Inept Banks Plunge Foreclosure Process Into Chaos

In yet another consequence of the “bubble years” when zero-down mortgages went to almost anyone, now the foreclosure crisis is itself in crisis.

Bank of America, largest holder of US home mortgages, has declared a moratorium on foreclosures. Other large lenders, GMAC, Chase, have stopped foreclosures in 23 states, but  all large lenders are expected to follow suit shortly and declare a total moratorium across the country.  Initially, California was not involved, though immediately Jerry Brown the attorney general who is also running for governor of the state, pledged to scrutinize the banks’ foreclosure processes.

The reason for the moratorium is the revelation of the “robo-signing” of foreclosure affidavits without even looking at the contents. This has opened the banks to claims of massive fraud.

What does this mean for my  home? Will the auction go through?

If you with a  BofA or Countrywide loan  were expecting an auction any day now, that auction has been postponed indefinitely.  As mentioned here previously, from start to foreclosure, the process has been taking over one year due to the slow pace set by the banks. Now, add to that an indefinite moratorium period. The consensus seems to be the time will be 60 to 90 days. I would bet that most, if not all, foreclosures will begin again only in the new year.

How long will I be able to stay in my property without paying the mortgage?

At this point, no one knows what is going to happen next. Most likely, BofA for now and perhaps other banks will use the period of the moratorium, no matter how long it lasts, to clear out their huge,clogged pipelines of homes which have already been foreclosed upon and remain in some part of the sale or pre-sale process.  With the pipeline cleared, once the moratorium is lifted, foreclosures should resume at a brisk clip.

I haven’t paid my mortgage on my home for 6  months and I have a Notice of Default. Does this mean I won’t get a foreclosure on my record?

No, this means that,  if you have just done nothing so far, the BofA  moratorium is allowing you time to do a short sale and avoid the worst result for your credit. If you have an NOD, that means the process has started and the clock is ticking. Once the moratorium is lifted, whenever that is, you are just that much closer to foreclosure. You  may be one of the first foreclosures after the moratorium.

For help deciding or doing a  short sale, call me at 626-641-0346 or email Diane.

I haven’t paid, but I don’t have a Notice of Default. What about me?

It’s unclear at this point whether or not the banks will continue to issue NODs during the moratorium. No matter because at some point the moratorium will be over and the foreclosures will continue.  During this lull in the foreclosure activity, you have time to get going on a short sale.

How did all this happen?

Foreclosure Heat Map

As indicated in another post, really the incredible speed and complexity of the modern mortgage system are at the root of the issue. As explained in a Washington Post article, the situation is further complicated by the various reactions and legal opinions coming from many states. Some states which have not been especially hard hit appear to have adopted either more scrupulous attention to detail or some have even passed laws making it easier for banks to foreclose. Other states, especially the Big Four Foreclosure States, Florida,  California, Arizona and Nevada, faced with entire neighborhoods shuttered and communities gutted of population, have tried to stem the tide.

What is going to be the outcome?

BofA has already said it will resume foreclosures once its internal investigation is complete and has further stated that, so far, its internal investigation has revealed no irregularities.Banks are notoriously self-serving, though, so no one is relying too much on a self-test. Rumors are that Congress wants to hold hearings on the topic to see exactly what the banks are doing to validate the foreclosure process.

It’s evident that massive lawsuits may follow any hint of wrongdoing which could throw the entire real estate and financial sector into chaos.  Bad as the foreclosures are, the spectre of another TARP to bail out the banks again is just too horrible to contemplate. Let’s hope against hope  the banks have been following the proper procedures.

For help deciding or doing a short sale, call me at 626-641-0346 or email Diane.

Save Money: Don’t Pay the Mortgage

Sounds awful, doesn’t it? Contrary to the frugal rules your parents taught you or maybe your grandparents. Well, the Great Depression was a long time ago and we’ve come a long way, baby. No more do trivial items like mortgage contracts bother us because, well, the other partner in the contract, the banks, are showing how little they care for us.

I’ve discussed loan mods ad nauseam in this blog. The fact is for most borrowers either the bank refuses to offer one for a variety of reasons [too much income, not enough income, current in payments] or the loan mod proffered after months of paper-pushing is too draconian for the homeowners who soon fall into arrears again.

What’s the solution?

