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February 12, 2010

The housing crisis seems to be entering a new phase, with government programs that had been designed to try to keep people in their homes now being subtly shifted into a program meant to ease them out.

One sign was this e-mail that came today with the headline, “Understanding the New Rules of the Short Sale Game: What Major Players Are Doing to Increase Activity.”

The name of the new game is HAFA, which stands for “Home Affordable Foreclosure Alternatives.” Ostensibly a subset of HAMP (that’s the Home Affordable Mortgage Program), the general drift we’re getting is that HAFA is the way forward.

So what is happening? HAMP, which President Obama said would pay the banks to modify a projected 3 million home loans so that struggling borrowers would be able to stay put, had done just 66,000 modifications by December.

HAFA, despite its name, is a program to encourage people to turn in their keys and move on. It’s a short-sale facilitation program, starting in April.

Short sales, of course, are deals in which the lender agrees to sell a home for less than the amount of money owed. The borrower gives up the property; the lender gets a place off its books, avoiding the maintenance and other headaches that come with owning an empty house. The borrower takes a credit hit, but often the lender pays him or her a little something to go.

CitiMortgage just announced a pilot program in six states (Texas, Florida, Illinois, Michigan, New Jersey and Ohio) that sums up the deal:

In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for a period of up to six months. At the end of the six months, the borrower will turn over the property deed to CitiMortgage, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly property expenses if Citi determines that the borrower can no longer afford them. Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner’s association and escrow fees, will be determined on a case-by-case basis considering the borrower’s specific financial circumstances. As part of the agreement, borrowers must maintain the property in its current condition and agree to bi-monthly meetings during which trained relocation professionals will help the borrower prepare for the next chapter of their lives.

The problem (aside from the reality, finally dawning on policy makers and bankers, that people cannot afford the houses they bought in 2005, 2006, etc), is that some players in the real estate industry make quite a bit of money in the short-sale system as it stands now.

Alert observers of the real-estate market have noticed that some short sales are suspiciously short-listed. As Bill at Calculated Risk noted in his typically understated way, the current system invites something other than arms-length transactions:

I’m aware of a property being offered as a short sale in SoCal where the agent is the wife of the owner, and she has been, uh, unhelpful to some prospective buyers. I just heard last night that the lender has reached a short sale agreement with a buyer who just happens to be a close friend of the agent. Why am I not surprised? Perhaps this is the best deal for the lender, but I have my doubts.

Hence the e-mail about “understanding new rules.”

HAFA rules would require “arm’s length transactions” (p. 7) and all short sale fees come out of the real-estate commission. And with all commissions (and other payments) documented, the current practices (overpaying a listing agent, splitting bank kickbacks, etc.)—which are already illegal—will become harder to do, at least in the HAFA deals.

That might count as progress.

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