This post first appeared on Minyanville.

It wasn’t so long ago that foreclosure relief programs had near-unanimous support in the political community. There were elections afoot after all, and something had to be done about the millions of homeowners facing the loss of their home.

But as data continue to show that loan modification and short sale initiatives are floundering and austerity emerges as the buzz word for the upcoming 2012 elections, such programs are on the chopping block. The House of Representatives passed two bills last week that evidence the lack of support for foreclosure prevention programs that have failed to stabilize the tattered housing market.

Last Thursday, the House voted to end the Federal Housing Administration’s short refinance program, which aimed to help borrowers refinance their underwater mortgages, and on Friday passed a bill killing a Housing and Urban Development program that provides interest-free loans to homeowners who have lost their jobs. But as HousingWire reports, any push to terminate the programs may not make it to the finish line. A source within the Senate called the bills “dead on arrival” and the Obama administration said the president would veto the bills if they make it to his desk.

Meanwhile, House Republicans and even some House Democrats are working on similar bills to kill the Home Owner Modification Program, or HAMP, and Home Affordable Foreclosure Alternative, or HAFA, which push banks to modify delinquent mortgages and accept short payoffs, respectively. A short payoff (also known as a short sale) is when a bank allows to the homeowner to sell the home for a lower value than the mortgage. Both programs were Obama-led initiatives that promised relief for troubled borrowers. Actual results have been underwhelming, at best.

The specter of ending borrower assistance programs is a mixed bag for big banks like Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC), who still retain billions in exposure to delinquent mortgages. On the one hand, less federal pressure to accept short sales and complete loan modifications could mean that banks take fewer losses in the near term.

On the other hand, homeowners eligible for assistance would are almost certainly end up in foreclosure if the programs get nixed. Foreclosure remains the least “profitable” exit scenario for banks, as carrying costs, home price depreciation and liquidation expenses make taking a loan through the entire repossession process a costly endeavor. A higher foreclosure rate means that banks would likely increased losses from a larger portion of their delinquent loans ending up real estate owner, or REO.

Certain real estate investors however, would cheer this possibility, as recent foreclosure moratoria stemming from last year’s robo-signing scandal has left foreclosure buyers starved for projects.

In the long run, winding down ineffective foreclosure prevention programs is the healthiest option for the housing market and the nation’s homeowners at large. The longer millions of distressed mortgages loom on the horizon, the longer a true recovery in the housing market will be forestalled. Without federal pressure, banks are more likely to make modification and short sale decisions based on economics, rather than politics.

Despite being now five years into the housing downturn and with prices nationwide down by more than 30%, buyers remain wary due to the vast uncertainty about how the logjam of potential foreclosures will play out. And until the we clear the overhanging supply that will be seeping out into the market, real estate will continue to be a drag on the economy.

This post first appeared on Minyanville.

The Obama Administration’s latest salvo in the war against foreclosures, Home Affordable Foreclosure Alternatives, or HAFA, is but a week old and already America’s real estate establishment is trying to cash in.

HAFA aims to step in where Home Affordable Modification Program, or HAMP, fails. In other words, when borrowers are so far behind or upside down that a modification doesn’t make sense, HAFA tries to provide an alternative. Whether it be through Short Sale, where lenders let borrowers sell their homes for less than the amount of the outstanding mortgage, or “deeds-in-lieu,” where homeowners hand their lenders the keys in exchange for absolution of the debt, Washington wants to make getting out from under crippling mortgage debt a little bit easier.

Realtors are licking their chops.

Short sales are notoriously tough to get done, since voluminous requests have bogged down the back offices of big banks like JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). Approving short sales can take months, and real estate agents lose commissions when buyers walk for lack of patience or if they find another deal. As a result, short sales sell at as much as a 10%-15% discount to regular sales or even bank-owned homes, simply because most buyers (and agents) don’t want to deal with the headache.

HAFA wants to fix all that. By providing cash incentives for interested parties (lenders, loan servicers, and borrowers) to push through short sales, Washington has devised yet another way to try and help distressed homeowners. But as I wrote last week in The Unintended Consequences of Treasury’s HAFA Program, these payments may be too small to push a material number of short sales through the system.

