On June first of this year Fannie Mae and Freddie Mac released guidelines that propose to govern the short sale process flow for loans that are owned by either of these two institutions. The recent Home Affordable Mortgage Alternatives Program (HAFA) guidelines for GSE mortgages (mortgages held by Fannie or Freddie) do display marginal improvements over the HAFA guidelines for non-GSE mortgages launched back in April of this year. However then and now these guidelines can be likened to that beautiful storefront in your town built a couple years ago that no one can afford; gorgeous facade, vacant inside.

A little background on mortgages: There is a primary and a secondary market for mortgages. Banks such as Chase loan money to consumers (primary market), then sell those loans to secondary mortgages holders such as Fannie Mae or Freddie Mac. This provides Chase with money to continue offering loans to additional borrowers; the cycle continues. Even though Fannie Mae and Freddie Mac own a majority of the mortgages out there, they still enlist the help of banks to service their loans. For example: Chase may give you a mortgage and then sell the mortgage to Fannie Mae. At that point it is very common for Chase to act as a front for the loan, providing you, the borrower, customer service, the ability to monitor your loan, etc. This also gives Chase a chance to retain you as a customer and market additional services to you; a win-win for the banks. It is also important to note that if Chase wants to resell your mortgage they have to make sure that they lend you money based on guidelines set in place by the secondary mortgage company who will be buying it; in this case Fannie or Freddie. If Chase plans to keep the mortgage themselves, they do not have to conform to these lending guidelines.

HAFA Shortcomings

Opt-In

The HAFA program is opt-in for non-GSE mortgages. After the guidelines were put into place, there was an almost nonexistent response from banks who were already slammed with too much work. As a result, very few banks leapt at the idea of completely re-working the procedures they have been hacking together like a patchwork quilt for the past year or so; especially with one that has no track record to prove a direct benefit to their bottom line.

Learning Curve

Since the policies and procedures of these guidelines are largely untested they are constantly going through revisions. If anything this will discourage banks from participating until the revisions taper off, if ever. There is no way to test these policies except in real life scenarios and selling a financial institution on the stability of standardization, while simultaneously enduring frequent revisions, will be tumultuous at best.

Inconsistent

The fact that the HAFA guidelines for Fannie and Freddie have variations from the HAFA guidelines for non-GSE mortgages is a mistake that needs to be remedied. How can you wave a banner of standardization while at the same time have variations under the same name? Also, banks that service Fannie and Freddie loans will be required to conform to the GSE version of HAFA on loans they wish to resell and continue to service. One question that lingers unanswered in my mind is: If Fannie or Freddie strikes a deal for a bank to service a loan that wasn’t originated by that bank (common), will that bank need to be GSE HAFA “certified” on all of their loans? The answer is important, because if Fannie and Freddie require banks that service their loans to be GSE HAFA accountable, it would be a huge boon for the efforts to standardize the industry as a whole. If the answer is that banks servicing Fannie or Freddie loans can opt-out on all non-GSE short sales this would impede movement toward standardizing the short sale process, which is supposedly the goal of both HAFA programs. If the new GSE HAFA guidelines do not require banks that service their loans to be consistent with the way they handle all of their short sales it opens huge doors for banks to rob consumers out of their portion of the HAFA guidelines depending on what’s best for the bank.

Banks Have Too Much Control

On many mortgages, it may be financially beneficial for banks to opt-out of HAFA. For example: The proposed incentive is $1500 given to a bank for conforming to HAFA guidelines on a short sale ($2200 for GSE HAFA). These guidelines also protect Realtor commissions up to six percent, but given that even a one percent reduction in commission can save the bank many times that amount depending on the purchase price, how attractive are these incentives? Also when compared to the enormous amounts of money the lending institution is losing when they agree to a short sale, the $2200 seems like a drop in the bucket. Combined with the fact that banks are allowed to opt-in on a case-by-case basis, it seems like HAFA is encouraging banks to keep their ad-hoc guidelines running in parallel with those of HAFA. What this will allow them to do is analyze whether or not it is beneficial for them to go HAFA or not; regardless of what’s best for the consumer that is experiencing a financial hardship. If it works out that the bank can save more money by choosing not to go HAFA, then the consumer loses out on the relocation assistance money that HAFA would have awarded them to find a new place to live. Also because the HAFA program puts a cap on the money that junior mortgage holders are allowed to be awarded and many banks hold both the first and second mortgage on a given property, this will be another incentive for a bank to opt-out if they feel that they can recoup more money by doing so. Another thing that may push a bank to opt-out is the fact that with HAFA they can no longer go after the borrower for a deficiency judgement which in some cases is could be a huge loss for them. With regard to the time it takes to process a short sale, HAFA may make things take even longer as now banks have even more risk to analyze before moving forward one way or the other!

No Enforcement

As an optional program, initially there were few banks that chose to be the guinea pig for these guidelines. Many bank workers still have no idea what HAFA is. Anyone working on a short sale right now has undoubtedly encountered this lack of awareness. For many banks that did decide to get involved with HAFA it ended up being on a case-by-case basis rather than a company-wide policy. What is the point of implementing standard procedures if they are not standard across the board at a given institution? What this is turning out to be is more of a way to for banks to work the system by utilizing HAFA when it is financially beneficial to them and avoiding it when it is not. This may bode well for their bottom line but what about the consumer? What happened to focusing on Main Street not Wall Street? The fact of the matter is that in order to accomplish what HAFA claims to, the industry must adapt these guidelines as enforceable regulations, and a governing body must be created to evolve, educate and enforce said regulations with the power to enact penalties for noncompliance.

Prognosis

HAFA is a weak start in a long race.  While trying to regulate and streamline an already laborious process, it seems to accomplish the antithesis.   For now it’s more of a conversation piece than a tool to help us climb the short sale mountain.  At the very least (and not much more) HAFA gives us bloggers something new to BS about.   Until the revisions taper off and an agency to enforce these regulations is implemented, we’re like a hamster with two wheels in our tank… either one we choose, we’re just running in place.