As mentioned in a recent NY Times article, in practice passive resistance rules . Homeowners simply stop paying on their underwater mortgages. Now, living “rent-free”, they take  whatever money they have and pay down bills, eke out an existence, put it away for the post- foreclosure rent deposit  or do whatever they have to do to make ends meet.

What about the foreclosure?

Don’t the banks swoop down and grab the house throwing its occupants into the streets? That’s what most of us think of when we think foreclosure, but the simple fact is the banks are swamped. In fact, today,  the average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

In my travels I’ve met plenty of homeowners who manage to stay in their homes rent free for months, even years. Not so long ago I talked to a man whose home in the Hollywood Hills had been in foreclosure for 24 months before the bank even threatened to evict him. He also had a guest house and had been collecting rent for the entire time. By law, his tenant was allowed to stay for another 60 to 90 days, though not rent-free.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier. In California, a non-judicial foreclosure state, the process can be fairly rapid, 3 months and 21 days from start to finish. That’s theoretically and legally possible, except, again, it rarely happens. In California, the average is now 415 days and lengthening every month. The reason is the overwhelming number of defaulting mortgages.

Even in short sales, the banks seem to be in no rush to consummate the transaction as borrowers forced to wait for 3 to 6 months have discovered. In the meantime, the homeowner lives rent free or collects rent from tenants Everyone lives in a kind of limbo knowing the ax will fall sometime and some would much rather just move out and get on with their lives and reconstructing their credit reports. For  many, it may not be  much, but it is some small revenge again the behemoth banks who took all that bailout money and turned a tidy profit while the nation’s homeowners bore the brunt. Yes, a small but satisfying revenge.

Short Sale Update: LA County’s Pricier Areas

Short Sales, strategic and otherwise, would seem to be the name of the game this year in L.A. County as in much of the rest of the country. With some 25% of the population now “debt-impaired” and 3 million foreclosures already accomplished, short sales are beginning to seem like business as usual.

Just wondering how the more pricey areas of L.A. County were handling the situation, I took a little tour on the MLS. Here’s what I found:

  • Malibu has one active listing of $4.5 million and 12 active  short sales priced from 389000 to $3.8 mill; 6 pending short sales, but no other pending sales. One short sale closed in the last 3 months, but no standard sales.
  • Pacific Palisades has  one active listing and 8 active short sale listings ranging up to $2.5 mill; one pending short sale , but no standard pending sales.Four short sales closed in the past 3 months and one standard sale at $3.75 mill.
  • Santa Monica has 19 active short sale listings and 14 standard, but 16 pending short sales and only 8 standards with 8 short sales closed in the past 3 months as opposed to 2 standard sales.
  • Beverly Hills shows 7 active short sale listings maxing out at $3.5 mill with 10 pending short sales up to $2.7 mill and no standard sales. In the past three months one short sale has closed, no standard sales.
  • Bel-Air has 2 active short sale listings, 7 pending short sales [up to $4.1 mill] and no sales in the past 3 months.
  • Brentwood, a larger city, has 217 active listings, 9 short sale listings, with 7 pending short sales,  but in the past three  months only one sale–a short sale, of course, for $2.9 mill.
  • Arcadia in the San Gabriel Valley shows 148 standard listings with 5 active short sales, 12 pending short sales out of 39 pending sales and in the past three months 68 closed sales with 7 short sales.

What are we to make of this? I see a number of different strands.

One, standard sellers who do  not lower their prices to short sale levels don’t sell their houses, so if you have to sell your home, it’s better to bite the bullet and price it right. If you don’t have to sell, take it off the market.

Two, in areas like Arcadia where many homeowners purchased their homes all cash or have paid off their mortgages, the crisis is less severe. If you want to live there, you will most likely do a standard sale.

Two, the short sale, strategic or otherwise, has certainly hit affluent areas.Any notion we may have had that expensive homes are somehow  immune to our ongoing financial crisis must surely be seen as wrongheaded. Owners of expensive homes, mansions, are also sacrificing. Short of calling up all these sellers or their agents, I can’t know if the sales are strategic or the result of genuine hardship. What I do know is that the rich are now as “debt-impaired” as the rest of us.

More About Strategic Short Sales

Banks do it, so why not the rest of us? That is the message not only from the famous liberal Grey Lady, the New York Times, cited in a previous post,  but now also from the notoriously conservative Wall Street Journal in an opinion piece that has the right all atwitter.

