Mortgage Problems?

 

(THIS PAGE WILL REMAIN UP UNTIL FORCED DOWN!  THE POWERS THAT BE WON´T LIKE THE TRUTH!  WE'VE LASTED 40 DAYS AND COUNTING!)

This was written to be read.  It explains things borrowers should know.  When you understand the forces that created your current situation, you begin to understand your solution!  You can skip to the bottom and read;

?       "WHAT WILL HAPPEN TO YOU?" 

?       "HOW TO WORK WITH THE BANK."    

?       "WHAT THE FUTURE HOLDS?" 

?       "THE SHORT SALE PROCESS?"  

     

Then come back.  We are starting to tell big corporations and the government, we "are tired and aren't going to take this anymore!!    We would like the government to correct this mess with common sense!
Your story will help!


MORTGAGES ARE A TRAP,
     YOU ARE PROBABLY INNOCENT!

First of all, let me state my credentials.  Very experienced Realtor®, former manager of bank loan department, BS Degree Business Administration (Finance), fully trained in all aspects of lending and a compassionate human being. 


LENDERS ARE THE CULPRIT!

Lenders weren't always guilty.   Until the 1970's most banks and savings and loans were responsible to the depositors´ first and they operated on the premise the banks would profit by benefiting the community.  This all changed when the banks compensation went from making a profit by earning interest over the period of the loan to the current practice of receiving a fee for making and selling the loan to an investor! 

We tend to believe those we call bankers.  As banking has changed, this is a misplaced trust.  The people that represent the banks in mortgages are called mortgage originators and they are paid for making a loan, not for making a good loan, only one that qualifies for the market where loans are sold!  I have known hundreds of loan originators and have only found two I recommend.  Only two people I trust out of the 400 or 500 I have done business with.  These are pretty bad odds!  Even that trust is with reservations as I see the temptations these two loan originators encounter.  Their compensation method would require them to be saints.  

From the top down, the industry operates on a "success fee" system of compensation.  This is a faulty system in a risk management industry!

Before the 1970's lenders made their money on deposits.  Banks can multiply the interest earned through a process called "fractional banking".  When a person deposits $100 into the bank, the bank keeps $20 in "reserves".  The bank lends out the remaining $80, keeping 20% ($16) in reserve. This process is repeated over and over, as the loans are usually deposited into the banking system.   The banking system could effectively multiply every dollar by 5 times and this is "fractional banking".

If the banks charge an average of 7% on the loans and earn interest on only 3 times the deposits, this equaled 21% banks could earn for money that is costing them less than 2%.  They can do quite well on just the interest earned and they would still care about making "Good Loans".   The loans were theirs and their future depended on a very large portion of these loans being repaid.


It isn´t all gravy for the banks.  Lending money long term and paying interest on short term savings accounts is always a juggling act for the banks.  While "reserve requirements" allows them a very wide margin, they may have to pay more than they are earning if savings cost more to keep than the interest they were earning.  The banks have never really encountered this situation as they have made savings accounts and certificate of deposits (CD´s) so cheap that few people use them to deposit money.  It also follows the loan interest rates would go up in savings rates went up.

The change from "fractional banking" to "fee based banking" started when intrastate banking was adopted.  Soon the Main Street local bank was absorbed by the big national banks and the sophisticated practices of the private Wall Street Banks were now practiced by all banks.  Banking became too complex for the average person to understand.  However, we continued to trust the bankers, even though the decisions were no longer made locally. Now lenders have made lending complex and they earn bigger bonuses.  Also they are "now too big to fail."  That wasn´t the case when your bank was on Main Street.   They could and did fail, and thanks to FDIC it was hardly noticed.

The change to "fee based banking" also resulted in Realtors® no longer being knowledgeable about mortgages.  When there were only 4 types of mortgages, FHA, VA, Conventional and Private Mortgage Insurance (PMI),  Realtors® could advise their buyers on the different programs.  Now there are over 4000 mortgages available and not even the most experienced mortgage person can tell you about many of them.  The different types of mortgages were created to "better serve the consumer" when I think the real purpose was to confuse both the consumer and the regulators while making the lender more profit.  I have given up on trying to stay current with them and if a former banker has trouble, think what the average consumer faces!
  

