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I believe that the current situation is outrageous, especially when you consider how the loan servicing process has been allowed to be run. (See my previous post at http://sandiegohomequestblog.com/why-short-sales-and-loan-modifications-and-foreclosures-take-so-long/)

However, in my opinion, the CAR proposals to correct the issue do not go far enough.

In particular, I believe that the activities of Fannie Mae and Freddie Mac do need to be significantly modified and/or curtailed. In particular:

1. I concur with a number of others who assert that their backstopping of conventional loans (and support for irresponsible lending practices, such as “Option Arms” and “No Documentation” lending) was a significant factor in the housing market meltdown.  By taking away the risk of loss from lenders, any thoughts that they may have had with regard to prudent lending practices went out the window. (After all, the government was always there to bail them out – and that is exactly what happened. So it is not surprising that they were willing to take on greater risks to see if they could earn higher returns.)

2. I also believe, from both my experiences and what I have seen and heard from others, that the behavior of both of these quasi-government entities has been more akin to what I would expect from storefront payday loan operators. (E.g., see my previous post at http://sandiegohomequestblog.com/looking-at-buying-a-bank-owned-reo-property-heres-a-few-things-you-should-know/ )  Let us not forget that these are government sponsored entities that have been granted special rights. Given that situation, I believe that they should be operating (at least in part) in the public interest – especially since we (as tax-payers) are now bailing them out to the tune of at least hundreds of billions of dollars.

 I believe that other methods of supporting the government’s political objectives to make homeownership more affordable should be employed., one’s that do not involve disrupting prudent lending practices by financial instutitions.  These could include: An expansion of first time homeowner programs, support for shared equity lending products and homebuyer tax credit programs (ones that could be structured so that the tax credit would be recovered on the sale of the home. )

In addition, I think that we all need to remember that money is fungible (and is perhaps the ultimate commodity.) That is, each and every dollar has the same value as each and every other dollar,  and there are no special manufacturing skills that lenders need to employ to produce them.  (In fact, they all come from the same source – all of our efforts in creating a viable and valuable economy.) 

Accordingly, there is no reason to encourage (or allow) banks to grow in size to the point where they “cannot be allowed to fail.” (In fact, smaller banks fail all the time.) When there is a disruption, there is usually an opportunity for others to come in (with their own capital or with c0-investors) to take the place of any banks that do fail.  Those who do so would have the potential to make higher returns until the void, if any, was filled by new competition.

To further minimize the disruption that any of these failures might cause, I believe that we should also place limits on the size of “retail”  (that is, consumer-focused) lending organizations.   That is,  their activities should be restricted so that each such organization would onlybe allowed to operate “locally” (i.e., in a city, or a county or perhaps even as large as a state.). If that were done, then (i) the size of the disruption from a failure would be limited, (ii) others would be able to come into the market, set up shop, and reap the benefits; and (iii) the banks would likely become more engaged with thier clients and with trying to help them.

 The other area where significant reform is needed relates to the way that loans have been allowed to be serviced. As you may know, the banks that originated many of the home loans no longer own those loans  (Typically 80% or more of loans that were funded by the large banks have been sold off to “investors” (including Freddie Mac, Fannie Mae, and others).  So the banks (and other loan servicers), may no longer have a risk of loss on those loans if there is a default. Instead, under the loan servicing contracts typically in use today, they may actually be in a position to make more when a borrower defaults. That is, they may earn more by: (i) dragging out the process (so that they continue to earn the loan servicing fee); (ii) “putting” homeowners into default (which enables the servicers to charge late payment, default and other additional fees); and (iii) having the opportunity to manage the sale of the foreclosed homes if they are acquired by their clients in the foreclosure process (so-called “bank owned” or “REO” properties.)

In addition, it appears that the banks also have an agenda may not be shared by the note holders – that is, they frequently seem to want to “punish” borrowers whom they deem unworthy for either a short sale or a loan modification. (In contrast, one would rationally expect the note holders themselves to be more interested in maximizing the recovery of their investments, and not in punishing anyone.)

So, while the loan servicers do have a fiduciary responsibility to act in the best interests of their clients, it appears that some of the above potential conflicts of interest between that fiduciary duty and the loan servicers own interests have been getting in the way of properly addressing the need to resolve the home loan crises we have been facing.

 Accordingly, I continue to believe that the suggestions presented in a previous post on this site (http://sandiegohomequestblog.com/home-loan-servicing-problems-some-potential-solutions/) should be considered.

 That’s my opinion. What’s yours?

Copyright 2011, Arthur Chatroo. All Rights Reserved.

Important Notice

Arthur Chatroo and Realty Experts are not associated or affiliated in any way, shape, or form with the government, and services have not been reviewed, endorsed, or approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.

The views expressed here are Chatroo’s personal views and do not reflect the views of Realty Experts.

The last record was set in 2005. That record was set because bankruptcy laws were being tightened up and people wanted to file before the laws changed.

(The big banks had convinced congress to make it harder for debtors to get relief.)

Discover how other sellers successfully did a short sale to avoid foreclosure by clicking here.

The number of bankruptcies filed in 2010 reached 1,530,078. That was an increase of 8.7% over 2009. Even though the economy is starting to show signs of a recovery, people still need relief from debt.

