A million or more homeowners have mortgage loans which were, from the onset, unsuitable for them and have resulted in foreclosure.  Many of these foreclosures can be challenged by legal claims for unfair lending practices, fraud, misrepresentation, usury, and violations to state unfair and deceptive acts and practices laws, the Truth in Lending Act, the Equal Credit Opportunity Act, and the Racketeer Influenced and Corrupt Organizations Act (RICO).

It’s likely many of those distressed homeowners’ rights were violated during the mortgage solicitation and origination process, and/or during the servicing of their loans. 

Those seeking help from their lender offered quick fix repayment plans, more permanent loan modifications, or outright refinances are often required to waive their rights to pursue legal claims against all that participated in the illegal mortgage process including brokers, lawyers, originators, title companies, appraisers, and loan servicers.

When it comes to workouts to avoid foreclosure, lenders will only do what is in their best, self interest. HopeNow Alliance, whose members include some of the nation’s largest lenders and loan servicers that collect payments, and a group representing investors who hold mortgage debt,  control a consortium of “non profit counseling services” who are compelled to do what is in the best interest of their employer… the mortgage loan servicing industry, and not necessarily what is in the best interest of the distressed homeowner seeking help.

Advising a distressed borrower his or her loan may be predatory and to seek legal counsel is not necessarily  part of the program.  If it isn’t, it should be.

It is important homeowners know they can challenge the legality of the foreclosure, and should not simply or too quickly agree to a temporary, quick fix while ill-advisedly and perhaps unknowingly waive their future, legal rights.

Before signing any agreement involving the listing or sale of their home, a mortgage refinance or workout, homeowners should have an attorney review the documents.  Many local chapters of Legal Services will perform the review without charge to qualified homeowners.

In my book, Fight Foreclosure! (Wiley 2008), I discuss options and alternatives available to homeowners threatened by mortgage foreclosure.

independent, non profit resource

BOOK REVIEW

‘Fight Foreclosure!’

by David M. Petrovich

A veteran consumer advocate clearly puts forth options for homeowners threatened with foreclosure.

By Frank Nelson, Special to The Times
May 4, 2008

AS foreclosures continue tracking relentlessly higher, nationally and in California, the advice dispensed by David M. Petrovich in “Fight Foreclosure!” could not be more timely, more astute — or more welcome.

He writes of an estimated 2 million families nationwide in danger of losing their homes, a figure that seems to tally with the grim figures in California. DataQuick Information Systems has put the state’s foreclosure activity “at record levels” and reported that in March almost 38% of Southland sales were foreclosed homes.

Petrovich has a winning bedside manner, not sugarcoating bad news but not throwing up his hands in despair either. There is much homeowners can do when threatened with foreclosure, and he sets out the various options clearly and honestly.

The author’s other big advantage is that he really knows his subject. He has spent 25 years working with troubled homeowners and co-founded the New Jersey-based consumer advocacy nonprofit Society for the Preservation of Continued Homeownership.

Petrovich, the agency’s executive director, writes as if he’s much more interested in helping people than in selling books, displaying an empathy for those in trouble that perhaps stems from his own very close brushes with foreclosure.

He tells the moving story of his father-in-law’s losing his home in foreclosure and the resulting effect on his wife’s family; then Petrovich himself, as the result of an injury and later a job loss, twice narrowly escaped the same fate.

Drawing on these personal and professional experiences, Petrovich dispenses solid advice: Be honest with yourself and your lender. Don’t make promises you can’t keep. Act fast. Explore all options. Document and file everything. Don’t sign anything you don’t fully understand. Beware of scams.

The golden rule is to act fast — the race against foreclosure is a race against the clock. Communication with the lender is crucial, and Petrovich outlines ways of persuading a lender to modify loan terms, enabling the homeowner to afford the mortgage payments and stay in the house.

Alternatively, an owner may use the time it takes to foreclose — about four months in California — to sell, with the aim of preserving equity and credit rating. Petrovich suggests smart ways to speed this process, starting with a realistic sales price.

Bankruptcy can stop foreclosure in its tracks, but the author takes time to explain the downside. Strong defense against foreclosure is also provided under the Servicemembers Civil Relief Act, which gives special foreclosure protection to armed services personnel who are, or have recently been, on active duty.

Petrovich points out some shrewd defenses under the Truth in Lending Act in which just trying to establish who owns the loan may be an effective barrier to foreclosure.

“The complexities of mortgage loan securitization cast a shadow of doubt on who has the legal right to foreclose,” he says.

Under the act, evidence of predatory lending may present a stout defense against foreclosure, as can any number of mistakes or omissions of a technical nature.

“A tiny error made (even innocently) by the lender may be grounds to stop foreclosure,” writes Petrovich, suggesting that an attorney can best help unravel those fine legal points.