Banks used to shy away from mortgages; they were more into consumer loans and business loans.  The huge profits of mortgage loans changed their attitude and now every bank has a mortgage loan department that they promote heavily.  To see how profitable an industry is, see which industry is doing the most advertising.  The mortgage industry is way up there!  Even in a recession!

Knowing lending, economics and finance, I was appalled when adjustable rate mortgages (ARM's) were introduced.  ARM´s allowed you to qualify for a larger priced home and keep the payment low.  If you were absolutely sure you were only going to be in the home a certain time, then this loan made sense.  But it is still a gamble as forecasting interest rates is difficult and ARM's allow the lender to pass the risk to the borrower.   The lender also made a higher fee on a larger loan and the borrower took the risk.  If ARM´s were a viable tool for banks, then banks could afford to pay more for savings accounts and certificate of deposits.  No, ARM´s just allow for bigger loans and higher fees.

WHAT HAPPENED?

You made a decision based on what you knew and what you were told by a lender you trusted.  Real estate has appreciated as long as you or I can remember.  We can anticipate the future as long as the way things work does not change. It is when we do not anticipate these changes that we get hurt.  However, what experience do you have in the big picture?

Congress passes laws we feel will benefit us, when in fact they benefit the special interest groups or the people that hire the lobbyists.  When the time comes to pay the bill, it is you and I, not the lenders, who pay!

You and I do not have a special interest group that protects us.  We rely on our elected officials to protect us and when those officials are influenced by money, we may end up getting the shaft.  AND WE DID GET THE SHAFT!  Lenders know lending and they know how to make good loans.  Then they discovered how to make huge profits by selling the loans rather than keep the loan and earn the interest.  When lenders became middle men they no longer cared about the quality of the loan, just the profit they made from the loan.  I have only found one nationwide bank I felt resisted this trend and that is US Bank.  At least they do not seem to be in trouble and that is more than I can say for every other nationwide bank.  Since the typical small bank does not have to pay exorbinate salaries and bonuses, they made better loans!


What we didn´t know was Congress passed legislation to pressured the banks to make "affordable housing" available to income disadvantaged people.  You couldn´t know this caused most of the big banks to lower their credit evaluation and make poor credit loans.  You were concentrating on your job and expected those you did business with to concentrate on theirs.
 

Anyway, the process started with the less qualified home buyer.  They are more desperate to buy and more likely to encounter the unscrupulous lender.  They buy a house they can not afford.  As everyone dreams of owning a home, they believe the loan originator. They rely on the "expertise" and integrity of this person they trust.  As these borrowers are at the low end of the economic scale, they are the first to get hurt when the market weakens.  Add to this the speculators who are making money from the high inflation in certain markets and you have a bonfire waiting for a match!  When too many of these borrowers get in trouble, then the housing market collapses.  People stop buying new homes.  The construction industry starts to crater.  Builders no longer buy materials, forcing their suppliers to lay off people.  The laid off construction workers no longer spend money, forcing other businesses to lay off people!  Eventually, it gets to you!  Now you no longer can afford your house payment.   Soon there are too many homes being sold and too few buyers. Real estate value starts declining because supply and demand is out of balance. 

When ever the market ignores the basic economic law of "supply and demand" you can expect trouble.  Most people do not factor in the 3rd component to supply and demand in housing, it is mortgages!  As very few of us can pay cash for our home, we rely on mortgages.  Mortgages are the 3rd component and they are an equal leg of a 3 legged stool!  When mortgages are not realistic they do not provide the long term support necessary.  When you sit on a stool with a broken 3rd leg you can sit, but as soon as you stand up, the stool falls over.  Mortgages are the broken 3rd leg.  We all need shelter, but who needs to be locked into a mortgage if your income is unstable?  Who needs 6000 sq. ft. or even 3000 sq. ft. just because you can qualify?   Who determined the income to debt ratio could go up, just because the growth economy we were in had given us a short (VERY SHORT) history of success at higher ratios?  No matter, we all bought into it.  We believed banks as it is their business to make good loans and when that went bad, we BAILED THE BANKS OUT!  They made the bad decisions´, we paid for it! 

WHAT HAPPENED TO YOU?