“The [2005] law was supposed to reduce filings, but we are very close to levels we were at then,” said Samuel J. Gerdano, Executive Director of the American Bankruptcy Institute. “The laws of economic gravity are more powerful than the laws passed by Congress.”

I can’t agree with him more. Here are a few tips if you are considering bankruptcy.

Tip #1: Sometimes not filing bankruptcy at all is preferred to a Chapter 13 Bankruptcy filing. Let me explain why.

A Chapter 13 is basically a repayment plan. Very few debts are wiped out. In addition, your whole financial life is placed in the hands of a bankruptcy trustee.

They oversee all your finances so you can attempt to repay everyone. Contrast this with a Chapter 7 Bankruptcy where you can erase debts you can’t afford.

Tip #2: When you interview bankruptcy lawyers, ask about their ratio between Chapter 7 filings and Chapter 13 filings. A good bankruptcy lawyer will be able to help you file Chapter 7 and avoid a Chapter 13 bankruptcy. Thinking about a short sale?

I can help you short sale your property and never pay the bank another penny. Send me an e-mail at achatroo@san.rr.com. I will contact you for a free consultation.

When we talk, I will explain how the process works in detail and answer any questions you may have. Or, if you prefer, you can call me at 858-775-0098

Discover how other sellers successfully completed a short sale and request a free consultation by clicking here.

Thinking about a loan modification? Our North San Diego County loan modification kit has the instructions you will need to get a loan modification approved with your bank. Click here to request a copy.

Thanks for reading this, Arthur Chatroo.

Arthur is a Real Estate Broker-Associate at Realty Experts. North San Diego County Short Sales Realtor:

Phone: 858-775-0098. achatroo@san.rr.com.

A Name You Can Trust

View My homes for sale at http://www.SDHomeQuest.com.

Arthur Chatroo specializes in loan modification assistance and short sales in North San Diego County California. North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Realtor , Short Sale Realtor. North San Diego County CA Short Sales. North San Diego County Realtor.

Copyright 2010 SFI Marketing Institute, LLC. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts.

Copyright 2011 SFI Marketing Institute, LLC. All Rights Reserved.

Important Notice

Arthur Chatroo, Realty Experts, and the Stop Foreclosure Institute are not associated or affiliated in any way, shape, or form with the government, and services have not been reviewed, endorsed, or approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.
Most lenders willingly work with agents on short sales. Why?

The views expressed here are Chatroo’s personal views and do not reflect the views of Realty Experts.

This information on US Bankruptcies just reached a 5 year high is provided as a courtesy to our viewers to help them make informed decisions.

As noted, the current home loan system appears to incentivizes loan servicers to foreclose on properties for their own benefit rather than pursue loan modifications and short sales that would benefit their clients as well as the borrowers on these loans and society at large. I believe that the system also encouranges both loan servicers and loan originators to take excessive and dangerous risks that put our entire enconomy in jeopardy.

 Accordingly, I believe the rules of the game need to be changed.  Below are some additional and/or expanded suggestions to avoid a repeat of the situation we are currently still experiencing:

1.  Avoiding Irresponsible Lending: In the conclusions of the NCLC report, they suggest that there be  additional regulations of loan products to avoid irresponsible lending.  However, regulations frequently have loopholes (both unintended and intended, and the banking industry does have a very strong lobby.)  What I believe is really needed to address this problem is the disbanding of Fannie Mae and Freddie Mac, the government sponsored agencies that guarantee home loans made by loan originators. In my opinion, these guarantees effectively eliminate most of the risk of loss to lenders from making bad loans (and that certainly encourages irresponsible lending.) At a minimum, no guarantees should be provided for non-traditional high risk loans (e.g, no doc, alternate-ARMs, etc.)
2. Not allowing loans to be “sliced and diced” to create New Securities: The creation of asset-backed securities out of risky loans that have been split and then assembled into portfolios of different risk classes can actually create more uncertainly about the value of the underlying assets (rather than reducing risk by diversification).  As a result, investors can be easliy misled as to the true risks involved. The existence of these assets accelerated the financial collapse that occurred when the housing bubble burst.
3.  Not allowing lenders to delegate the decisions on short sale or loan modifications to loan servicers: While previously mentioned, this bears repeating.  Since loan servicers generallystand to make more money in a foreclosure than in a loan modification or short sale, their interests are contrary to the best interests of the investors they represent and society as a whole. In addition, loan servicers frequently seem to be concerned with punishing defaulting homeowners even if that reduces the recovery that can be realized on the loan, and that is likely to be contrary to the interests or concerns of the investors..These conflicts of interest are best avoided by not giving loan servicers the authority to make loss mitigation decisions regarding these loans, and requiring them to submit all offers to the investors for consideration.
4. Regulate default fees reasonably related to the costs incurred (so they do not become an additional profit center for loan servicers):  As noted by the NCLC, these fees can increase the cost of curing a default to homeowners to the point where a loan modification is no longer possible. They also encourage servicers to place homeowners into foreclosure.
5. Make Retail Lending to Consumers An Activity Of Only Local Banks: The major national banks have become so large that they were “too big to allow to fail” when this problem started.  As a result we have had to subsidize them to the tume of billions of dollars, even though they shared a good portion of the fault for  many of these losses. With those subsidies (and the assumption of the losses by Fannie Mae and Freddie Mac through loan guarantees) the banks are now very profitable again while others are losing their homes and their jobs,  In addition, Fannie and Freddie are being subsidized by taxpayers (for the banks losses that they had to backstop) to the tune of $135 Billion or more currently (depending on which of the reported numbers you believe). And that number could more than double before its all over. I believe that is not something we, as taxpayers, should be paying for. Local lenders are likely to be more responsive to their clients and less likely to take unreasonable risks. In addition, to the extent that they do make mistakes, they can be left to suffer the consequences of their actions without jeopardizing the entire U.S. economy.
6.  Mandating a Modification Before a Foreclosure: As suggested by the NCLC, laws should be passed requiring that loan modifications should be considered before any foreclosure actions are started, and loan modifications should be required where they are more profitable to investors. I believe that makes a lot of sence. It reduces the damage to the economy (and to homeowners), and it ultimately allows for a recovery of some or all of the loss over time. That is, the loan modification could include a provision for a sharing of equity gains as home prices go back up (which is what usually happens over time.)
7.  Providing for Principal Reductions in the Government’s Making Home Affordable programs (and also in Bankruptcy proceedings): This is another NCLC recommendation that I agree with. They note that principal foregiveness is frequently necessary to make modifications affordable, and that they may well be justified in cases of improper underwritiing.
8. Speeding Up the Processing of Foreclosure Alternatives: It currently takes far too long for these alternatives to be concluded, which puts further strain on our economy and increases the losses being incurred. With regard to modifications, NCLC suggests that borrowers be given standardized offers (based, e.g, on their income at the time of origination and current default status) without the need for detailed underwriting. Only if the offered modification is rejected by the homeowner (e.g., due to a decline in income or other hardship), or if an initial modification fails, would detailed underwriting then be needed. The idea would be to introduce speed and uniformity, but with the opportunity for a subsequent review if the standard program is inadequate and if a further loan modification would save investors money (and, if a modification were possible, preserve home ownership.) With regard to short sales, the delay likely increases the failure rate  – i.e., most buyers are not willing to wait six to 6 to 9 months or more  to purchase a property with no assurnace that the transaction wll ever be approved. 

