Ultimate Help For Homeowners: Mortgage Litigation

Over the past three years while writing this blog, I have combed every source I came across for avenues that could possibly help homeowners keep their homes, reduce their payments or avoid foreclosure. I have written about loan modifications, federal loan modifications, loan restructuring, short payoffs and forensic loan analysis, trying to see if any of these cold provide a solution to the housing crisis we are facing. In the end, though some of these helped some individuals a bit, nothing has actually made much of a difference.

Ultimately, I have come to believe, banks are not going to help homeowners because it is not in their financial interest. Because of TARP and really for PR purposes, banks have done a few loan mods, helped a few homeowners avoid foreclosure and participated in a few forums to help individual property owners. In the aggregate, though, their efforts have been puny in the face of massive numbers of underwater homes. Their public pronouncements about their interest in remedying the situation have clearly been hypocritical in light of the little they have done.

Banks have become the most hated institutions in America and for good reason.


Quite some time ago, I came to the conclusion that only massive legal force would give homeowners any leverage in dealing with banks. Forensic loan audits seemed for a while to provide this. Legal firms analyzed individual loans uncovering in the process RESPA violations, fraud, and numerous questionable actions in almost every loan done since around 2002. The attorney would then send this information to regulating agencies and to the fraudulent bank, expecting some repentant reaction.
But, when faced by an individual attorney representing an individual homeowners, each bank’s response was, “So what? What do you intend to do about it?” Since lawsuits are very expensive, the banks were aware individuals behind in their mortgage payments were highly unlikely to file suit.

What To Do?

Finally, we may have some recourse. It seems that across the country many attorneys have been filing suit against banks for their fraudulent actions and, little by little, the database of suits has been growing. At this point, more than three years into the crisis, attorneys have banded together to file on behalf of individual homeowners and, if a suit against that individual’s bank already exists, to add him to the list of plaintiffs.
This seems the only way to go. Joining such a suit costs money, of course, and no results can be guaranteed, but to me it seems like the best solution so far.
Here are some of the benefits of mortgage litigation.

  • A lawsuit is filed-a judge decides the merits of a case, not the banks
  • If it goes to trial, banks know that juries now universally favor homeowners
  • This is not a loan modification–the banks do not control the outcome

Possible Outcomes

If the attorney or legal firm accepts the case, the demand is always to completely tear up the note or mortgage on the property. While this is not always the outcome or even usually, the next demand is for the note to be re-written to 70% of current value of the property. Of course, another outcome is always that the homeowner and his attorney might lose the suit. That is possible but highly unlikely.

Top 10 Short Sale Questions & Answers

1. I can’t make my house payments but I do have an ability to pay back all or part of the negative equity. Also, I want to preserve my credit score…is a short sale right for me?

That depends. If you want to keep the house, then  probably not. In cases where the seller can pay back all or part of the negative equity (usually to the 2nd lien holder) it makes sense to work out a repayment plan.See post Short Sale v Short Payoff.

On the other hand, if you are underwater and prefer to walk away, then you could opt for a short sale.

2. If I pay mortgage insurance and default on my loan, wouldn’t that cover the deficiency amount?

The mortgage insurance is not there for your protection; it protects the mortgage lender.

3. Do I have to have my home ‘Approved’ by my lender prior to offering it for sale as a short sale?

No. Technically speaking, there is no such thing as being ‘Short Sale Approved’. The actual approval only happens with an accepted offer.

4.I just missed a payment and I know I will miss more….how long does the foreclosure process take and is there time to do a short sale?

See  post  How Does A Foreclosure Work  In California? Practically speaking, it’s  taking 6+ months.Generally,  a well-priced short sale being processed by an educated short sale listing agent will sell and close in less than 120 days.

5. Will I still have to pay property taxes if I do a short sale?

Property taxes will always have to be paid as part of any accepted short sale. If you don’t pay the taxes, then the lender will.  Usually, though, lenders will NOT pay HOA fees, though not always. 

6. I owe more than my home is worth and I can’t make the payment, do I have to somehow qualify for a short sale?

The simple answer is NO. If someone can’t make their payment and they are otherwise insolvent they qualify for a short sale. Note: insolvent simply means their total debts are great than their assets.