What’s that, you ask? Both papers now, from the right and the left and really the middle, are proposing that homeowners wise up and get out of their upside-down mortgages. In short, both are advocating the strategic or voluntary short sale

To go further, in my view, if the  nation is to survive this crisis, it’s very possible that short sales will soon be seen as not only the financially reasonable way out but also the most patriotic way out. Why’s that?

Recent figures indicate that 3.5% of all mortgages are already in the foreclosure process. That’s, of course, on top of the massive numbers of foreclosures that have already taken place. Add to those in the process another 9.7% of all mortgages which are now 90 days or more late and that’s an impressive 14% of all mortgages looking down the barrel of foreclosure. And, that’s not the end of it. An estimated 25% to 30% of mortgages in this country are upside down as homeowners owe more than their homes are now worth. That number is predicted to climb to over 40% in the near future.

What is the fastest way out of this mess? Obviously, the best way would be for the banks holding the mortgages to reduce them down to present value of the homes or at least somewhere close to the present value. Homeowners stay in their homes; banks keep collecting the mortgage payments.  Banks are reluctant to do this. In fact, despite the government’s HAMP program offering significant incentives for banks to modify loans, banks effectively refused by merely tweaking loans or outright refusing to touch them.

Now, the U.S. Treasury has come out with a new program which went into effect March 1, 2010. Called HAFA [Home Affordable Foreclosure Alternatives]. the program is a blueprint or set of guidelines for banks on how to process short sales. Designed to expedite the excruciatingly slow process in place to date at most banks [you know who you are, Countrywide], this may finally break the logjam of distressed mortgages that is threatening the very stability of our country’s economy.

For anyone considering a short sale, strategic or otherwise, as a way out of a personal financial morass, this may be the best time to get underway. If you are considering such a move, call me and I’ll be glad to give you what advice I can.

Trying To Keep Above Water: What is a Strategic Short Sale?

Short sales are popular. With literally millions of homeowners hit by the double whammy of adjustable loans and  financial dire straits, it’s no wonder that so many have chosen to avoid foreclosure and short sale their homes. Banks document the hardship and then agree to the sale.

But, homeowners with bad loans or victimized by the economy are not the only ones wanting to get out of their over-priced mortgages and underwater homes. In fact, anyone with the smallest touch of financial acumen has figured out that paying a mortgage double what the property is now worth hardly makes sense. Enter the strategic short sale.

Simply put a strategic short sale is a voluntary short sale that does not necessarily involve a hardship. Increasingly, homeowners are making the financial calculation that not only are their homes and properties underwater but are likely to remain so for the foreseeable future. Even if they can make their payments, homeowners, especially the more financially literate, are determining that it simply is financial suicide to stay in a home, paying on the mortgage when the property has lost half its value. Better to bail. It’s better to keep your head above water than to drown.

For those who feel it’s possibly not “honorable” or “moral” to treat the sacred contract signed with the bank so cavalierly, consider this: according to a recent New York Times article, Morgan Stanley itself made this “strategic” decision to walk away from five office buildings it had bought in San Francisco at the height of the boom. Yet, Henry Paulson, as U. S.  Treasurer, expostulated that homeowners who walk away from their bad deals are nothing more than “speculators’. Oh, right, Mr Paulson, formerly CEO of the now-universally-acknowledged odious Goldman Sachs.

Today in February 2010 about 25% of all mortgages are underwater. 10% of these mortgages are actually delinquent. Whatever you hear from the Pollyannas of real estate, those figures are likely to rise this year. Why? Simple–the unemployment rate is astronomical by our normal standards. Loan mods not only don’t work; they also require the homeowner to have a hardship, but not too much of a hardship since that would mean no money to pay the loan….The refi program isn’t working. All the wonderful ideas about helping homeowners have not helped, at least not enough.

What’s a homeowner to do? Follow the lead of the very banks to which you owe money and do a short sale. Make the calculation and decide if this is the best route for you. Today, if a homeowner is not delinquent, he can short sale his home and buy another at the same time. Increasingly, too, homeowners can get that short sale wiped off their credit reports in record time, especially if they have the money to purchase another home.

People who short sale their homes frequently have lost thousands and often hundreds of thousands of dollars of real money, not paper equity.  It’s not their fault the economy tanked. People operated synergistically with the banks in our economic ecosystem taking on the bad loans that banks offered, both in good faith at the time. Neither is totally at fault for the resulting disaster, though both are suffering, people more than banks, I dare say. In a short sale, banks get something less than the promised amount but usually 35% to  50% more than in a foreclosure.