That’s my opinion.  What’s yours?

If you would like to add any additional suggestions or comments, please do so below.

Arthur Chatroo, Realtor®, specializes in loan modification assistance and short sales in North San Diego County California. North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Real Estate Agent, Short Sale Real Estate Agent. North San Diego County CA Short Sales. North San Diego County Real Estate Agent..]

REALTOR® and REALTORS® are registered trademarks, service marks, membership marks, and/or logos of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”). All rights reserved. As a registered collective membership mark, REALTOR® identifies a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics.

Copyright 2010. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts. This information on SanDiegoHomeQuestBlog: is provided as a courtesy to our viewers to help them make in

The banking industry attributes this low success rate to the failure of homeowners and their agents to submit complete documentation and otherwise comply with the short sale approval processes that they have set up, as well as an overload of the system.  (As noted, I believe these are excuses that help cover up the real issue related to servicer compensation.)

However, I believe that there are some practices to work the current system that exists to help improve the odds of success, and have listed them below:

1. 1.  Play by the Rules: Before you can get anywhere with a loan servicer, you do need to get them to look at your short sale request.  This requires that you submit a complete file with, at a minimum. all of the required documentation. (If you don’t, your file will likely be put in the trash, and any chance of negotiating the file or getting someone higher up to look at it will be lost.)  Of course, there are some exceptions, principally relating to loopholes that can potentially be taken advantage of in automated submission systems used by some servicers (e.g., Bank of America and GMAC).
2. Follow Up/ Follow Up/ Follow Up:  After submitting the file, it is recommended that the servicer be contacted to verify the file has been received and complies with lender/servicer requirements.  (Servicers are notorious for “losing” even complete submissions, so this is important.)  Also, frequent follow up on a regular basis is needed to make sure things are moving. 
3. Be Cordial:  You never know when you might get lucky and be assigned a negotiator with a sympathetic ear – one who is willing to help.  It seems to be rare, but it does happen.
4. Find Out Who Owns the Note.  Loan servicers are generally loathe to disclose this information, but it is important.  You may then be able to find out what the policies of the owner are (and are less likely to be misled by the negotiator.)   Also, this information may be useful if you run into a problem.  Escalation to the owner, if that is possible, may finally put you in touch with someone who is knowledgeable, rational and motivated to avoid a foreclosure.  Loan  servicers are required to disclose this to borrowers, but the request needs to be in writing and should be sent by certified mail.
5. Find Out Whether The Foreclosure Process Has Been Initiated.  I have found that the Loss Mitigation and Asset Management (Foreclosure) departments at these institutions do not communicate very well.  See if you can get them to agree to suspend any foreclosure activity while the short sale (or loan modification) negotiations are continuing.  Sometimes they will (but that is not always the case.)  In any event, you need to know this information so that you know how much time you have to get the file approved.
6. Respond in a Timely Matter to All Requests.  If this is not done, the process will likely stall (and your file may wind up on the bottom of the pile or simply be trashed.)
7. Meet with the Appraiser or Agent Doing the Broker Price Opinion.  This is very important.  You want to make sure that they are aware of what is going on in the market and also of any problems with the property, and this is another area where a real estate professional’s services are likely to be more effective. Note that this may be the only opportunity to make sure that the valuation comes in correctly
8. Don’t Cave In to the Negotators Demands.  Sometimes negotiators take a position just to see what the response is.  Other times, they try to mislead to get a better result, threatening to close out the file if their demands aren’t met.  In reality, as fiduciaries, they should normally be submitting the best offer that they have negotiated to the owner of the file (and not closing it out), and many times that does happen.  (The exception will be where the authority to make decisions for the owner has been delegated to them.) Sometimes it may actually be better to have the file closed out since, if there is enough time, the request can be submitted again.  That will likely result that another negotiator being assigned – and you may have better luck with them. 