When a buyer makes an offer on a short sale, it first must be approved by the homeowner, then sent on for approval by the bank. More often than not, sellers place the asking price as high as possible in hopes that an offer will be good enough to get the bank’s attention. And more often than not, overpriced short sales get stale as buyers move on in favor of better, lower-priced homes.

But in the few days since the Treasury Department announced HAFA, a strange thing has started happening. Short sale prices are being slashed and buyers are stepping in. The logic makes sense: If you were an underwater borrower (or his or her Realtor), why not slash your asking price to well below the amount you owe, grab an offer, and send it through. You never know what you may get. After all, the president effectively announced that he’d be asking lenders to take it in the shorts for the common good. So banks, eager to keep their names out of the papers as uncooperative, may be eager to fill their government-mandated quota for HAFA short sales and approve just about anything that comes in the door.

And, of course, Realtors then get to collect their commission. A commission which HAFA mandates must be higher than the going rate for distressed sales.

This post first appeared in the April edition of: Cirios Trends: In Search of Real Estate Opportunities.

For 12 months now, the Case Shiller Home Price Index – the most widely watched home price indicator – has been hinting that the housing market has at the very least stopped getting worse. In February’s Cirios Trends, we examined housing’s relationship to the stock market and how last April’s nadir coincided with lows in equities. (For more on home prices and stocks, flip to the charts in the back of this month’s issue for some interesting graphical analysis.)

But back to the data. This month we also received two more signs that the economy, at least on paper, is doing a bit better. First, last week’s employment report showed a meaningful jump in non-farm payrolls for the first time since the recession began. Second, that same Case Shiller Index registered a year-over-year change of nil, the first time prices didn’t slip from the previous year in more than four years.

And looking below at the state of office vacancies, despite hitting the highest level since the 1990s, the rate at which office space is going dark appears to be slowing.

So is that it, are we out of the woods? Not exactly.

Data is easily manipulated and subject to bias, even when its collectors have the best intentions. Let’s look at Case Shiller and dig into just what the data tell us.

Case Shiller looks at paired sales to determine home price changes. In other words, researchers compare sale prices of individual homes in a given month to the last time that house sold. Add in a bit of statistical wizardry and you have a pretty good metric for home price changes over time.

Case Shiller is also considered a value-weighted measure, as it weighs more expensive homes more heavily than cheaper ones. This makes some sense, since otherwise the relatively small number of high priced sales would get lost in the mix.

The implications of this is that an increase in the Case Shiller Home Price Index could either indicate true appreciation, or a shift in data where if more higher priced homes started selling, prices would look like they were rising when in fact, it was something else entirely.

Case in point: Livermore, CA – one of the cities we highlight in this month’s Talking Charts. By measuring price per square foot, which we use as a broad proxy of value, it appears that prices have flat lined for the past 12 months or so. Meanwhile, looking at median prices (a metric commonly used by the National Association of Realtors), prices are up 13.4% in the past 12 months. Quite a difference.

As we edge forward, keep in mind that there is more going on underneath the data than it appears. Always look at trends on as defined a level as possible. Look at cities not countries, zip codes not cities, neighborhoods not cities. Only by drilling deep into the data will it truly help you make better real estate decisions.

This post first appeared in the April edition of: Cirios Trends: In Search of Real Estate Opportunities.

Every six months or so, Washington’s political will seems to coalesce in support of the only issue where there is true agreement across party lines: The housing market is still broken. Sadly, in our view, the Treasury Department’s Home Affordable Foreclosure Alternatives Program, or “HAFA,” is simply the latest in a series of flawed legislation aimed more at pacifying popular outrage rather than offering real, tangible solutions to the challenges facing the US housing market.

On April 5th, HAFA will become law, representing the Federal government’s latest assault against the depressed residential housing market. HAFA aims to provide options for homeowners unable to qualify for loan modifications through the Home Affordable Modification Program, or “HAMP,” which was the last government-backed foreclosure prevention initiative.

Indeed, the foreclosure epidemic in this country remains a pressing issue, as recent data indicate that more than five million households are behind on their mortgage payments, with almost three million households 90 days or more delinquent but not yet in foreclosure.

