Category Archives: Mortgage Modification

All About Short Sales: Why They Can Be Beneficial to Both Lenders and Borrowers

The most frequent way used to work out a settlement between lenders and borrowers in real estate is the short sale. In this type of transaction, the borrower wants to sell the property, and satisfy the majority of debt to the lender. However, since his mortgage amount exceeds the amount that can be realized from the sale of the property, it is referred to as a “short” sale.

When property is in foreclosure and a loan modification isn’t on the horizon, a short sale may be the most efficient way to solve the problem. Often, federal regulations give the borrower a release of liability on the remainder of the debt, once the short sale is approved by the lender and a closing occurs. Of course, the lender has to accept less than the full amount of the debt; in this sense, the sale is “short” to him.

Here’s an example. Suppose you own a property worth $100,000 and the debt on the property is $120,000. In this case, if the property sells for $100,000 and selling expenses are 10%, only $90,000 will be realized to pay off the lender, who is owed $120,000. Of course, the practical lender will weigh his alternatives: is receiving $90,000 better than receiving nothing in the short-term and going into foreclosure? Clearly sometimes the best choice is to accept the short sale.

Just as is true with a deed in lieu of foreclosure, these transactions can be complicated by second mortgages, judgment liens, homeowner’s association liens, and other impediments to conveying a clear title. In addition, beyond the problems with liens, there may be repairs needed to the home, which means the property sells for even less. Still, in all of these cases, the lender will benefit from a short sale, as a “bird in the hand” is better than waiting for a very uncertain price at  a foreclosure sale down the road.

When clients want a mortgage modification, they are faced with an uncertain future: if the lender does not approve the modification, they may not be able to hold onto the property. It these cases, sometimes a short sale can be very useful. The property is sold, and the lender is paid something.  The debtor often gets a release on the debt.  In this way he can avoid having to file bankruptcy, with the ensuing credit report damage.

Short sales are becoming more and more popular in the current economy, as mortgage modifications do not always work to get relief for the borrower. In these cases, a short sale can be a great advantage to resolve the situation. Obviously, in working with an attorney for mortgage modification, you want to make sure that he is familiar with short sales, and works with them on a regular basis. I personally have found them to be a highly effective tool, giving more options to the overburdened borrower.

Why Aren’t More Mortgage Modifications Done?

Lenders continue to stall, and refuse to cooperate in modifying mortgages, even where legally obligated to do so under federal law.  Law in the state of Indiana continues to allow foreclosure without meaningful discussion of other options.  The state run website, telling consumers “you can get help for free” is merely a forms gathering service for lenders, sending forms back and forth from consumer to lender.  Once the lender has the forms, all too often he tells the consumer he is not qualified for any help.  Thus there is no assistance, from any source, at any time, to tell the consumer what his rights are and how to get what he is entitled to receive in mortgage modification.

The Indiana statute was passed, effective July 1, 2009.  It provides for a “settlement conference” should the consumer elect to bargain with the lender instead of passively allowing foreclosure. The theory of the statute, on its face, is to give the homeowner a chance to ask and be educated on alternatives to foreclosure.

In practice, certain critical flaws have become apparent:  1) the government website is of no help to consumers in transmitting forms; 2) courts are not supervising settlement conferences and what actually takes place at those conferences; 3) lenders are refusing to obey the federal law on mortgage modifications and often do not attend settlement conferences or offer any alternatives to foreclosure.  These problems can be tracked back to the major flaw in the 2009 Indiana legislation:  it is permissive, not mandatory.  The statute says the lender may offer alternatives, but it does not say that he must offer alternatives to foreclosure.  The statute was created with the appearance of helping the consumer, but it was created “without teeth”.

Many of us don’t know it, but the federal government is by far the “biggest player” in the mortgage market, on a national basis.  Very few mortgages are made or paid today on a local basis, that is, the money doesn’t come from or go to Terre Haute or Kokomo, Indiana.  We have a variety of players now, in place of what used to the just one lender holding the loan he wrote; we now have lender correspondents, wholesalers, mortgage brokers, securitizers, investors, servicers, insurors, and packagers, all with a stake in the document, information, and payment stream of the American home mortgage.

It is not untrue to say that we have created even a global market in US home mortgages; but who is in charge?  The federal government owns, buys, sells, and insures the vast majority of US residential mortgages.  As such, the power of the federal government to affect foreclosure over time is immense.