What makes your story unique!  Transfer? Job loss? Divorce? Illness? Accident? Death?  There are a number of ways you can get broadsided and while your reason may be unique, there is one thing statistically correct about it.  Less that 9% of the people who are in your situation, had anything to do with causing it!  All of the rest were "blind sided".  So how does being the victim of a collision, make you guilty?  You are guilty only when someone in power is able to blame you!  You would never be convicted in a court of law, but in the court of public opinion, you may feel guilty.  I ask, "Guilty of what?"  Did you lie on your application?  Did you get an "under the table kick-back"?  Did you falsify any documentation?  Just what did you do that was wrong?  Since statistically, you did none of these things, I don't see how you could be found guilty.  You may have been naive but you are not guilty.

WHAT WILL HAPPEN TO YOU?

The picture is not pretty.  But interestingly enough, a very large portion of Americans have gone through similar problems.  When ever you are in a group of 10 people, statistically 1 of them has filed bankruptcy, 1 of them has had a foreclosure or repossession, more than 2 of them have had bill collectors call them or been sued for debt.  This figures that 40% of the population has some poor experience with credit.  You are not alone; you just are the one in the hot seat today.  All of these people recovered and are on their way to living the American Dream, just as you will. 

The foundation of our society is freedom.  And that includes the freedom to fail.  It also includes the freedom to try again.  History is full of people that failed many times before they succeeded.  Some of them even became rich and famous.  Your friends and neighbors don´t tell you about their failures, just how they finally got it right.  You are expected to try!  If trying causes you to fail, so be it!  As the old song goes, "Pick yourself up, dust yourself off and start all over again!"


HOW TO WORK WITH THE BANK

When you talk to your banker or Mortgage Company, bear in mind, the bank is facing a very large loss and that colors their decision.  Even if they are just servicing the loan, they still have some responsibility to the investor.   Your basic options are;

1. Bring the loan current.  That also means you are able to keep the loan current.  If this is possible, you do not need to read this.  You can negotiate reducing the late charges and accelerated interest rate.  As soon as you miss a payment, you are placed in a "watch" category which will very quickly put you into a "non-performing loan" category.  Bringing the loan current should remove you from this category.  Use the banks desire to get your loan to "performing status" to your benefit.  You probably can not do much with your credit rating as that is electronically processed.  However, time cures all credit scores.

2. Short sale, sell the house for less than the mortgage.  If you can not bring the loan current or sell it for enough to pay the mortgage in full, banks are more interested in doing a short sale than foreclosing or deed in lieu.  The short sale will average 14% more net to the bank than foreclosing and it is generally a shorter process.  They also prefer short sales over deed in lieu  as they do not have to worry about disposing of the house.  Banks do not like to own real estate.  They do not know the community, they have to rely on someone else and just as soon as the public is aware the home is "bank owned" the value goes down and the cost of disposing of the home increases greatly!

3. Deed in Lieu, at the same time, either you or the bank will start a deed in lieu of foreclosure process.  The bank may allow this as it is a shorter and cheaper process the than a foreclosure.  A deed in lieu is just ahead of foreclosure in the banks desire. 

4. Foreclosure, this is what will happen if you do nothing.  There is only one advantage to you in a foreclosure, but most of the time you want to avoid a foreclosure.  The advantage is you stay in the house until the sheriff evicts you.  You credit is trashed and if you fill out a loan application they ask if you´ve had a foreclosure in the last 7 years.  Currently, they do not ask if you´ve had a short sale or deed in lieu.  Generally, most people would be better off to try and work with the lender.

5. Deficiency Balance, in most states you will owe a balance after closing or foreclosure.   This is what is left after you have participated in one of the above solutions to your mortgage problems.  This balance will include all the late charges, the accelerated interest rate, all legal fees and any out of pocket expenses the bank paid, and all of is added to the existing balance.  Then the amount is reduced by the net amount the bank received.   The bank will continue to charge you the interest which maybe the higher "default interest rate". You can attempt to negotiate with the lender to reduce or even remove the deficiency balance, but this might jeopardize the short sale or deed in lieu process. 

The US Government just passed legislation removing the income tax liability for "the forgiven mortgage debt."  This is a temporary situation and can be reinstated at any time.  There is always publicity in regards to "debt forgiveness", but most of these are very hollow solutions and more designed to give the lender a better public image.  "XYZ Bank is working with our delinquent borrowers" sounds better than "We harass and intimidate them."

Down the road, lenders have been known to settle a debt for pennies on the dollar.  Some times they even forget about it.  Each state has what is called "Statute of Limitations", which is a period after which the debt is no longer collectible. 