9. If You Do Run Into Problems, Escalate.  The negotiators that you are likely to deal with initially have been described to me by a loan officer at one of the major banks as “banking center employees” (i.e., clerical staff).  They are underpaid, overworked and generally appear not to be very knowledgeable about the real estate business.  In addition, many of these employees do not seem to care about avoiding foreclosures, attempt to mislead the homeowner and their agent, and, in some cases, actually appear to be vindictive.  However, the servicers ultimately do have a fiduciary obligation to their clients, the owners/investors who are holding the loans.  I believe that when you do go high enough, they recognize that they can no longer ignore what their staff employees are doing – that is, their knowledge of the situation is now on the record.  As a result, I have found that they are more likely to pay attention and act rationally in their client’s best interests.
10. Document that the Offer Submitted is Fair And Likely to Provide A Greater Return than a Foreclosure.  A senior executive (or their staff member) presented with this information will act rationally and forward the file on for consideration, and that can result in a very rapid approval being issued.
11.  Threaten to Go Viral.  If escalation does not work, threatening to post negative comments on the internet and/or contact the media, etc., could be helpful (especially if they are being unreasonable.)  With all the investigations by state attorney generals going (on robo-signing), and at least one lawsuit on the improper handling of defaults, you may be able to hit a nerve and get a more favorable response.
12. Managing the Buyers.  While all of the above is going on, it is necessary to manage the buyers expectations, and keep them updated on a regular basis, to avoid losing them (and that needs to be addressed up front.)  The buyers need to understand that the short sale process can take 6 months or more.

 If the above sounds like  a lot of work, it is.  So if you are not prepared to handle it yourself, it is best to have a trained and knowledgeable  real estate professional handle it for you.  In a short sale, the real estate commission in almost all cases is not charged to the Seller.  (That is, it is structured to be paid from the proceeds of the sale (i.e. before the balance is paid to the owner of the home loan.) 

Have any comments or questions?  Please feel free to leave them below.

The next post on this site will discuss some additional suggestions that I believe would help avoid future meltdowns so that we hopefully won’t have to go through this economic crises again.

 Having financial difficulties and don’t know what to do?  For free advice on your options, visit http://SaveYourSDHome.com.

 Buying a distressed property?  For a free list with pictures, send an email to Arthur@SDHomeQuest.com with information on the location, size and price of the properties that you would be interested in.

 Arthur Chatroo is a Broker-Associate with Realty Experts

 Phone: (858) 775-0098.  Email: Arthur@SDHomeQuest.com

 Arthur Chatroo, Realtor®, CDPE (“Certified Distressed Property Expert”), specializes in helping buyers in the purchase of distressed properties and sellers in financial difficulty with loan modification assistance and short sales in North San Diego County California.

North San Diego County Distressed Properties, North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Real Estate Agent,  Short Sale Real Estate Agent. North San Diego County CA Short Sales. North San Diego County Real Estate Agent.

 REALTOR® and REALTORS® are registered trademarks, service marks, membership marks, and/or logos of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”).  All rights reserved.  As a registered collective membership mark, REALTOR® identifies a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics.

 Copyright 2010. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts. This information on SanDiegoHomeQuestBlog: is provided as a courtesy to our viewers to help them make informed decisions.

Today we’re going to cover some ideas that may help alleviate some of these problems. 

As noted in the prior posts, problems with the current system appear to be related to: 

• The fact that, in a majority of cases, the loans are not owned by the loan servicers with whom the distressed homeowners are negotiating.
• The compensation structure appears to give servicers more of an incentive to push homeowersn into foreclosure rather than trying to work out a loan modification or short sale solution.
• Understaffing
• Inadequate training and/or lack of knowledge of real estate transactions by some of the negotiating staff.
• Lack of openness and transparency by the servicers  in the loss mitigation process.

 Accordingly, the following are some suggestions to correct the above:

