Why is HAFA good for Short Sales?

Projections suggest that 50% of mortgages will be under water within the next 24 months.

We have all been hearing about HAFA the last while and how its here to save homeowners and get banks to play nice.

Maybe I’m biased but I don’t think banks needed the monetary incentive, but they will certainly take it when it suits them.

You see, a lot the insiders I talk to are skeptical that this program will actually work on a broad scale.

The 2 big things HAFA promises:

1-Cash incentive for sellers
2-Banks commit to NOT pursue deficiency

Those in the trenches are thinking that the HAFA program won’t be effective because it is a suggestion with incentives for banks IF they follow it and NOT an obligation.

But when we lay out the 2 main options for defaulting mortgages and their consequences it looks like this:

Foreclosure(F) Vs Short Sale(SS)

F= 1099-A or slim chance to pursue deficiency
SS= 1099-C or the option to pursue deficiency if included in the short sale agreement

Many states are not allowing homeowners to be exempt from taxes owed on the 1099′s like the MFDRA allows with the IRS and so the homeowner MUST look at the reality of selling a home versus foreclosing and ALL the consequences.

Foreclosures are typically sold for less money than short sales, the loss incurred by the lender is GREATER and therefore the 1099 will be LARGER in a foreclosure than in a short sale. Banks average COST is $60,000-$70,000 on a foreclosure, it is far reduced when sold as a short sale.

Banks will naturally select Short Sale instead of Foreclosure ALL DAY LONG IF (and its admittedly a HUGE if) the agents would present the deals to the short sale lenders in a way that clearly shows the advantage of the short sale with good numbers. Then the agent and buyers NEED to CLOSE the deal in a timely fashion.

The other obvious factor is that banks are really interested in the option of pursuing deficiency judgments / collections on as many short sales and foreclosures as possible.

This will be an interesting next few years…