  • It is still owed, but the lender can not use courts to collect the debt, which makes it worthless. 
  • There are things you must do and can not do if you want to qualify under the "Statute of Limitations". 
  • You should seek legal advice in regards to the "Statute of Limitations".

The bank may sell a bundle of debt to outside collectors (a 3rd party) who hope to collect what they can.  Here again, you can generally settle for pennies on the dollar.  There is some question as to whether you need to tell the 3rd party debt owner of your current financial situation.  They do have access to the credit bureaus.

 

THE "SHORT SALE" PROCESS

1.     You miss a payment.

2.     You list the property for sale as the bank won´t start the short sale process until there is a contract (accepted by you) on the property.

3.     List the property as "short sale, subject to lenders approval of net proceeds".  The reason for this is you need to motivate a buyer to deal with the problems of a short sale and to protect yourself against offering something (the price) you can not deliver.  Also include this in any contracts you sign!  Buyers are motivated by the opportunity to get a bargain.  Base your price on recent distressed sales (foreclosures or short sales), not on "arm length transactions".   The lender is free to not accept.  Sometimes the lender will give you some indication of what price they expect. 

4.     Banks have a policy in every event (short sale, deed in lieu or foreclosure) to order a Brokers Price Opinion or BPO.  This is done by a Realtor® who specializes in establishing BPO's.  This value will be heavily influenced by distressed sales.  If the bank tells you what the BPO figure is, you may want to list just above or at the BPO price.

5.     The bank generally wants the contract price to be the BPO figure or better.

6.     You start compiling the information the lender is going to require from you.  See the list below.

7.     The bank may start the foreclosure process.  Don´t get upset or angry as foreclosing is time consuming and the bank will not want to waste time if problems arise.  Many states allow the process to get started and then extended if there is something else in process, such as a "short sale" or "deed in lieu".

"SELLERS LIST TO START SHORT SALE"

Here is a "generic" list as to what is required by banks to consider a "short sale" or "deed in lieu":

1.     This will include almost everything that a closing requires.

2.     Hardship letter.  The bank wants to know what happened.  The last picture they have of you is when you applied for the mortgage.  Be specific in what happened.  State this was unexpected and also what you are trying to do to correct it.  You will need to support most of this information, just as when you applied for the mortgage.

3.     Financial statement showing all of your assets and liabilities.  This will include the last 2 months of all bank statements, investments, retirement accounts, etc.  The bank will want this signed and dated.

4.     The last 2 months pay stubs and source of all income.  The bank will want to see pay stubs of everyone who signed on mortgage. Basically the only income not included is support from family helping you along.   

5.     Living expense statement.  This should include all of your current expenses as YOU ACTUALLY MAKE THEM!  If you have moved out, they expect to see something for rent or housing.  Include utilities, food and all of your living expense; just be able to support them with receipts if requested.

6.     Authorization form allowing your Realtor® to talk to the bank.  Identify yourself by loan number, name, and address and last 4 digits of your social security number.

7.     The Realtor® should be listed by name, address and phone number.  The Realtor® should be given all of the above, plus all of the contract information you have.

8.     The same rules apply as when you applied for the mortgage and the information may be verified. 

9.     Lying at this point is committing fraud. 

10. Debt is a civil matter and you do not go to jail for being in debt. 

11. You can go to jail for committing fraud! 

12. Most of the other requirements will be taken care of by the real estate agents and the title company. 

13. The buyer must be pre-qualified.

 

 

SELLERS PROCESS IN A SHORT SALE

 

  • You are asking the bank to less than the amount owed the bank.
  • The bank needs to be convinced they should make the concession. 
  • Banks have more experience in short sales than you have.
  • Find a Realtor® who has some experience in the process.  
  • There are Realtor® designations (SFR) which means "Short Sale and Foreclosure Resource Certified". 

 

As soon as you think you will not be able to make a payment, call the bank! 