1. Prohibit investors from delegating the decision making process to the loan servicers.  There’s too much of a conflict of interest, not only in the area of compensation, but in other matters as well.  (Some of the loan servicers seem determined to try to “punish” homeowners for their financial problems, which is probably not a priority of the investors.)
2. Require that the loan servicers forward the best loan modification or short sale terms that they are able to negotiate to the lenders. Many times, if the negotiator for the servicer doesn’t get their demands met, they close out the file, or at least threaten to do so.  Also the new on-line system being used by Bank of America for short sales, the files can be closed out automatically if the homeowner or agent is unable to respond in the required time-period.)
3. Loan servicers should be required to employ adequate staff to handle loan modification and short sale requests.  In addition, they need to hire people who understand the real estate business (or to provide them with appropriate training for that purpose.
4. Require that the loan servicers fully disclose (i) who owns the loan; (ii) what their guidelines are (iii) and a copy of the appraisal or other price opinion that was obtained for the property.
5. Limiting default fees to an amount that reasonably reflects the costs incurred in servicing the defaulted loans.  These fees should not be a profit center for the servicers, and should be tied more closely to successfully achieving a modification or short sale to encourage that outcome.
6. To require that an approval or rejection of a short sale be provided to the homeowner within 30 to 60 days.  This willl provide  potential buyers with an idea of wht the approval time frame will be.  (Too many buyers become frustrated with the delays and lack of response and simply decide to go elsewhere, making it more likely that the property will to into  foreclosure.)
7. To allow reasonably sufficient time after approval of a short sale (without penalty fees) for the transaction to close.   Currently, many approvals specify relatively short time periods for closing, sometimes as short as 10 days after the approval was given.  However,, as many of these servicers know (especially the banks, since they have lending arms themselves.) it may take 45 days or more before the buyer’s loan can be funded . 
8. For modifications and short sales that are not approved, the investors/servicers should be required to provide a written explanation regarding why their request was denied and what changes would be needed for approval. 

I believe the above would be a good start to making loan modifications and short sales achievable, which I believe would  be in everyone’s interest. 

That’s my opinion. What’s yours?

(And if you do have additional or alternative suggestions, please share them below.)

Note that, in spite of these problems, some loan modifications and short sales do get  approved and closed. 

Tomorrow we will discuss how best to proceed under the current environment to achieve that result.

 Having financial difficulties and don’t know what to do?  For free advice on your options, visit http://SaveYourSDHome.com. 

Buying a distressed property?  For a free list with pictures, send an email to Arthur@SDHomeQuest.com with information on the location, size and price of the properties that you would be interested in. 

Arthur Chatroo is a Broker-Associate with Realty Experts, 

Phone: (858) 775-0098.  Email: Arthur@SDHomeQuest.com

Arthur Chatroo, Realtor®, CDPE (“Certified Distressed Property Expert”), specializes in helping buyers in the purchase of distressed properties and sellers in financial difficulty with loan modification assistance and short sales in North San Diego County California. 

North San Diego County Distressed Properties, North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Real Estate Agent,  Short Sale Real Estate Agent. North San Diego County CA Short Sales. North San Diego County Real Estate Agent. 

REALTOR® and REALTORS® are registered trademarks, service marks, membership marks, and/or logos of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”).  All rights reserved.  As a registered collective membership mark, REALTOR® identifies a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics. 

Copyright 2010. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts. This information on SanDiegoHomeQuestBlog: is provided as a courtesy to our viewers to help them make informed decisions.

The report noted the reasons why banks, as loan servicers have an incentive to push defaulted mortgages into Foreclosure rather than completing Loan Modifications or Short Sales. 

This view is certainly shared by others. In a speech by newly appointed Federal Reserve Board Governor Sarah Bloom Raskin on November 12, 2010, she noted that: 

“… a foreclosure almost always costs the investor money, but may actually earn money for the servicer in the form of fees. Proactive measures to avoid foreclosure and minimize cost to the investor, on the other hand, may be good for the homeowner, but involve costs that could very well lead to a net loss to the servicer.” 

(Mrs. Raskin is a former Maryland state banking regulator.) 

While there are incentives offered to servicers for loan modifications and short sales under, e.g., the government Home Affordable Modification Program (“HAMP”) and Home Affordable Modification Program (“HAFA”) these do not seem to be sufficient to have much of an effect.  (The HAMP program itself has only been successful in modifying a fraction of the homeowners that were targeted to benefit from its provisions.)  [Information on these and other foreclosure avoidance programs can be viewed online on one of my other sites at websites at http://www.SaveMySDHome.com (and you can simply bypass the sign in form if your not interested in receiving updates).] 

Thus, in spite of their legal fiduciary obligations to act in the best interests of the investors who actually own the mortgage notes, these banks (and other loan servicers) appear to be acting in their own best interests much of the time. 

To recap, as previously noted in the prior post on this Blog: 

• Some 80 to 90% of the loans made by the major banks are now no longer owned by them (having been sold off to investors).  The banks, as loan servicers, are thus not the ones who will suffer the loss likely to be incurred in a Foreclosure; and
• In many if not most cases, the loan servicers are likely to receive greater compensation from a Foreclosure than from a Loan Modification or Short Sale arising from both the delay in the transaction and the default fees that they can charge the homeowner. 

So, homeowners already in financial difficulties certainly suffer more by losing their properties, having their credit damaged to a greater extent by a foreclosure and, in some cases, having the default fees added as additional deficiencies to their accounts. 

Other homeowners also suffer as additional foreclosures have a negative effect on home prices in their area. 

In addition, the investors suffer greater losses from a foreclosure, as noted.

 But who also suffers when these investors suffer?

 Well, certainly the secondary investors who purchased interests in the loan portfolios that were created. 

And, since many of the notes were purchased by Fannie Mae and Freddie Mac, and are guaranteed by them,  they are losing money also.

