Government Short Sale Program

Both the New York Times and the Wall Street Journal ran stories recently about the Treasury HAFA program, part of the HAMP program (Reported on this blog on 2/17/1010) and some of the key points of the program.

One of the main concerns are those properties with 2nd liens or subordinate liens on the property. Typically foreclosures net the 2nd lien holders only a small amount or no amount at all, so what happens to most of the troubled properties that have a 2nd on them. Here are excerpts from the Treasury HAFA Guidelines. This program begins on April 5th, 2010.

"Subordinate Liens - We will allow up to 3% of the unpaid balance of each subordinate lien in order of priority, not to exceed a total of $3000, to be deducted from the gross sale proceeds to pay subordinate lien holders to release their liens. We require each subordinate lien holder to release you from personal liability for the loans in order for the sale to qualify for this program, but we do not take any responsibility for ensuring that the lien holders do not seek to enforce personal liability against you. Therefore we recommend that you take steps to satisfy yourself that the subordinate lien holders release you from personal liability."

Here is how this works. A property has a $100,000 2nd on it and under the HAFA the lien holder would be paid 3%, which is the maximum amount and is $3000, sign off on deal and release the borrower from personal liability. The 1st lien would be reimbursed 1/3 of that amount or a maximum of $1000. In this case the 1st would have lost an additional $2000, in order to get the 2nd to release its lien. Not bad for the 1st lien, not so good for the 2nd.

"Investor Reimbursement for Subordinate Lien Releases - The investor will be paid a maximum of $1000 for allowing up to $3000 in short sale proceeds to be distributed to subordinate lien holders, or for allowing payment up to $3000 to subordinate lien holders. This reimbursement will be earned on a one-for-three matching basis. For each 3 dollars an investor pays to secure a release of a subordinate lien, the investor will be entitled to one dollar of reimbursement. To receive an incentive, subordinate lien holders must release their liens and waive all the future claims against the borrower."

So the deck is stacked for 1st liens and not to good for the 2nd liens. Such a small amount of money, 3%, to release the lien, meaning you just loss 97% on this loan, with no recourse against the borrower to recoup this loss. Hmmm, I'm sure this will help some but I suspect that most of these 2nds are going to push for the foreclosure and seek to recoup losses later. Just a guess on my part.