Many homeowners are vulnerable when it comes to opportunists who begin circling at the first whiff of foreclosure. Petrovich details several popular scams and gives cautionary tips on how to recognize and avoid them.

For further support, this excellent book lists online addresses for Department of Housing and Urban Development offices in every state plus other websites to which worried homeowners can turn.

Petrovich assures readers that financial troubles and foreclosure are nothing to be ashamed of.

“The only shame is in not doing something about it,” he says.

• a portion of Fight Foreclosure! royalties dedicated to SPOCH, a charitable/education org.

I’ve been working a preforeclosure short sale for a property with documented structural deficiencies.  The dwelling is in a gated, clusterhome community.  The subject ‘cluster’ is Plaintiff in a lawsuit against the builder.I submtted a complete, shortsale application several months ago.  The lender conveniently misplaced the file which I see now as more a standard practice, than an exception to the rule.  The market dropped, the buyer revised its offer, the contract was resubmitted, the PHUD1 revised, etc.  Finally the lender agreed to order a BPO. After about 10 days I called to ask the lender about the BPO, and I was advised the BPO had already been performed.  The BPO indicated a value about $100,000 more than the pending offer.

I explained a drive-by BPO wasn’t sufficient for this particular dwelling in light of the engineering problems, and an interior BPO would provide better information.  I was told by the loss mit rep her records indicated the BPO was an interior BPO, and its indicated value would likely result in the rejection of the short sale offer.

I always emphasize to the agents I’m working with it is essential they accompany the BPO rep, point out defects, adverse market conditions, etc. and then hand them updated market data.  That’s our best chance to influence the lenders’ perception of value. I want to be kep informed when the BPO is scheduled, so we can discuss what additional/supportive info should be handed to the BPO rep.  I called the agent to find out why he hadn’t alterted me to the scheduled BPO appointment.

The agent claimed he was not contacted for access, nor did the sellers grant permission to anyone at anytime to perform an interior BPO. The subject property is in a gated community with limited access.  A guard at the gate would first need telephone authorization from the owners before conferring permission to enter the community.  No such permission was sought, or granted.

I called the lender, again, who stated it had the results of an interior BPO performed on January 4th, 2008, complete with interior photos. 

I told the loss mit I had no doubt her records confirmed a BPO had been performed, but her infomration was faulty.  It must be a mistake.  I suggested the vendor must have inserted the property info incorrectly, because there had been no BPO performed.  She said she would investigate and get back to me.  Of course, she never did get back to me.  I sent several emails and FAXes, and left messages asking for the results of her investigation.

Today, after waiting on hold for about 15 minutes,  I was able to speak to another loss mit rep who listened to my allegation of BPO falsification… a subject which should be of interest to all mortgage loan servicers.

The records indicated a rush interior BPO was ordered from the vendor on 1-4-08.  Apparently, the BPO was performed by the vendor on 1-4-08.  Talk about fast service!

I suggested, diplomatically,  the vendor most likely assumed the unit was like any other unit in the community, and provided generic photographs from its archives while claiming it had performed an interior BPO.  In the BPO report, there was no mention of the engineering/structural problems, no pictures of sagging beams or rafters, or settling foundations.  There was no mention of the pending lawsuit, and no mention the listing agent had provided details of the structural problems verbatim from the Plaintiff’s summons and complaint.

In short, it seems the BPO vendor falsified information, and then billed for a service it had not performed.    

Fight Foreclosure!

Wishing all readers their family’s and friends’  warmth and understanding, and the strength to overcome all which ails you.

The administration’s push to transform the FHA into an ATM….

A couple of months back I was invited to attend a round-table workshop whose keynote speaker was HUD Commissioner Brian Montgomery.  Invitees included members of NJ’s non profit default counseling orgs who peppered the tired, travelling panel about their recent acknowledgment of a ‘pending problem’ with mortgage loan resets and the increasing number of mortgage delinquencies, defaults, and foreclosures. Nationwide.

This was their NJ stop.

Of course, foreclosure is nothing new to us… on average, NJ has 15,000 mortgage foreclosures annually.  The predicted housing downturn/market correction/subprime ARM reset will only further increase an impossible workload. Experts predict that number to double this year.  And perhaps triple next year. (see A Perfect Storm)

At that time, Mr. Montgomery (an administration appointee) stated it was the administration’s goal to “reform” the FHA, and then make the FHA more competitive, modernized, and able to offer people more choices… by implementing risk-based pricing for folks with blemished credit willing to pay higher premiums.

I’m sorry, but doesn’t that sound familiar?  Isn’t that what “subprime” lending proposed and wasn’t that proximate cause to the ‘meltdown’ we (those in the trenches) have seen coming for 18 months?

I’m reading HR 1852.  Congress is putting forth legislation which will enable the FHA to help qualified families avoid loss of homeownership by offering alternative financing….  at increased loan amounts,  but with statutory caps on annual premiums.