 But note Fannie Mae and Freddie Mac were taken over by the government in 2008. While still publicly traded (for pennies on the dollar), the federal government is subsidizing their operations to the tune of billions of dollars.  As noted in a recent article in The Huffington Post, these entities have already drawn down $125 billion in federal funds, and that number is still climbing.  (See http://www.huffingtonpost.com/2010/03/22/why-fannie-mae-freddie-ma_n_508934.html.)

 So that means it is you and I, as taxpayers, who are now actually suffering many of these additional losses as well.

THAT IS SOMETHING THAT I FIND TO BE SIMPLY OUTRAGEOUS! 

To begin with, these banks played a large role in the financial crisis that we have been going through.  From what has beed disclosed, I believe that that they made excessively risky loans to people who were likely misled about the affordability of those loans.  (While the banks are trying claim that the borrowers were at fault, I’m not buying that.  Do you really believe that anyone would want buy a home with a loan that they knowingly couldn’t afford and then lose everything in a foreclosure?)

  Then there was the packaging and securitization of these risky loans for sale to other investors as AAA-rated securities.  (This was achieved, at least in part, by “slicing and dicing” the loans into separate parts for incorporation into different loan portfolios to help “manage” (hide?)  the risk.) 

This securitization was done on an enormous scale.  So, when the bubble finally did burst, the economy went into a nosedive. 

As a result, many people lost their savings and/or their jobs, and more went into default on their home mortgages. 

As you probably remember, the economy had gotten so bad that we had to bail out the major banking and financial institutions to prevent them from going under (and quite a number of the smaller banks, who were not bailed out, have failed and continue to fail.) 

The bail out funds, which were also intended to provide liquidity to the banks so that they could continue to make loans, were then used by the banks to purchase other businesses instead (further increasing the downward pressure on the economy.)

Moreover,  there were investigations by Congress into whether the increased risk of foreclosure was actually by design.  (See, e.g., Senator Carl Levin’s Opening statement the first meeting of  the U.S. Senate Permanent Subcommittee on Investigations Hearing on Wall Street and the Financial Crisis: The Role of High Risk Home Loans at  http://levin.senate.gov/newsroom/release.cfm?id=323765.)

And all the while these banks continued to pay their senior management and others what I believe were exorbitant salaries and bonuses even while the banks were actually losing money.  (Most of these same banks are now making money again while the rest of us suffer   E.g., the latest FDIC Quarterly Banking Profile reported that earnings of FDIC insured banks for the 3^rd Quarter of 2010 were up 600% from a year ago, even though the number of problem banks had increased – see http://www2.fdic.gov/qbp/2010sep/qbp.pdf .)

More recently, we’ve also seen the effects of robo-signing of foreclosure documents by employees of these banks, with reports of people losing their homes to foreclosure when they were not in default (or when they did not even have a loan.)

 Clearly, there were others who played a part in creating the housing bubble as well (including many politicians from both parties who encouraged the banks to make these loans to help promote broader homeownership, and who also took away much of the risk to the banks from any defaults that might occur.)

 But Wait, there’s more . . .

•  From my own experiences in negotiating short sales, and from the experiences reported by others, it appears that the banks are engaging in misrepresentation to try to sqeeze even more out of the already financially distressed homeowners.   (Yet all we seem to hear about  are their complaints about Loan Fraud being committed by borrowers, buyers and agents.) 
• Many of these negotiators also appear to be clueless (e.g., they don’t seem to understand that buyers will not simply sit around for 6 months or more waiting for a response from them); incompetent (they frequently “lose” files); and in some cases, actually vindictive (and that could be the subject of an additional posting. 
• The negotiators, while demanding full transparency from the sellers, buyers and agents in a transaction, generally refuse to disclose information on their side (e.g,  the results of their appraisal or other price opinion, the identity of the owner of the note, etc.) to facilitate the negotiations. 

So my question is: What’s next?

Are we simply going to ignore this problem and let it continue, or are we going to demand that something be done about it?

I, for one, believe that (i) the banks and their managers need to be made more accountable for their actions, and (ii) what appear to be obvious flaws in the system need to be corrected.

That’s my opinion, what’s yours?

While I’m usually not a proponent of additional government regulations, tomorrow I’ll share some thoughts on changes in the banking laws that might help alleviate the current situation and avoid a similar occurrence in the future.

Having financial difficulties and don’t know what to do?  For free advice on your options, visit http://SaveYourSDHome.com. 

Buying a distressed property?  For a free list with pictures, send an email to Arthur@SDHomeQuest.com with information on the location, size and price of the properties that you would be interested in.

Arthur Chatroo is a Broker-Associate with Realty Experts

Phone: (858) 775-0098.  Email: Arthur@SDHomeQuest.com

Arthur Chatroo, Realtor®, CDPE (“Certified Distressed Property Expert”), specializes in helping buyers in the purchase of distressed properties and sellers in financial difficulty with loan modification assistance and short sales in North San Diego County California.

North San Diego County Distressed Properties, North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Real Estate Agent,  Short Sale Real Estate Agent. North San Diego County CA Short Sales. North San Diego County Real Estate Agent.

REALTOR® and REALTORS® are registered trademarks, service marks, membership marks, and/or logos of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”).  All rights reserved.  As a registered collective membership mark, REALTOR® identifies a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics.

Copyright 2010. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts. This information on SanDiegoHomeQuestBlog: is provided as a courtesy to our viewers to help them make informed decisions.