HAFA attempts to step in where permanent modification via HAMP is not a viable option, offering incentives to lenders, servicers and distressed homeowners in the hopes that foreclosures can be cut off at the pass. The primary mechanisms HAFA promotes are short sales, where the lender allows the homeowner to sell his or her home for less than the mortgage amount, and deeds-in-lieu of foreclosure, or “DILs,” where the homeowner hands the lender the keys cooperatively in exchange for the lender agreeing not to pursue back payments. These alternatives are believed to be less damaging to a homeowner’s credit.

While some homeowners will be assisted by HAFA, each group affected by the legislation could see unintended consequences that mitigate the program’s good intentions.

1. Distressed Homeowners
HAFA’s primary goal is to help distressed homeowners. Noble enough, but will the program be effective? First, to incentivize homeowners to cooperate in short sales, Uncle Sam (read: taxpayers) is offering a $1,500 payment for “relocation assistance.” This payment is on top of cash assistance lenders often provide short selling homeowners.

From our experience, however, the decision to short sell is not typically one that is easily swayed by $1,500. If the government wants to help homeowners start over, every little bit helps, but if the aim is to encourage more short sales, this amount of money is but a drop in the bucket and successes will be few and far between.

Second, and almost more important, it’s not even clear short selling truly benefits the homeowner in all cases. Even though the IRS revised rules which previously treated the forgiven loan as taxable income, many states are behind the ball. For example, in California, if a homeowner short sells his home for $400,000 with a $500,000 mortgage outstanding, at year end he could face $100,000 in additional taxable income. A proposed amendment to this law is in limbo because Governor Schwarzenegger has threatened to veto due to an unrelated provision in the bill. For those seeking to enter a short sale, tread lightly and seek tax counseling before agreeing to anything.

2. Lenders / Mortgage Servicers
HAFA also tries to further incentivize lenders and mortgage servicers (who collect payments and administer modification and/or foreclosure proceedings on behalf of lenders) to avoid foreclosure. Lenders and servicers receive a $1,000 bonus for each short sale and Uncle Sam (read: taxpayers) will cough up $1,000 to second lien holders in order to get them to play ball. Second lien holders can gum up short sales by demanding payoffs first lien holders aren’t willing to make. Washington hopes this token payment will encourage second lien holders to cooperate, but in reality a mere $1,000 may not be enough to coax second lien holders’ to take their lumps.

In addition to making short sales more palatable, HAFA makes the foreclosure process even more onerous than it already is. Additional notification to borrowers, a required HAMP review of each file and other hurdles to completing foreclosure aim to push more lenders in the direction of short sales or DILs.

3. Non-Distressed Homeowners
Some of HAFA’s major impacts, to the extent it is successful of course, will be felt by homeowners seemingly untouched by the legislation: Non-distressed homeowners.

While the government wants to delay foreclosures, short sales flooding the market could put downward pressure on home prices. For each successful short sale or DIL, that is one additional home dumped onto the market. Currently short sales are viewed by many buyers as not worth the hassle and that they should not be treated as true supply. If word gets out, however, that lenders are actually cooperating, short sales may lose their negative stigma and start to more strongly impact prices.

Mortgage-paying homeowners could see their property values continue to fall thanks to government efforts to speed short sales to market.

4. Once Again, Taxpayer Loss is Realtor Gain
No analysis of HAFA would be complete without mention of the National Association of Realtors, or NAR, which continues to demonstrate it’s lobbying prowess.

In addition to supporting the legislation because more short sales means more transactions and more commissions for Realtors, the NAR lobbied aggressively for the inclusion of a provision preventing lenders from lowering a Realtor’s commission in a short sale below 6% of the sales price. In distressed transactions, a 5% commission has become the defacto rule, a trend which, much to the NAR’s chagrin, is causing commission compression across even non-distressed housing markets.

Thus, HAFA hands lenders, servicers and homeowners taxpayer dollars, even as it mandates that real estate agents earn more money on each transaction.

So how will it all end? Ultimately, the aforementioned effects will only be felt to the extent the program is an actual success. Will small handouts across many transactions cause actual change?

Will HAFA promote Washington’s stated policy of propping up home prices? Will flooding the market with new short sales add to the backlog of distressed homes working their way through the system or fail and further delay the inevitable normalization of the market?

Time of course will be the true arbiter of the debate, but we’ll be monitoring the program’s successes … and failures.