For those of us in the industry, it hardly comes as any surprise that Bank of America has failed to help thousands of Americans receive a permanent loan modification through the Home Affordable Modification Program (HAMP).  And it now looks like they might have some explaining to do:  A judge has denied the bank’s request to dismiss a case involving tens of thousands of homeowners who claim they were refused help through the HAMP program.

As you remember, HAMP uses federal funds to help struggling homeowners.   Under the program, Bank of America is required to provide foreclosure alternatives and permanent loan modifications to eligible homeowners.

However, according to Steve Berman, managing partner of Hagens Berman, the firm representing the homeowners. Bank of America has refused to permanently modify the loans of thousands of borrowers, even after successfully completing a Trial Period Plan (TPP).  “The vast majority tell us the same thing: Bank of America claims to have lost their paperwork, failed to return phone calls, made false claims about the status of their loan and even taken actions toward foreclosure without informing homeowners of their options,”  said Berman.

In the lawsuit, Berman seeks to prove that Bank of America “intentionally postpones homeowners’ requests to modify mortgages, depriving borrowers of federal bailout funds that could save them from foreclosure.”

“The bank ends up reaping the financial benefits provided by taxpayer dollars financing TARP-funds and also collects higher fees and interest rates associated with stressed home loans,” Berman added.

The case will be limited to homeowners who entered a TPP, but were denied a permanent modification.  Judge Rya Zobel also ruled that homeowners in nine state, including California could pursue claims in their states where consumer protection laws are stronger. 

So if you’re a homeowner in the middle of trying to get a HAMPmodification form B of A, the outlook is not encouraging.  The federal government has cut-off HAMPfunds to Bank of America until they make improvements in how they administer the program, which could mean more foreclosures and short sales on the horizon for Bank of America borrowers.

Anyone who knows me would probably say that I’m a fairly optimistic person, but lately it seems as though the real estate market is developing into a vicious cycle with no way to correct itself.   In a report released on Monday, the researchers at Capital Economics said that we could expect nationwide home prices to fall an additional 3% this year, bringing the year’s total decline to about 5%.  So, despite the fact that some markets inSan DiegoCountyhave seen modest gains in home prices over last year, overall, the picture is less than rosy.

So what are the driving forces behind this downward spiral?  Well, the obvious answer is that there are many complicated factors at play, but the cycle we’re seeing is really pretty simple:   Housing prices are falling due to low demand and too much inventory. Normally after a recession, home sales start to pick-up, but that’s not what we’re seeing.  Instead, demand is being strangled by increasingly stringent lending requirements which restrict buying power.  So instead of more buyers coming into the market to take advantage of the low interest rates, we’re seeing fewer that are able to qualify because of high credit score and/or high down payment requirements.   Even existing homeowners looking to sell and buy up or down are caught in a stalemate as most have limited or no equity to leverage against a new property. 

The cycle picks up momentum every time prices drop.  Lower prices, mean less equity for existing homeowners and for those with a mortgage, an increasing number of borrowers are choosing strategic default.  These voluntary defaults are adding to the foreclosure inventory already on the market and the estimated 5 million foreclosed homes lurking in the shadows.  And so the cycle continues; more foreclosures create a bloated inventory.  With an insufficient number of buyers able to buy, sales drop and prices fall, which breeds more foreclosures, and on, and on.

As I’ve noted before, I’m no economist and certainly don’t have all the answers, but there are clearly two actions that could put the brakes on falling prices and encourage increased sales:

  1. Congress should oppose the Quality Residential Mortgage (QRM) requirements being proposed.   The QRM would require an unnecessarily high down payment of 20% and impose a very stringent debt-to-income ratio for conventional loans.  The result would be that more borrowers would seek FHA loans, which in turn would likely raise qualification standards and insurance requirements.  The bottom line result will be fewer qualified buyers and fewer sales.
  2. Banks need to address the issue of negative equity by offering programs that provide principal reductions.  When a borrower feels that he/she is paying on lost equity that they will never recoup they are more likely to choose to default, adding to the inventory glut.

Do you have any ideas about breaking the cycle of falling prices?  I’d love to hear from you!

 

On May 24th, The New York Times ran an article in their Opinion section that revealed a nasty, little-known truth about loan servicing that I find outrageous.

As most homeowners know, your mortgage is probably not owned or serviced by the bank or company from whom you originally borrowed.  Not only was your loan probably sold in the secondary market, but it is likely that it is serviced by an entirely different company than the bank or company you actually owe. 

Loan servicing refers to the tasks associated with collecting your monthly payment, paying the investor, and often times, managing payments for insurance and property taxes.  These servicers are also responsible for sending out notices associated with delinquencies, collection activities, and if needed managing defaults.  In return, the servicer is paid a percentage of the principal amount owed, usually 12.5 – 50 basis points (1bp = 0.01%).  Additionally, the flat servicing fee may be augmented with a variety of incentives, all designed to create additional cash flow from each loan on the books.  The total value of these fees and incentives are noted on the servicer’s balance sheet as MSRs – Mortgage Servicing Rights.