The answer lies in the structure of the mortgage loan servicing activity.

Most loans are not retained by the original lender. Some 80 to 90% are sold off to either government agencies (e.g., Fannie Mae and Freddie Mac) or to private investors. The loan servicing activities (the collection of monthly payments, escrowing of taxes and insurance, and the loss mitigation activities) may be retained by the lender (in the case of many of the large banks) or may be sold off to the banks or other loan servicers. (Even lenders that do keep the loan may hire a loan servicer as well.)

Servicers, unlike the entities that own the loans, do not have the same incentive to avoid foreclosure. That is, since it is not their loan, they do not suffer the loss from the additional cost of a foreclosure over the other alternatives.

In addition, the income that they receive actually encourages the servicers to let the loans go into foreclosure.

To see how that works, consider the following:

• The most significant aspect of servicers compensation is a monthly servicing fee, calculated as a fixed percentage of the unpaid principal balance of the loan;
•  The servicers also get to keep some or all of the fees charged to borrowers in default (that is, late fees, “process management fees”, etc.) While these fees are not received by the servicers when the loan is in default (and the servicer may actually have to foot the payments to the owner/investors for at least some period of time during the default), any recovery from a foreclosure is paid to the servicers first (that is, before the owner/investor is paid.)

Thus: 

 The longer the loan is maintained (even if it is in default), the more the servicer earns in servicing fees. 

Default fees reward servicers for keeping a borrower in default and also add to the principal loan balance on which the servicing fees are calculated.

The servicers will lose servicing fees if they offer a loan modification with a principal reduction. 

 To facilitate a loan modification, the servicer may well have to waive the default fees (since they can rapidly grow to the point where a modification recovering those fees would be unaffordable.

There is a significant disincentive for the servicer to offer a principal reduction, since that would also reduce its servicing fees.

The above is largely a brief summary of some of the findings from a more detailed report issued in October 2009 by the National Consumer Law Center, Inc. (a nonprofit corporation) entitled “Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior” If you would like to access a copy of the report, please send me an email at Arthur@SDHomeQuest.com with NCLC Report in the subject line.

 So the information in the report seems to explain much of bank/loan servicer behavior (e.g.., the long delays in processing short sales, loan mods and foreclosures; the relatively low approval rates for foreclosure alternatives; and the structuring of loss mitigation practices (understaffing, “undertraining”, and the strict adherence to formalities – all of which can be used to provide credible excuses for the delays and low approval rates.)

While the amounts involved in each individual loan may be relatively small, note that the large loan servicers can be handling portfolios with tens of thousands of servicing contracts, and so significant amounts of money are involved.

Note also that the loan servicing activity also appears to be very profitable. In many cases the loan servicers will actually pay to buy the rights to service the loans.

For example, in 2007 Goldman Sachs purchased Litton Loan Servicing for what was reported to be $500 million. [However, it now appears that they are looking to sell Litton based on a concern about how that business had been run and the fear of potential liability. (See, e.g., the articles at: http://www.housingwire.com/2010/12/03/goldman-considers-sale-of-litton-loan-servicing-report; and http://www.fiercefinance.com/story/goldman-sachs-litton-loan-servicing-unit-draws-heat/2010-06-20)]

 More recently Ocwen purchased the loan servicing company HomeEq for about $1.3 billlion. (See the article posted on HousingWire 0n 9/10/10 at http://www.housingwire.com/2010/09/03/ocwen-closes-homeq-buy-more-than-1000-job-cuts-possible)

Given the above, it appears that the loan servicers (including the banks who are engaging in that activity), could easily add additional trained staff to help remedy the situation.

Based on the above, it appears that the loan servicers need to be reminded that they do have a fiduciary duty to the parties for whom they are servicing the loans when they seem to be dragging their feet and otherwise operating in their own self interest.

More on this subject on Monday.

Have you had a negative experience with your loan servicer?  Please let us know by posting a comment below.

Buying a distressed property? For a free list with pictures, send an email to Arthur@SDHomeQuest.com with information on the location, size and price of the properties that you are interested in.

 Having financial difficulties and don’t know what to do? For free advice on your options, visit http://SaveYourSDHome.com

Arthur Chatroo is a Broker Associate with Realty Experts
Phone: (858) 775-0098. Email: Arthur@SDHomeQuest.com

 Arthur Chatroo, Realtor®, CDPE (“Certified Distressed Property Expert”), specializes in helping buyers in the purchase of distressed properties, and sellers in financial difficulty with loan modification assistance and short sales in North San Diego County California. North San Diego County Distressed Properties, North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Real Estate Agent, Short Sale Real Estate Agent. North San Diego County CA Short Sales. North San Diego County Real Estate Agent..

REALTOR® and REALTORS® are registered trademarks, service marks, membership marks, and/or logos of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”). All rights reserved. As a registered collective membership mark, REALTOR® identifies a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics.

Copyright 2010. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts. This information on SanDiegoHomeQuestBlog: is provided as a courtesy to our viewers to help them make informed decisions.

Earlier this year Deutsche Bank evaluated the average length of time the top home loan servicers in the U.S. have been taking to complete the process.

The study was broken down into four categories based on the type of loan involved:

Prime: A loan with first lien rights where the borrower has a high credit score and has fully provided the required supported documents (A-Paper).

