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Federal housing program complicates short sales

by J. Craig Anderson – Jul. 15, 2010 12:00 AM
The Arizona Republic

A recently implemented federal housing-market stimulus program designed to encourage short sales appears to be doing just the opposite, according to Phoenix-area real-estate agents, title companies and mortgage lenders.

Home Affordable Foreclosure Alternatives, the fourth initiative to be launched under the banner of the Obama administration’s Making Home Affordable program, offers a cash incentive of up to $3,000 to homeowners on the brink of foreclosure who stick around to complete a short sale or deed in lieu of foreclosure, rather than just walking away.

It also provides a bonus of up to $6,000 to loan servicers for every short sale or deed in lieu they approve.

A short sale is one in which the home’s seller owes more on the mortgage than the home’s sale price would cover. The lender must agree to remove its lien from the property despite the unpaid loan balance.

A deed in lieu of foreclosure involves the delinquent homeowners signing the deed to their home over to their primary lender and walking away from the mortgage. The exchange occurs by mutual agreement, rather than by default.

While deeds in lieu are relatively rare, short sales have become foreclosure’s twin engine in driving the housing market through its current readjustment period following an unprecedented real-estate bubble that burst in 2007.

Short sales are better for the housing market than foreclosures, because short sales generally do not lead to long periods of home vacancy, as foreclosures often do.

With that in mind, real-estate agents and others said they had been eagerly anticipating the April’s implementation of the federal short-sale program, nicknamed HAFA.

That excitement quickly turned into disappointment as the effects of HAFA started to become clear, they said.

First of all, HAFA short sales require double the paperwork of other short sales, said Tempe real-estate agent Steve Trang of Occasio Realty.

“The most irritating thing is going from a document that was 50 pages to one that’s 100 pages,” Trang said.

HAFA short sales also can take twice as long to complete, said Steve DeLaveaga, vice president of sales and marketing at Fidelity National Title in Tempe.

A typical short sale takes longer than regular home sales because there are extra steps and more people involved. However, DeLaveaga said most lenders had done a good job of streamlining the process in the six months leading up to April.

Before HAFA, the typical escrow period was 35 to 50 days, DeLaveaga said. Now it’s taking 75 to 100 days.

Most big consumer-mortgage lenders now require HAFA applications for all short sales, he added, even when the sellers have little chance of qualifying for the $3,000 relocation allowance.

Only about 10 percent to 20 percent of Phoenix-area short sellers actually qualify for the money, according to DeLaveaga and others.

Over the past three months, HAFA short sales have developed a reputation for being more time-consuming, labor-intensive and unreliable than comparable short sales occurring outside the federal program, Trang said.

For instance, a HAFA applicant’s lender must send a letter of approval to the program’s administrators in Washington, who then must review the application themselves.

Delays on the part of lenders and the government have dragged out the sale process, he said. In some instances, the buyers have gotten impatient and walked away from the deal.

“We have a government that is well-intentioned, but they’re adding more obstacles,” he said.

HAFA is the fourth program to be implemented under the Obama administration’s $75 billion mortgage-relief effort, known as Making Home Affordable.

Its two key components, the Home Affordable Mortgage Program and Home Affordable Refinance Program, have undergone a number of revisions, primarily to reduce eligibility standards in response to lower-than-expected participation.

HAFA is likely to be subjected to a similar tweaking process, said Jay Butler, associate professor of real estate at Arizona State University’s W.P. Carey School of Business.

“Basically, they’re trying different things to see if they work,” he said.

Dan Noma Jr., branch manager at Arizona Best Real Estate in Chandler, said he is optimistic about HAFA’s potential for helping the local housing market.

The biggest problems are that too few consumers know about the program, he said, and too few real-estate agents know how to effectively push through a HAFA deal.

Chad Melin, branch manager at Academy Mortgage in Mesa, said real-estate agents should warn their clients to start putting together the documents required under HAFA, which include proof of income and evidence of financial hardship.

Noma said he still believes the program ultimately will help people once it has been broken in. HAFA eligibility lasts until Dec. 31, 2012.

Gilbert HomeStart real-estate agent Maria Hass said she was not optimistic.

“The HAFA program, just like the other programs, has not really helped,” she said. “It’s been a disaster.”
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