Now here is the kicker:  Banks make more from the fees and charges associated with managing a defaulted loan and foreclosure than they can make on a loan modification!  Surprised?  No wonder so few modifications are approved; the servicers have their MSRs to protect! 

The only winners in this game are the servicers.  Not only do the homeowners seeking a modification lose, but so do the banks and investors who will foot the high cost of foreclosures and carrying REOs. 

Luckily, there are others that find this behavior unacceptable.  Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced Senate bills to establish standards for the loan servicing industry.  The proposed laws and regulations are designed to prevent banks from putting their financial interests above those of everyone else.

Here are 3 suggested new rules: 

1)      Homeowners would be evaluated for loan modification before ANY foreclosure activity, or related fee is initiated.

2)      Lender analysis used to approve or reject loan modifications would be standardized and public.

3)      Should a lender fail to offer a modification when analysis indicates that one is warranted the lender would be blocked from proceeding with foreclosure.

Whether it is the result of a Senate Bill, or actions by the new Consumer Financial Protection Bureau, someone needs to rein-in the greed of the loan servicing industry and give borrowers a much-needed break.

The short answer is “No” and “Maybe”.  When faced with the prospect of losing their home to foreclosure, many people are willing to try most anything to halt the process and save their home.  Bankruptcy however, is probably not the answer.

Let me first say that I’m not an attorney, and do not intend this as legal advice.  If you are considering bankruptcy, please consult an attorney before taking any action.

Personal bankruptcy is generally filed under Chapter 7 or Chapter 13.  Under Chapter 7 most of your unsecured debt (such as credit card debt) is permanently discharged, while Chapter 13 allows you to reorganize your debt with your creditors and develop a plan to pay-off your debts over a specific period of time.  If you qualify and file personal bankruptcy under either Chapter 7 or 13, an automatic stay is put on all your creditors, including a lender that might be pursuing foreclosure.   However, this is only a temporary halt to the foreclosure process.

As mentioned above, filing Chapter 7 does not discharge your secured debts.  A mortgage is a secured debt and the collateral is your home.  If you do not pay, your lender has the right to take back the security you offered in exchange for the money advanced as a mortgage.  So filing a Chapter 7 will not save your home from foreclosure.  At any time before your unsecured debts are discharged, the court can allow your lender’s request for “relief from the automatic stay” and the foreclosure can proceed.  After discharge, the foreclosing lender is free to continue the process.

Filing Chapter 13 however may allow you to save your home from foreclosure.  In a Chapter 13 bankruptcy you are allowed to make arrangements with your creditors for repayment of debts owed, including your mortgage.  However, this is generally allowed by the courts only when you have a stable source of income that will allow you to make all payments as agreed for the entire repayment period.  There are many factors that determine if filing for protection under Chapter 13 will allow you to keep your home. The only way you will know if this will work in your particular situation is to consult an attorney.

It is also important to note that a bankruptcy will remain on your credit report for 10 years after date of filing. If this doesn’t seem like a viable solution, please read more about other options to avoid foreclosure.

During a town hall meeting last Thursday inWashington,D.C. the President took a comment from a woman in the audience who explained that her loan modification expires in January, 2012.   Despite having excellent credit, she can’t refinance because she owes more than the house is worth.  Without a new loan mod, or principal reduction she will not be able to make her payments and could lose her home.

The President agreed that the banks need to take a more aggressive role in protecting homeowners.  He commented to the banks, “We were there for you when you got in trouble, then you’ve got to be there for the American people when they’re having a tough time.”  (I think he just forgot to add the part about the banks creating this problem in the first place.)

“We want to see if we can get longer-term loan modifications. And in some cases, principle reduction, which will be good for the person who owns the home, but it’ll also be good for the banks over the long term,” President Obama said.  “You know what,” Obama continued, “speaking to the banks…you’re going to be better off if somebody’s still paying on their mortgage than if they get foreclosed on and you end up not only having to go through all those legal processes, but you also end up…selling the home at a fire sale price.”

Excuse me, but isn’t that stating the obvious?  Is there anything new here?  Under the current government Home Affordable Modification Program (HAMP), borrowers may receive a modification that is valid for 5 years, and under some non-HAMP programs the modification period is as short as 2 years.  But then what?  Like the woman in the town hall meeting who was fortunate enough to even get a loan mod, what happens when it expires? 

President Obama concluded by adding that his administration is working with banks to expand loan modifications.  “We’re going to be talking to the banks. And I mean, on a regular basis,” he said.

