A new government push to clean up bad home loans could dent bank earnings because the industry may have to take losses on the assets sooner than some investors expect.
The new effort, called Home Affordable Foreclosure Alternatives, or HAFA, kicks in April 5. Some banking and real estate industry experts see it as a response to the limited success of a government loan modification drive known as the Home Affordable Modification Program, or HAMP.
"The administration wouldn't want to categorize it this way, but HAFA is an acknowledgement that a lot of loans won't meet the criteria for a HAMP modification -- even a trial one," said Rick Sharga, senior vice president at RealtyTrac, which compiles data on foreclosures.
Slumping house prices and surging unemployment have triggered a wave of foreclosures that will continue washing over the U.S. banking industry for a few more years.
There could be foreclosure filings on 3 million to 3.5 million homes in 2010, according to RealtyTrac. There were a record 2.8 million homes with at least one foreclosure filing in 2009, the firm recently reported. Foreclosure activity will likely remain high until at least the end of 2012.
Foreclosures would probably have been higher last year if not for government and industry efforts to cushion the impact, including HAMP and state legislation extending the process.
Under HAMP, over 1 million homeowners have started trial modifications, which reduce monthly mortgage payments. However, less than 116,000 homeowners have a permanent modification under the program.
"HAMP hasn't worked," Nancy Bush, president of bank industry research firm NAB Research, said. "It's just a massive expense of time and money."
Wells Fargo /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 29.00, -0.15, -0.52%) has 15,000 people working on HAMP, she noted. In a recent meeting with Wells Fargo executives Bush said she asked when the program might end.
"They just shrugged their shoulders and said maybe never," Bush said. "The expense of that is huge. HAMP may turn out to be the most expensive thing the banking industry has ever done."
Under the new HAFA program, if a homeowner doesn't qualify for a HAMP modification they must be offered a short sale. Borrowers can also be offered a deed in lieu of foreclosure.
Homeowners who qualified for a HAMP modification, but have missed two consecutive payments, will also be offered a short sale or deed in lieu through HAFA.
A short sale happens when the borrower and the mortgage servicer agree to sell a home for less than the value of the loan or loans. A deed in lieu of foreclosure occurs when a homeowner voluntarily gives the deed of the property to the servicer.
To kick-start HAFA, there are government incentives. Borrowers get $1,500 to help them move to a new home and up to $3,000 in short sale proceeds can be given to holders of second mortgages on the homes in the program.