  • Start communicating.
  • See if you can establish rapport with a person. 
  • Get a big note book and take lots of notes. 
  • While some short sales are quick, that is not the norm.  Keep detailed notes and review them after you´ve made them and before you call again.
  • Date and time everything.  Get their name, phone number, email address, employee number and ALWAYS treat them like a FRIEND! 
  • Never get angry, never call them names and never raise your voice. 
  • They are the person who can point you in the right direction. 
  • No one knows how the bank operates as well as the people inside. 
  • YOU WANT THEM ON YOUR SIDE!  WIN THEIR FRIENDSHIP! 
  • They expect you to have emotions, crying is accepted. 
  • Don´t make it personal to them! 
  • Always ask if this person can help you.  If not, ask them who can?  Ask them what they know about the process?  Take notes, they may not know the process but with enough information you will start asking better questions. 
  • You have a lot to gain here.  You may not get out of the debt, but the deficiency balance will be less, you will have pride in knowing you did everything you could to satisfy the debt and as of February, 2010 the short sale had less of an impact on your future home buying than foreclosure or bankruptcy. 

THE PHASES OF THE SHORT SALE PROCESS

Some lenders are more formal than others, put this is the generic process they use.  They are understaffed for the volume of problem loans they are handling and they seem to have been reluctant to petition congress for a better method of handling these loans, even though changing the process could improve their bottom line and strengthen the real estate market.

PHASE ONE   will vary depending upon loan type, but this is process for the largest volume of delinquent loans, those with mortgage insurance.

  • Accepted contract from qualified buyer and signed by all parties
  • All paper work to bank.  This includes the complete contract with all attachments, amendments, supporting documents and buyers pre-approval letter
  • All of the sellers supporting data to bank. It should be current and dated close to the contract date.
  • The bank will have a BPO or order one.  They may order several and the mortgage insurance company will order BPO´s as well.
  • The bank will assign a negotiator whose duty it is to compile all of the information, verify it and package it for the next phase.
  • Property is reported as under contract  to MLS
  • The negotiator can reject the offer if it is too far below what the bank wants.  This is a verbal counter and if the buyer wants it, they amend the purchase contract to reflect the change.  If the buyer doesn´t accept it, the negotiator will reject the offer and the home goes back on the market. Accepting the banks offer is no assurance you are going to sell the home, it just means the offer was within the banks parameters.

 

 

PHASE TWO

  • This is the decision process.  The package is being reviewed by the bank, perhaps the investor, FNMA and the mortgage insurance company. 
  • They can ask for more money.  The expectation is everyone gives a little.  If the real estate commission is more than 5% the bank will generally not allow it, even though this type of contract is more difficult for the agents. 
  • For the most part, the seller will not be able to participate with cash.
  • We wait.  The waiting time is being shortened all the time, but one of the reasons the bank loses money is they have not acted in a timely manner.  Recently the US Treasury stipulated the short sale process be completed in 30 days.  I doubt this can be enforced.

 

PHASE THREE

  • The lender and the mortgage insurance company verbally accept.
  • It is not a binding contract on the part of the bank; they do not sign the contract or counter offers. 
  • The bank communicates with the title company and sends them a "payoff statement".  This is the same document that causes millions of homes to sell every year.
  • This is as binding as it gets, but at this time they usually close.

 

 

PHASE FOUR  

  • Now the closing process of a REGULAR real estate contract starts.
  • Typically we have 30 days to complete all of the loan process,
  • The inspection is only pass or fail, lenders will only repair vital things
  • Review the title and the CCR´s
  • Get the appraisal
  • Set the closing
  • Seller(s) will need to attend the closing or sign the deed and other papers by mail or a separate closing.  The deed will need to be notarized.

 

PHASE FIVE   you now have sold your houses!

 

MORTAGE MODIFICATION

There is another program being touted, "mortgage modification".  It does not work.  The successful mortgage modifications can be counted in the thousands.  It could be a very good program.   Loan modification could:

  • Keep many people in their homes
  • Thereby reducing inventory
  • Thereby increasing values
  • Thereby allow those who need to sell to sell
  • Banks are not behind the program as no benefit
  • Need a change in  tax laws
  • Need a change in FDIC regulations
  • May need to allow bank to defer interest earned
  • Collect unpaid interest at later date
  • The home owners must qualify
  • Even a 1% mortgage has a payment with taxes and insurance. 
  • The banks created this mess by not using good credit decisions, the banks should bear the brunt of the lost profit necessary to work out this problem. 
  • The won´t, they have the politicians ear!
  • They are "too big to fail!"

 

Don Stark, Realtor®. (SFR)

"Short Sale and Foreclosure Resource"

Affordable Brokerage Company

www.abc-realestate.com

Denver 303.778.0505

Colo. Spgs. 719.574.HOME (4663)

 

mortgageproblems2.doc (3-29-2010)