have you ever stopped to ask yourself why? A new house or neighborhood is somewhat “unproven” but the excitement of being “first” tends to create anticipation that can be tapped into. Take a note from developers that routinely price high to create a sense of value, then discount to provide customers a sense of a “good deal”.

3. Enhanced Value – Everyone likes to feel like they are appreciated and nothing says “appreciation” like a free upgrade or other valuable service. Make a list of amenities included in the sale of the property and/or consider including a few low-cost additional enhancements. Popular ones include free lawn-care for a year, electronic device or home warranty.

What to Exclude

1. Acquisition Cost – Without a doubt, this is one of the most common mistakes made by novice investors; the tendency to use acquisition cost as a basis for the sales price of a property. As millions of Americans have learned, what you pay for a property may have little to no bearing on the eventual price of a property….good and bad. Although the media is filled with horror stories about people that paid too much for a property (of more often…obtained bad financial terms), there are equally impressive numbers of people that made a lot of money after paying very little for a property. Price the property based upon value…not acquisition cost.

2. Expenses – If acquisition cost is the most common errors, surely expenses are the next. The tendency to add up the cost of repairs, insurance, broker and agent fees, taxes and other expenses in order to derive a figure is outdated at best and limiting at worst. Again, price the property based upon perceived value rather than cost or expenses. It’s often possible to perform inexpensive upgrades that dramatically alter the appearance (and desirability) of a property for very little investment. Don’t deny yourself the benefit of a fully priced property if in fact, it’s possible to price higher.

See you at the top!

Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2010.

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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

    * As the top Florida foreclosure and pre-
      foreclosure expert, he oversees more than
      100 short sale & REO closings each month
   * Long-time authority on real estate investing
      and rapid reselling of distressed homes.  Owns
      portfolio of nearly 100 high-value, high-profit
     properties
    * Owner of one of Florida’s largest Real Estate firms,
     running 4 different offices, supporting over
     400 agents, uniquely positioning him to help
     thousands of investors make money in the
     biggest market opportunity ever!
    * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building
    * Follow me on Twitter: http://twitter.com/mclaughlinchris
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