But federal regulation is tricky; one rule conflicts with another, complex procedures and paperwork rule.  How to wade through the swamp of authorities and paper?

Fortunately in the mortgage market, two federal buyers and traders of mortgages are preeminent: the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).  Since they process a majority of American home loans, the government picked these two entities to be “point men” in the initiative to stop foreclosure, lowering mortgage payments if necessary to keep homeowners in their homes. Since “Fannie and Freddie” have become involved, loan modifications are happening on their loans, even though the pace is slow.

Mortgage Modifications Are Good For Everyone

A few years ago, I decided to put my thoughts in writing regarding “the mortgage mess”.  It seemed to me then, as it does now, that the solution was simple: make mortgage payments affordable so that fewer homes are foreclosed.  So I started to write an article which was on point, showing how a matrix/chart/interest table could explain in financial terms what was required.  That article I have included here, and I suggest you read it for background on the issue of mortgage modification.  See The Mortgage Crisis

The question I pose in that article is quite simple:  why are we forcing foreclosure to be the “one size fits all” solution, when both parties essentially want the same thing? Homeowners want to stay in their home, and lenders want to keep being paid?  What are the creative ways we can use to slow down the foreclosure crisis?  Is there a way to stop the loss of neighborhoods, investments and homes?

Why should lenders go to the trouble of modifying mortgages?  What’s in it for them? Why bother?  The answer is quite simple: lenders modify mortgages to make money, and to avoid losses that are certain in foreclosure.  Yes, that’s right…to make money.  Studies by lenders, the American Bankers Association, and mortgage servicers show that foreclosure is no way to a quick profit. It is actually a dead loss, with the lender losing 50% or more of the loan value, as a result of deteriorating real estate, legal and realtor fees, and loss of mortgage payments.  All commentators agree: foreclosing on homes will not make a profit.

Many lenders blame the current mortgage crisis on foolish consumers borrowing too much money.  They are quick to forget the lender’s role, and the huge sums made in the structuring of loans for 125% of equity, thousands of dollars in hidden charges, floating rates of interest, misrepresented payment structures, false appraisals, prepayment penalties, and making loans beyond the ability of the consumer to pay with no proof of income.  Much lending activity has been subject to investigations by state and federal authorities and condemned as less than honest.  Truly, the mortgage community has talked consumers into many a foolish loan for excessive short term profit on their end.  As a primal cause of the current mortgage crisis, the lending community can see that their mistakes have created a bad result.  Of course, the consumer is also to blame, but which came first, the chicken or the egg?

Lenders and bankers can be a cynical lot, with little willingness to take blame for their own mistakes, and little trust that the homeowner will pay.  Many are like adolescent “sore losers”, disheartened and threatening to “take my ball and go home”.  The assumption was that they should have been able to profit handsomely from bad loans to more consumers, with no downside risk.  But it didn’t work out that way, and now bad loans must be adjusted to more reasonable terms in the present circumstances.  The times have changed, and they call for a change in approach.

Both parties are to blame, and both must “give a little to get a little”.  Even while acknowledging that some real estate deals will never work out, lenders and borrowers all profit when a homeowner pays consistently and foreclosure is avoided.

Of course, workouts don’t work in every situation.  Some homeowners just can’t stay caught up with mortgage payments.  But when loans are adjusted to levels where they can and do perform, everybody wins.  Adjusting mortgages is good for the lender, the investor, the servicer, the homeowner, neighbors, businesses nearby, and the town where the neighborhood is situated.  When homeowners do not pay mortgage payments steadily, everyone loses.  And most importantly, the economic picture becomes bleak: depression sets in. When that happens, it’s bad for the entire country.

The economy runs on consumption, and consumer spending is 70% of that consumption.  If the consumer is evicted from his home, he spends less, works less, and gets disoriented and detached from community and friends.  His job performance may suffer, as he works through his personal crisis.

Do we want to save the economy? Then save the consumer’s peace of mind, and his home.

Credit Reports (Part 1)

Years ago, it occurred to me that we all need to know something about credit, and how credit reports are made.  I put together a CD for clients explaining credit reports.  Now with advances in the web, I can get it to you without a CD! I hope this 12 part series is of use to you. Immediately thereafter, I will publish my 11 part series on credit report correction.

Here is the first audio clip.  Hope you can find the time to listen to the whole series.  There is a lot of good information in these old CDs from several years ago, still relevant today.

Download This Episode