Well, I bet that has the banks shaking in their boots!  “Talking on a regular basis”, what does that mean and how is that going to change anything?  If we are ever going to see an end to the real estate depression that continues to drag down our economy we need an effective plan, not lip-service.  Someone needs to lean on the banks to make permanent, meaningful modifications that include (as I’ve been saying for over a year), principal reduction.  Come on Mr. President….you’ve shown you’ve got the muscle.  Let’s see some action!

May got off to an interesting start with the release of several foreclosure reports that frankly, seem a bit contradictory.  There was good news.  There was bad news.  And I’m not quite sure analysts have a handle on what it all really means to the housing market.

Let’s start with the good news:  Mortgage delinquencies are down.  According to data from Lender Processing Services (LPS), delinquencies are down by 20% compared to this time last year.  At the end of March there were 6,333,040 loans nationwide that were past due or in foreclosure.  Sounds like a lot, but that is the lowest level since 2008.  The report would seem to indicate that modifications are helping as 23% of loans that were 90 days past due a year ago are current today.

Now here is where it gets confusing.  The same report showed that at the end of March foreclosure inventory was at an all time high – 2.2 million loans.  This inventory represents loans that have been referred to a foreclosure attorney but have not yet reached foreclosure sale.  The number of new foreclosure actions was 270,681 in March which is a 33% increase over the previous month.  So foreclosures are up but delinquencies are down?

Another piece of bad news was delivered in a HUD report detailing sales of FHA foreclosed homes.  HUD manages the disposition of homes that had FHA loans that were repossessed.  At the end of February there were 68,801 homes in the HUD inventory.  That is a 50% increase over the previous year.  The monthly sale of HUD homes has dropped from ahigh pointof 8,893 last June to a low of just 2,632 in January.  Thus new foreclosures are entering the market at an increased rate while sales have significantly stalled.

One factor not considered in the LPS report was the increase in the number of short sales over the last year.  In addition to loan modifications, which have not been very effective, short sales are presumably impacting the decreased delinquency rate as more homeowners are opting to sell short earlier in the delinquency cycle versus riding out the foreclosure timeline.    If you are a homeowner that owes more than your home is worth and are struggling to make your payments, the bright spot on the horizon might just be a short sale should a loan modification not provide the relief you need.

For the real estate industry overall, this jumble of numbers would seem to indicate that we’re still a long way from recovery.  With foreclosures increasing and sales decreasing, a bloated inventory of homes on the market will likely keep prices fairly stagnant in most markets.

A survey released on Monday shows that nationally, nearly half of all home sales in March involved distressed properties; either foreclosed homes or short sales.  This is the second highest level seen in the past 12 months.   And while this might not seem like good news, the statistics actually provide a glimmer of hope. 

The Housing Pulse Tracking Survey reported that short sales rose from 17.0% of total sales in February to 19.6% in March, and at the same time REO sales fell from 14.9% to 12.0%.  this is an all-time high for short sales.

So why is this a good thing?   Short sales, though not as speedy as we would like, are resolved much more quickly than foreclosures.  An REO can sit empty on the market for months, often falling into disrepair.  REOs are used as comparables by appraisers and thus drag down neighborhood property values.  Smaller numbers of REOs would be a positive sign for improved home values in the months ahead.

Additionally, from the point of view of an individual, a short sale is usually preferable in terms of both short and long-term impact.    A few of the advantages include the fact that a short sale does not have near the negative impact on a borrower’s credit score as a foreclosure;  there is no set time limit that disallows a borrower from buying again, and a short sale is not reported on a credit report for 7 years, as is a foreclosure.

If you have any questions about short sales, or any other real estate questions, please don’t hesitate to give me a call at 619-846-9249.

Over the past few years as home values have taken a nose dive, we’ve witnessed a new group of borrowers in the default arena – enter the strategic defaulter.  A strategic default occurs when a borrower who is financially able to make their monthly mortgage payment, chooses to walk away from their property because they owe more than the home is currently worth.  The rationale is that it doesn’t make financial sense to continue to pay for negative equity, waiting and hoping that the home’s value will increase and they will re-coup their lost equity.

To banks that are already struggling to cope with the thousands of borrowers who are legitimately unable to make their mortgage payments, this group represents a growing challenge.  According to studies by the Chicago Booth School of Business, strategic defaults in September 2010 represented 35% of all defaults, up from 26% in March 2009.  Last year the problem became so large that Fannie Mae announced that it would seek stringent penalties against borrowers who are able to pay, but choose to walk away.

Hoping to stem the tide of strategic default, banks are looking for ways to identify those borrowers most likely to walk away from their mortgage obligations.  The problem however, is that to date there has been no reliable way to identify the potential strategic defaulter.  Intervention is impossible if you don’t know who you’re looking for.

FICO Research Labs may have developed the tool banks are lacking.  The credit assessment company announced that it has developed a method that analyzes consumer spending and payment habits and allows lenders to identify borrowers who are 100 times more likely to default than others.  

