By RUTH SIMON

In the latest move to bolster its $75 billion foreclosure-prevention plan, the Obama administration on Monday will outline new efforts designed to increase the number of borrowers who receive mortgage relief.

The Treasury Department on Monday will announce plans to appoint officials to monitor the actions of the largest mortgage servicing companies on a daily basis. It also will announce it is requiring mortgage companies to develop and report to the administration their plans to increase the number of completed modifications, a Treasury spokeswoman said.

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“ What’s silly about this is that it is wholly unsustainable ”

—Charles Gotlieb

While more than 650,000 borrowers have been given trial mortgage modifications under the plan, few borrowers have received permanent modifications. Many borrowers complain that it is difficult to get a permanent fix even once they have made trial payments; some have been required to send in duplicate paperwork or even ended up further behind on their mortgage payments.

The Treasury won’t release the number of completed modifications until December, but the spokeswoman said it is in the “tens of thousands.” It is too early to know what portion of trial modifications will become permanent, she added.

Based on their initial experience, some mortgage executives expect 25% to 35% of borrowers enrolled in the trial program to qualify for final modifications.

The stakes for the economy of a successful modification program are high. To stop further home price declines, some economists argue that the share of home sales that are foreclosures and other distressed properties must remain stable. Foreclosure sales fell this year because of moratoriums and stepped-up modification efforts, helping stabilize home prices.

The Obama administration program provides financial incentives for mortgage companies and investors to reduce loan payments to affordable levels for troubled borrowers. Borrowers first make reduced payments under a trial program. To receive a permanent modification, borrowers must make three payments during the trial period and provide a hardship affidavit and other documents.

For borrowers who do receive a trial modification, few are becoming permanent. Some borrowers can’t make the required payments during the trial period, mortgage companies say, often because the reduced payment still isn’t low enough or they have suffered another financial setback.

In other cases, borrowers in the trial program aren’t providing a hardship affidavit and other necessary documents or the paperwork doesn’t match the information provided verbally. In still other cases, the loan may not pass a “net present value test” used to determine whether a modification is less costly to the lender or investor than a foreclosure.

Meanwhile, the number of borrowers falling behind on their loan payments continues to outpace the administration’s efforts to help them. Roughly 1.56 million loans that were current in March were at least 60 days past due in October, according to LPS Applied Analytics. That’s more than double the number of trial modifications.

Mortgage companies have stepped up efforts to collect documents, but many borrowers say firms are frequently disorganized and ask repeatedly for the same paperwork or offer confusing information.

John Fitzpatrick, a home builder in Ohio, made his first $1,464 trial payment in June. Three months later, Bank of America Corp. sent him a statement indicating he should pay $2,038, his monthly payment before the trial modification. Mr. Fitzpatrick said he has continued to make the lower payment on the advice of his attorney. Mr. Fitzpatrick said he believes he has provided all the required documents; in mid-November, he sent in another set of papers at the mortgage company’s request. A Bank of America spokesman said the statement with the higher payments “was sent out in error.”

Some borrowers are ending up in worse shape after seeking help under the government program. Jennifer and James Pugliese, of Scranton, Pa., were struggling, but still current on their mortgage when Litton Loan Servicing offered them a trial modification that reduced their loan payments by nearly 50% to $758. But after making successful trial payments, the couple was turned down for a final modification. Because the trial payments are considered partial payments if the modification fails, the Puglieses are now more than $5,000 behind on their mortgage; their credit score dropped after Litton reported to the credit bureau that the couple had entered the Obama program.

“There is no way we can recover at this point,” said Ms. Pugliese, who received a foreclosure notice last week. “We are pretty much resolved to losing the house or filing for bankruptcy.” When their loan payments were cut, the couple used the extra cash to pay other debts, she says.

A spokeswoman for Litton, a unit of Goldman Sachs Group Inc., said: “Litton is following the program’s guidelines for eligibility qualifications, modification trial periods and credit reporting. Loans that do not pass the net present value test are not eligible” for a modification under the Obama program.

What happens to the 75% to 65% that don’t get the modifications that they are waiting for? They short Sale, or foreclose! yes,, more inventory to wipe away all the gains we have made over the past 6 months. “Shadow Inventory” is coming, and it doesn’t look good.

Posted via web from Ada County Market Report

Why do banks take so long to approve a short sale?

This question comes up over and over again from Realtors, homeowners and home buyers everywhere I go.

A one sentence answer doesn’t exist for this question. If you truly want to know the

answer to the question, “why” continue reading. This means you will have to take a step back from your particular emotional situation enough to really listen to what’s being said because everyone wants their deal approved NOW.