Subprime:  Loans made to borrowers who do not qualify for a Prime loan.  These are considered the riskiest loans, and because of that, they carry a higher interest rate than prime loans

Option ARM: These are ‘Adjustable Rate Mortgages” (mortgages where the interest rate varies periodically based on an index rate of another debt instrument, such as: the 1 year treasury bill rate; the Cost of Funds Index; or the London Interbank Offer Rate.), but which also give the borrowers a number of monthly payment options, typically: a stated minimum; interest only; a 30-year fully amortizing payment; or a 15-year fully amortizing payment.  If the monthly payment chosen by the borrower is less than the interest due for that month, then the shortfall is added to the outstanding principal amount of the loan (“negative amortization”.)

Alt-A:  Alt-A (“Alternative Documentation Loans”) are loans that are made based on the credit score of the borrower only, with little or no supporting documentation from the borrower regarding income, etc.  These types of loans are considered riskier than Prime loans but not quite as risky as subprime loans 

The results of this evaluation for average time taken(and the percentage of their property dispositions that were short sales) are shown below.

Prime:

 GMAC: 6 months (53%)

Citimortgage (Citigroup): 7 and one half months (56%)

Wells Fargo: 8 months (34%)

CountryWide (Bank of America): 11 months (59%)

Subprime

 Wells Fargo: 15 months (14%)

HomeEq Servicing (Now owned by Ocwen): 16 months (22%)

Saxon Mortgage Services (Morgan Stanlye): 17 months ((18%)

Equicredit: 29 months (41%)

Option-Arm

 EMC Mortgage (Chase):  8 months (43%)

Aurora Loan Services: 10 months (30%)

GMAC: 10 months (33%)

Countrywide (Bank of America): 14 months (22%)

Alt-A

First Horizon: 9 months (35%)

Wells Fargo: 11 months (17%)

Aurrora: 11 months (16%)

Countrywide (Bank of America): 13 months (24%)

Note that the above are averages, so the actual time that you may have to wait for a short sale to close can be longer.

Why do short sales take so long?  Well, that will be the subject of my posting tomorrow.

Buying a distressed property?  For a free list with pictures, send an email to Arthur@SDHomeQuest.com with information on the location, size and price of the properties that you are interested in.

Having financial difficulties and don’t know what to do?  For free advice on your options, visit http://SaveYourSDHome.com

Arthur Chatroo is a Broker Associate with Realty Experts

Phone: (858) 775-0098.  Email: Arthur@SDHomeQuest.com

Arthur Chatroo, Realtor®, CDPE (“Certified Distressed Property Expert”), specializes in helping buyers in the purchase of distressed properties, and sellers in financial difficulty with loan modification assistance and short sales in North San Diego County California.

North San Diego County Distressed Properties, North San Diego County Loan Modification Help, North San Diego County Short Sales, North San Diego County Short Sale Real Estate Agent,  Short Sale Real Estate Agent. North San Diego County CA Short Sales. North San Diego County Real Estate Agent..

REALTOR® and REALTORS® are registered trademarks, service marks, membership marks, and/or logos of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”).  All rights reserved.  As a registered collective membership mark, REALTOR® identifies a real estate professional who is a member of NAR and subscribes to its strict Code of Ethics.

Copyright 2010. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Arthur Chatroo’s personal views and do not reflect the views of Realty Experts. This information on SanDiegoHomeQuestBlog: is provided as a courtesy to our viewers to help them make informed decisions.

It only says “conditions for EMC’s acceptance of this discounted payoff are X.” Will they sell the note to a collection company and then hound us for years to come?

There are a few types of loans that commonly ask for a promissory note, (although any lender may do so.)

The ones that more typically ask for a promissory note (or who simply retain the right to pursue a difficency) are loans that are owned by the lender you originally got the loan from. A good example is a credit union loan, or a small community bank. Another common type are loans that were granted with Private Mortgage Insurance. In our experience, these companies are very demanding. They negotiate hard and say they will not approve a short sale without a promissory note. However, that is not always the case.

Prove to them that you don’t have any assets, nor any extra monthly income. Your agent will show them that they are better off accepting the short sale. Most of the time they will waive the promissory note and accept what they can get. After all, something is better than nothing. Make sense?

If you are considering a short sale and are worried about the deficiency, then give me a call at 858-775-0098. When you contact me, I will research your situation and the type of loan you have. Based on that research I can give you my opinion on the deficiency.

The above is my opinion. It is not legal or accounting advice. Please contact a competent attorney or other professional because the circumstances vary, depending upon your specific situation.

Thanks for reading this,

Arthur Chatroo

Arthur Chatroo is a real estate broker-associate at Realty Experts.

Phone: 858-775-0098

Get the tools you need for a successful loan modification by clicking here.

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Arthur Chatroo specializes in loan modification assistance and short sales in North San Diego County.

Copyright 2010 SFI Marketing Institute, LLC. All Rights Reserved. This is not intended as legal, technical, or tax advice. Please speak with a licensed professional before making any decision. Information is deemed reliable but not guaranteed as of the date of writing. The views expressed here are Chatroo’s personal views and do not reflect the views of Realty Experts. This information on North San Diego County Short Sales is being provided as a courtesy to our readers to suggest what they may want to consider in the areas discussed.