7. Do I have to pay income taxes?I have heard that I will get a 1099. Will the loss the bank takes be treated as a taxable gain to me..the seller..is this true?!

It WAS true, now it’s not. Consult your Tax Attorney or Qualified CPA.Very recently the tax law was modified and now homeowners  who do a short sale on their principal residence will have no taxes due. However, this tax relief, granted by Congress, last only through 2012.

If the short sold property is an investment property, the homeowner will not have to pay taxes if he is insolvent.

8. How do you, my listing agent get paid? Who pays your commission?

The bank will pay the commission along with all the other usual closing costs.In return, the seller agrees to take no proceeds from the property.

9. Do I have to miss a payment to do a Short Sale?

No. That WAS true, but most major lenders accept short sale offers from sellers who have never missed a payment.

10. I want to do a short sale and have a 2nd mortgage, does this make me ineligible?

No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then your agent must  negotiate the terms with the second lender. Most short sales do involve 1st and 2nd lien holder.  See post Short Sale v Short Payoff.


Short Sale v Short Payoff…What’s the Difference?

In an earlier post, Short Sale v Foreclosure, we saw the difference between a short sale and a foreclosure, but there is another option for a distressed  homeowner. This is the Short Payoff. This option makes sense only under special circumstances.

What’s the difference between Short Sale v Short Payoff?

In our current real estate environment, short sales are becoming more common. A short sale occurs when  the lender or investor agrees to accept an amount less than actually owed on the property. The lender sells the property “short.” In this case, it’s up to the homeowner, usually using a real estate agent, to market and sell the property. The new buyer usually gets a bargain. The previous homeowner gets out from under an unmanageable mortgage by giving up the house.

In order to qualify for a short sale, generally speaking, the homeowner must demonstrate a verifiable long-term hardship rendering him unable to pay the mortgage. These days,  many homeowners, especially those who bought within the last several years or those who refinanced and took big chunks of equity out of their properties, becoming “upside down” in their home loans or owing more than the home is worth. Now, more and more often, these homeowners are also doing short sales.

So far, this doesn’t sound like such a bad deal. The house I bought loses value, so I sell it at current market rates and the lender takes the loss. Well, true, but the homeowner no longer has a home. And, the former homeowner will probably be a renter for several years to come as his credit report’s FICO score will immediately drop by about 300 points. The newest loan guidelines from Fannie Mae and Freddie Mac specify that after a short sale, a prospective borrower must wait for 2 years to qualify for any  FHA- or government-backed loan.

So, what’s the alternative that will NOT damage credit to such a degree?

That option is called a Short Payoff. It also carries some tough restrictions. If the homeowner is upside down by a smallish amount, say $10,000 to $50,000, depending on his  financial perspective, he might try to negotiate a short payoff with his lender.  In this scenario, the lender agrees to release the lien, his interest in the property, allowing it to be  “conveyed” or sold to a new owner.  The lender agrees to accept less than the amount owed on the property to release the lien, thus “short payoff,”   However,  in return, the former homeowner signs a promissory note for the difference or some of the difference agreeing to “pay off ” this unsecured line of credit according to the terms of the note.

To do a Short Payoff, the mortgage must be  current, the borrower must have  great credit, and must demonstrate the ability to pay off the debt.  The upside of this situation? The former homeowner keeps his great credit and can purchase another home or anything else he desires.

When is a  Short Payoff appropriate? A homeowner might  request a short payoff when the home has lost value dramatically or even just enough to make it impossible to sell, and he does  not have the ability to pay the large amount to get completely out of the property.

Not all lenders will allow for a Short Payoff; however,  you will never know if you never ask.
Of course, the advantages of short Pay-offs are the borrower are able to move out of the property and get on with his life, there SHOULD receive no negative feedback on the former homeowner’s  credit.

If for some  reason down the line, the borrower’s  ability to pay changes and cannot pay on the note, the credit ramifications are significantly smaller.

For further clarification of the entire short sale, foreclosure and short payoff differences, I have just posted an E-Book, Should I Short Sale My Home or How To Survive the Worst Real Estate Market in History, available as a free download, on my website. Plus, it appears in Links to the right of this post.