If enacted as written, HR 1852 would result in additional ‘receipts’ for the FHA… perhaps as much as $75,000,000 which would be used to create a new Affordable Housing Grant Fund linked to increased FHA receipts.

The administration has voiced objections to this proposed legislation (diverting receipts to fund affordable housing) presumably because it needs the additional $75,000,000 to fund other pet projects…..

ShortStopping Short Sales to Stop the Bleeding?

In the years (decades) I’ve been choreographing preforeclosure short sale transactions, I’ve always asked the applicant to provide copies of original documents, and make additional copies for themselves since lenders made a habit of losing papers. Sometimes accidentally, other-times intentionally.  Having worked in a prototypical loss mitigation arm of the nation’s then largest loan servicer, I knew the drill, and marching orders came from the department leader who took orders from the division leaders who took orders from….. and so on up the food chain.

The surest way for a manager to clear a department’s backlog is to deny partially complete workout applications and then send the loans to the foreclosure department… making them someone else’s problem. “By 5:00, any workouts not formally approved… send the borrowers a letter of rejection, refer the file to foreclosure, and then close the file.  See you all on Monday!” 

In today’s loss mitigation environment, its not much different.  Except the loan servicers’ objective, in my opinion,  isn’t so much about clearing a department’s workload… it is more about deferring the realization/monetization of loss.  An under-performing or non performing loan is still an asset on the books… but once a short sale is approved, the asset is exposed for what it is and real loss is incurred. For many lenders who seek investors.. maintaining the appearance of solvency is crucial in its quest for financing. 

Comprehensive applications with supportive documentation are conveniently lost. (Irrespective of the loss mit’s instructions to FAX the application, I usually send a copy or copies of the workout/short sale application via US Priority Mail, Certified, return receipt requested). 

Servicers’ customer service call centers can be voice mail jail if the lender hasn’t prioritized the account. Once you key in the loan account number… the “prison” keeps you in a holding cell, and either directs you to an overflowing voice mail box,  or a human voice who states he or she cannot speak with you and then asks you submit a LOA for the third or fourth time.  “FAX it, and then call back in 72 hours….”

How many of us trying to speak with the loan servicer’s designated loss mit rep have been placed on hold for far too long only to be disconnected?  Coincidence?  Nope.  Design.  

When the lender is ready to proceed… be ready.  That’s when you’ll be glad you made extra copies of everything.

ShortSales:  An Ethical Approach

Every upside down scenario doesn’t indicate short sale, and not all loans qualify as having short sale feasibility.  At least three key elements must be present before a short sale may even be considered.

1. The specific loan itself must be eligible for a short sale workout as imposed by servicing criteria.  If deemed eligible, all servicing criteria must be met.  Some criteria  includes loan default, or mortgage foreclosure.  The property  must be marketed for sale at a defendable, fair market value. The property must be sold in its as-is condition with no seller concessions, and the seller can’t receive a dime from the transaction.  Typically, the lender sets a  minimum net recovery in the form of a percentage of the confirmed, as-is value.  Anything impacting their net recovery (real estate commissions, closing costs, liens, etc.) as evidenced on the HUD1 will influence the lender’s decision to accept or reject a short sale proposal.
2. There must be full documentation of long term, financial hardship, and the inability to pay the mortgage, cure the default, or sell without special lender consideration  & concession, and
3. The lender must view the loan as at risk of loss.    

If all these elements are in place…. then we can proceed with the construct of a formal request for short sale consideration.           

ForeclosureFocusUSA

July 31, 2007

A Burdensome Mortgage

By JAY ROMANO, The New York Times

Q. We are buying a new home from a builder who is providing the financing, but we have not sold our current home yet. We believe our asking price is less than what the current home is worth, but we still cannot sell it. Is there any way we can get out from under the mortgage on the current home? Someone mentioned a deed in lieu of foreclosure. How exactly does this work? We have run out of options.

A. Steven Einig, a Manhattan lawyer who specializes in foreclosures, said that a deed in lieu of foreclosure is a negotiated settlement between a lender and a borrower. Basically, Mr. Einig said, when a borrower is in default on a mortgage, the lender has two options: to foreclose against the property – which can be a lengthy and expensive procedure – or accept a deed in lieu of foreclosure in which the borrower voluntarily transfers ownership of the property to the lender in exchange for forgiveness of the balance due on the mortgage.

Typically, Mr. Einig said, unless a borrower is in default - that is, he is already behind in his payments - there is no incentive for the lender to consider a deed in lieu of foreclosure. At the same time, however, once the borrower starts missing payments, late charges begin to accrue and, under most mortgage documents, the borrower can be held responsible for any legal fees incurred by the lender. If the borrower goes into default, Mr. Einig said, there is no guarantee that the lender will consent to a deed in lieu of foreclosure, but could proceed with a foreclosure instead, which would leave the borrower with no house and with a judgment for the balance of the loan not paid off by the foreclosure sale, as well as for the costs of the foreclosure.