So what is the profile of the strategic defaulter?  They are actually quite savvy managers of their credit having higher FICO scores, lower balances on revolving debt, less retail credit usage, and fewer instances of exceeding credit limits than the general population.  FICO claims the company’s new analytics can provide loan servicers with a method of reaching two-thirds of these would-be strategic defaulters, and according to Dr. Andrew Jennings, head of FICO Labs, “The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early.”

But then what?  It is one thing to identify borrowers who might choose strategic default, but, what intervention can banks offer that will actually deter would-be defaulters? If lenders follow Fannie Mae’s example and simply threaten legal action to recoup outstanding mortgage debts, I doubt that will be much of a deterrent or solve any of the real problems.

The issue comes back to a point I’ve often made in this blog:  I don’t believe we are going to see a significant reduction in defaults, both strategic and involuntary until lenders are ready to consider meaningful principal reductions for borrowers who owe more than their homes are worth.   If Savvy Bob the Homeowner is considering default because he owes $80,000 more than the home is worth, do you think he might consider staying in his home if his principal balance was reduced by $60,000?  Throw-in a lower interest rate and I’m pretty sure you’d have a deal.  Considering the bottom line expenses for banks to foreclose, costs for carrying an REO, lost revenue, and a lower net sales price, principal reduction should start to look pretty good.

So I’m all for identifying those who are likely to choose to walk away, but before banks rush to hit them over the head with penalties, l hope they’ll put some thought into resolving the equity issues that are driving strategic default and offer borrowers a meaningful alternative.

Believe it or not, a Republican and a Democrat are working together!  The two Representatives are sponsors of a bill that would require lenders to provide a decision of approval or disapproval of a short sale within 45 days of submission of the file.  Hallelujah! 

For those of us in the short-sale trenches, the most painful part of the process is the long period we spend waiting for the bank’s decision.  We meticulously prepare the file and then fax it off into a nameless abyss where it seemingly lies hidden at the bottom of someone’s in box.  Weeks later, we are informed that half of the information we submitted is missing from the file and would we please re-send it, or what we sent is now outdated (because they took so long to review it), and would we please send new pay stubs and bank statements.  It is a vicious process that can make a normally calm Realtor want to jump through the phone and strangle someone.

So yes, a decision in 45 days would be a Godsend!  The Bill is sponsored by Reps Tom Rooney (R- Florida), and Robert Andrews (D-New Jersey), who believe that by imposing a deadline on lenders, more short sales would be successfully executed and fewer homes go to foreclosure.   Although a few banks such as Bank of America have made an effort to improve their processing systems by utilizing a technology platform such as Equator, most banks rely on outdated systems and under trained personnel, ill-equipped to handle the thousands of short sales landing on their desks.  Thus in the current market, many short sale transactions fall-apart because the buyer gets tired of waiting and simply moves on, often leaving the homeowner to face foreclosure.

The Prompt Decision for Short Sale Act of 2011 is currently waiting to be referred to a Committee.  A similar act with the same name was introduced last September, but never came up for debate before the legislative session ended…let’s hope the support of the National Association of Realtors will help prevent this bill from a similar demise.

At the end of the day however, even if we have a shortened time period for decisions, any short sale is only as strong as the negotiator acting on behalf of the homeowner.  Please don’t hesitate to contact me for more information on how to improve your chances for a successful transaction.

As a result of the foreclosure robo-signing mess uncovered last September, loan servicers are facing new federal and state requirements outlined in a draft settlement proposal last week.  Here are the highlights that could provide greater protection for homeowners:

  • Servicers would agree to stop dual tracking.   Hard to believe, but currently many companies will pursue foreclosure, even while the borrower is trying to get a loan modification.    This new requirement would mean that foreclosure processing would be put on hold during the loan modification process.
  • Servicers would be required to review any loan modification that is denied.  They would also have to implement a system whereby the borrower would have 10 days to appeal a modification denial.
  • Most significant is the provision that would require servicers to “implement processes reasonably designed to ensure that factual assertions made in pleadings, declarations, affidavits, or other sworn statements filed by or on behalf of the servicer are accurate and complete.”  This would help alleviate the problem of minimum wage processors signing-off on foreclosures.
  • The proposal also states that servicers may not develop compensation programs for employees that encourage foreclosure over modification or other options.   And yes, that was in place at some institutions.
  • And lastly, servicers would be required to offer one point of contact to borrowers trying to complete a loan modification, short sale or forbearance agreement.   Finally!  This alone should improve the process, or at least lessen the frustration level of speaking with a different person every time the borrower calls.

Do I think this will improve loss mitigation for borrowers?  Let’s say I’m cautiously optimistic.  At the end of the day of course, any regulation is only as good as the enforcement that backs it.