"HAFA" – Foreclosure Warning Dead Ahead!

“HAFA” – Foreclosure Warning Dead Ahead!

Posted by Karl Denninger

Under the Radar – a bit – came this ditty at the end of November.  Coupled with the “unlimited” Fannie and Freddie “credit line”, this may presage a veritable collapse in house prices this coming spring and summer – along with a massive “dump” of inventory.

“HAMP”, the Treasury’s program to “prevent” foreclosures, did not originally appear to have a “stick.”  Well, here’s the stick folks – for those who cannot qualify for a modification, or who “blow it” while on a trial program and simply don’t get a permanent change servicers are in fact required to offer short sale or “deed in lieu” alternatives when they make sense.

Got that?  Servicers participating in HAMP must follow the guidelines set forth in this Supplemental Directive.

No choices here folks – if you’re part of HAMP, you are required to offer expedited and unified procedures for short sales and, optionally, “deed in lieu” programs.

This goes into effect in April, although servicers can start offering these programs earlier. 

Come the spring selling season you’re going to see the inventory of homes that were “HAMPd” and failed for whatever reason hit the market. 

This is not a trivial number of houses – there are close to 750,000 homes currently under trial modifications, and only a tiny number of them – something like 30,000 – have converted to permanent payment changes.

Thank Treasury for not telling you about this until the “selling season” had ended and we were in the middle of the winter months when sales are slow – and timing the “required start” date for April 1st, right into the maw of the spring selling season.

If you need to sell your house in the next year this is something you need to take into consideration.  A flood of nearly 3/4 of a million houses appear poised to hit the market as short sales and “deed in lieu” sales beginning in April.

In short it appears that Treasury has figured out that all these “extend and pretend” games are not converting delinquent loans into sustainable payments and ownership opportunities.  As such the stick has now made it’s appearance.  While this will promote the market clearing (a good thing) one wonders about:

  • The propriety of “deciding” to extend an unlimited line of credit to Fannie and Freddie on Christmas Eve in the hope that the market “wouldn’t notice.”  Dennis Kucinich and a couple of other reps have made noise about Fannie and Freddie becoming the tools by which bad loans are dumped on the taxpayer in a back-door bailout of the banks.  Before you applaud Dennis make sure you look at his voting record on the bills that enabled the bailout of Fannie and Freddie – and made Treasury’s actions lawful – in the first place!
  • The be really really quiet fashion in which Treasury has tried to play this one.  Remember that there are overlapping programs here, and the quiet nature of some, along with the trumpeting of others, appears to be designed to disadvantage consumers – that is, to SCREW YOU.  Specifically, the “first time” home buyers tax credit (and repeat credit) both require contracts to be signed by April 30th, 2010.  This program’s mandatory effect begins on April 1st, which means that with the ordinary process of approval and evaluation (set forth in the document linked above) that inventory will hit the market right about May 1st.  That $8,000 “credit” may be the most expensive $8,000 you have ever received compared to the deal you would obtain had you waited a couple of months and bought into the maw of the short sale and deed-in-lieu unload.  Thank Tim Geithner and President Obama for hiding their intentions in this regard until tens of thousands of Americans bought (and are still considering buying) grossly-overpriced houses when they were fully aware of their intent to force an unload at an actual market price just a few months later!

The short form is that Treasury has suddenly pulled the stick out of its pocket with regard to the HAMP program and as a consequence those who believe that “housing has stabilized” are very likely to get a truly epic surprise later this spring and into the summer months.

In addition, those who bought during the time period of the “home buyer tax credit” almost certainly, to an individual transaction, have gotten and will continue to be screwed, with the essence of the rip-off being the lack of disclosure of Treasury’s intent to force the market to clear. Indeed, Treasury has sent public signals for over two years that they have NO INTENTION of forcing market-clearing prices – EVER!

If “housing stability” is part of your investment thesis, whether it be in credit the equities, you need to check the premise upon which your thesis is based and adjust accordingly.

I applaud Treasury for what appears to be recognition of what I have advocated for more than two years: The housing market cannot be propped up at artificially-inflated prices and must be forced to clear by a return to fundamental values. 

However, I must object to how Treasury has gone about this.  Rather than being an advocate for the people of this nation Treasury has instead intentionally designed these programs and withheld critical information from the public with regard to their full intentions with the purpose and effect of inducing consumers to enter into transactions that are severely to their disadvantage – all to create yet another rip-off of the public for the benefit of the big banks.