There are two other potential problems to consider. First, it is possible that in the documents under which the builder is providing the financing for the new home, the buyer is making a representation that he is not in default of any existing loans. If such a default occurs, it is possible that the deal on the new home could fall through. And secondly, according to David Petrovich, executive director of the Society for the Preservation of Continued Home Ownership, a counseling organization in Oakhurst, N.J., it is possible that any forgiveness of debt on the original mortgage will be considered taxable income on both the federal and state level.

With growing frequency in preforeclosure short sale scenarios, its simply not enough to present a compelling, full market value, cash, as-is purchase offer to a foreclosing lender in hopes it will release its security interest and accept less than is due.

Sometimes a properly constructed, well supported, and timely short sale proposal is rejected, even though a short sale appears to be in all parties’ best financial interest. Why?  There are other, untold forces at play.

Criteria imposed by the Investors (owners of the mortgage debt) which employ the loan servicers who are reponsible for collection activities including preforeclosure short sale workouts and forced foreclosure sales have specific business objectives which may not appear to make short term financial sense to us.

Internal investment criteria used to consider short sale workouts include, but are not limited to derivitive relationships and their impact on earnings, taxation, and position in the marketplace.

Loan Servicer:  “We have considered your request for short sale. The Investor says we can only accept the full amount due.”

Agent:  “But the fair market value is less than what is owed.  This is a great offer!  You’ll never net this much if this property is sold at Sheriff’s Sale or Trustee’s Sale!”

Loan Servicer:  “That may be, but we can only accept payment in full.” 

Agent:  “But you stated you woulkd consider a short sale as an alternative to foreclosure.”

Loan Servicer: “Yes, that’s true.  We will consider a short sale.”

Agent: “I have complied with all the criteria listed in your application.  A fair market value listing agreement.  An MLS activity history.  A contingency free Contract of Sale.  A Preliminary HUD1.  Full financial disclosures.  A letter of hardship.  Everything.  You’ve done a BPO and confirmed the asking price is market value.”

Loan Servicer:  ”Yes.  Thank you for all your hard work.  I can only accept the full amount due.”

Even though your transaction may fail,  you can be sure your presentation (market data, borrowers’ hardship, etc.) will be used by the loan servicer when it seeks to justify losses sustained by its Clients.

 An Ethical Approach (to preforeclosure shortsales)

I did my first short sale in 1985 or 1986, and have been involved since then in preforeclosure shorts from all sides of the closing table: as buyer, as seller, as real estate agent, and as loss mitigation asset manager for the foreclosing mortgagee. 

I’ve spent years reviewing failed short sale attempts (my own, early attempts, included which I call Trial by Education)), and repairing botched but salvageable short sale attempts for brokers, brokers’ agents, speculative investors, and private homeowners. (not all botched attempts can be salvaged, and not all well constructed attempts are successful)

In my experience, the most common cause for failure can be traced back to inadequate prequalification of the short sale candidate, and/or the inadequate foundation of the short sale construct.

When building a house, like a short sale, there is a process to follow.  You don’t start by building the roof…. you must first build a stable foundation.  If the foundation is built poorly, or the construction techniques shoddy, the house will not stand.  And you don’t run the electrical wiring or the plumbing AFTER the drywall is up.   There is an order to follow. 

When on a listing appointment the agent first suspects a preforeclosure scenario, and quite possibly an indicated short sale scenario… it is essential to provide the homeowner accurate information and quickly displace and reign in the seller’s unrealistic expectations with cold hard facts. The agent’s task is to tell the seller what it needs to hear, not necessarily what it wants to hear.  At this critical moment, the seller will hear what it wants to hear, and remember what it wants to remember. So great care and attention must be paid to detail, both in the collection of information from the seller, and in providing information to the seller. 

Builders who use faulty construction techniques don’t have many happy customers.  Neither do real estate agents who fail to lay the proper foundation, use faulty techniques, and botch sellers’ chances to escape foreclosure via short sale.

An agent who answers a seller’s foreclosure or short sale related question with, “I don’t know, but I’ll find out” is doing a greater service to all concerned than if he or she gave an incomplete or inaccurate response.

Recently, an agent handed me a file which contained a listing she had taken the day before. The seller owed about $50,000 more than the property was worth.  Not only had the agent listed the property for sale about $25,000 too high for the market, there was a Sheriff’s Sale scheduled within a few weeks. Yet, she gave the seller hope (false hope) a short sale could be worked out within that small window of time.

It’s hard to unring the bell.

 Oh, and not every upside down situation indicates short sale feasibility.

• An Ethical Approach (to preforeclosure shortsales)