Short sales, strategic or not, make the best sense for both parties. A classic win-win, if you will, or, more aptly, lose-lose.

Paperwork and the Short Sale

It’s pretty clear that banks are much better off financially with short sales as opposed to foreclosures. Then, why on earth are these crazy banks making them so complicated?

Typically, banks require reams of paperwork for homeowners who wish to do a short sale on their properties instead of heading directly into foreclosure. Primary among the tax returns, financial statements, bank statements, pay stubs, W2s,   and such is the hardship letter, delineating reasons why the homeowner can no longer make the payments and so is requesting that the mortgage holder accept less than what is owed on the property and call it good.

Some banks have already recognized the futility, stupidity, hypocrisy, call it what you will, of this method and are no longer requiring mountains of paperwork and are, in effect, streamlining the whole process. Wachovia, now defunct,  but operated by Wells Fargo Bank,  announced quite some time ago that it would no longer require any paperwork other than the listing from the homeowner  wishing to do a short sale  along with a  buyer’s offer.  Most marvelous of all, Wachovia actually makes a decision and accepts or rejects the offer within 5 business days or tries to. Contrast this with Bank of America’s [aka Countrywide] 3 to 4 months.

Wachovia’s way makes sense, doesn’t it? It recognized that homeowners who are underwater to the tune of 50% or hundreds of thousands of dollars are not going to make the payments whether they are able to or not. They would need to be financial morons to stay in that situation. So, why force  or punish the poor homeowner who is nevertheless giving up his home or his investment and require all this useless paperwork?

Let’s just face it. With about 24% of loans nationwide underwater, millions of homeowners, clogging up the system with all this useless and unnecessary pasperwork looks more like punishment for the homeowner than anything really needed to make the transaction happen. Listen up, big banks, let’s hear it for Wachovia!

Great Short Sale News. You CAN Buy Another House.

Losing sleep over the precipitous drop in the value of your home? Wondering how you can continue to make payments on that $500,000 loan when the home now seems worth at most $300,000? Casting  jealous glances at the newcomers in your area who are getting bargain prices and bargain rates?

Guess what? Now you can short sell your home AND  buy another house at today’s prices and rates.

Over 14 million loans in the U.S. are now either underwater or in some stage of foreclosure. About half the nationwide sales to new buyers are either repossessions or short sales.  It seems to most underwater homeowners that there ought to be some way to connect the two–now there is. You can short sale your home and buy a similar property for half the price.

Lenders are  now coming out with new programs, many insured by FHA, which make it possible for homeowners to short sale their homes and simultaneously buy another property at today’s prices and today’s rates. Many homeowners have allowed their homes to go into foreclosure or waited helplessly for the loan modifications that never came simply because they couldn’t figure out where they were going to live if they left their homes. Some decided to stick out the school year. Others couldn’t bear to leave the neighborhood. Now they don’t have to.

Here are a few of the guidelines that will allow homeowners to short sale their current home and simultaneously purchase another home. First, they must be current on their mortgages. So, owners who have “let the property go” or who were not financially able would not qualify. Finally, here is some reward for those who have steadfastly made their payments in the face of dropping values.

Second, they must be able to qualify for the new mortgage.That means a FICO of at least 640 and income sufficient to pay for the new mortgage.That’s not as hard as it may seem. If a homeowner can pay the $500,000 mortgage at 6% or 7%, no matter with what great difficulty, think how easy it will be to pay the $300,000 with a 5% mortgage for an identical property.

Third, the buyer must have money sufficient to pay the minimum 3.5% FHA down payment and the accompanying  closing costs. The short seller will get no proceeds from the sale of his property. That’s a given. So, where will the money come from for the new property? If  it’s an FHA loan, the minimum down payment is 3.5% and that total amount can be a gift. Also, the short seller is eligible for the federal tax credit which goes up to $6500 for move-up buyers. That may be applied to the down payment or closing costs, but this is not yet determined.

Finally, some programs require that the new loan cannot be more than the previous loan. So, in this case the new loan cannot be more than the $500,000 which the  buyer was paying on the previous home. With the drop in prices today, in most markets, this will be an easy criterion to satisfy.

Impetus to do short sales just got much bigger. If you’ve been dithering about what to do and how to house the family after a short sale, these new loans could certainly aid in the decision-making process and give you peace of mind. Short selling your home and buying another one at today’s much lower values may, in fact, result in a significant improvement in your housing standards…