Banks are under no obligation to approve your short sale. I know what you’re thinking, reader. You’re thinking, “Well if the darn bank would just approve my short sale faster, they wouldn’t be losing so much money!”

Let’s start at the beginning. A homeowner is said to be in a short sale situation when he or she owes more than what the home is currently worth, is in default and must sell. Traditionally, homeowners agreed to pay back the difference between what was owed and the sales price. The short sale seller signed a new, unsecured note at closing and promised to pay back the difference in regular monthly installments. The only case where the debt was “forgiven” was for true financial hardship cases where there was absolutely no way the homeowner could ever repay the difference.

An example would be the untimely death of one of the breadwinners. But that was then.

In today’s politically charged, loan modifications for all, let’s-dump-everything-into-

FHA environment, homeowners in a short sale situation today are receiving debt forgiveness and even temporary tax exemptions on top of that. Don’t worry, the rest of us tax payers will pick that up for you.

The first step in figuring out why your short sale is taking so long to be approved is to inquire about whether the homeowner is asking the bank to forgive the difference or if the homeowner is gainfully employed and able to pay back the difference. This all must be proven and documented to the lender’s satisfaction. If the homeowner is asking for debt forgiveness, the short sale will take longer to approve if the bank does not have all the required documentation.

Thought question: Why would any lender approve a short sale, especially one that requires debt forgiveness, unless there is proof that foreclosure is imminent? Answer: They won’t.  Lenders have no motivation to approve a short sale if the homeowner has not yet defaulted on their loan; the bank has little motivation to approve the short sale. Why not wait for a better offer to come along? (Note, homeowners reading this article should always consult with an attorney if you are selling short, in default, or will be in default on your mortgage loan(s).)

All loan servicing departments have processes in place for dealing with short sale approvals. They may not have fancy computer systems so that everything is automated but maybe that’s a good thing. Look where automated underwriting got us.

Next step: Homeowners must prove that they do not have the money to make up the shortfall. This means sending in copies of all bank statements, tax returns, w-2s, and other supporting documents to verify that the homeowners is financially insolvent.  Short sales are reserved for people with NO MONEY.

Gentle reminder: The new sale must be an arms-length transaction. Another common problem that lenders must watch for is when the real estate agent on the transaction happens to be the “assigned” buyer on the purchase and sales agreement. The lender is not going to be thrilled in paying a real estate commission on that kind of transaction. Further, there are plenty of foreclosure rescue scams happening nationwide. Lenders scrutinize short sale offers to look for signs of fraud.

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved?

No. There are no painless alternatives. There shouldn’t be. There cannot be.

Next, everyone who is patiently waiting for the bank to approve the short sale must now realize that once the bank says “okay” to the short sale, there very may be a long list of investors who own pieces of this mortgage loan. Each and every investor will have to give their approval for the short sale. We enjoyed many years of growth in the real estate industry and the overall economy thanks to the invention of Residential Mortgage Backed Securities. RMBS made millions of dollars for many people. The downside to securitizing mortgage loans and then selling off slices of each mortgage to different investors is that when it comes time to tell the investor “you’re going to have

to take a haircut” that investor gets to have a say in the matter.

Calling loan servicing and yelling at them over the phone will get you nowhere.

I would like to be first to predict that the next meltdown will be loan servicing. But perhaps my prediction is so obvious as to not be much of a prediction at all. How much longer can they sustain this level of stress and pressure, with their current staffing levels, while the banks are facing enormous losses? Of course when that meltdown happens, I predict our government will step in and mandate harsher regulations on servicers, which will be passed on to the consumer in the form of higher interest rates.

Loan servicing use to offer what it said: “service.” It was treated as a cost center on a bank’s balance sheet. Over the past 15 years, servicing became a “profit center” and the highest expense, namely labor, was cut to achieve profit goals. This is one more lesson in under-pricing. The cost of “good” loan servicing in which phones are answered and files processed smoothly, would have cost us all, way, way, way more on the retail end, than what we paid. Let’s say we could create instant loss mitigation nirvana today. All phones are answered on the first ring, all short sales are approved with no questions asked, no documentation required, no proof of hardship necessary, no proof of financial insolvency needed, and all Realtors receive their full 6% commission.  The consequences of not performing due diligence at the loss mitigation stage are disaster for all of us. Compare this to the current nirvana we just left behind: A world where anyone could get a mortgage loan with no verification of ability to repay, with massive fraud still being uncovered. We need to do it right this time, and it takes TIME to do proper short sale loss mitigation.

Posted via email from Jeremy R Erickson