Reasons to Do a Short Sale? Maybe Not

Besides avoiding a foreclosure and its hit on your credit record, you may have other sensible reasons for looking into a short sale of your home. Let’s consider those other reasons.

In my last blog I showed how a short sale may be harder to pull off than expected, and how they can be dangerous if you do not get advice from knowledgeable professionals looking out for your interests. Simply put, you should not assume that any particular solution is the right one without knowing all your options. And that means asking whether the reasons you are pursuing one option might or might not actually be better served through a different option.

So here are some sensible reasons to consider doing a short sale:

1. You can’t afford the house anymore and so believe you have no choice but to get out.

If your income has been cut or the mortgage payments have gone up so that you cannot keep up those payments, and yet you can’t sell your house in the normal fashion because it’s worth less than the mortgage balances, then a short sale may be a good way to escape the house and its debt.

But maybe you have important reasons to stay in your home. Your family may benefit from staying for deep personal reasons—such as not leaving your kids’ school district or maintaining family stability. If you leave this home it may be a long time before you would have the financial means to buy again. So there may be ways to lower the cost of keeping your home. A mortgage modification may now be more available than in the last few years because of the recent large mortgage fraud settlement with the major banks, and other improved programs. A Chapter 13 case in bankruptcy court may enable you to eliminate or drastically reduce a second mortgage balance, and either eliminate, reduce, or delay payments on other liens on the house. And either a Chapter 7 or 13 could reduce or eliminate other debts so that you could better afford to pay the home obligations.

2. You’ve heard that bankruptcy does not allow “cram downs” of mortgages on your home. So you see no way out of your second mortgage other than getting them at least a partial payment through a short sale in return for writing off the rest of that debt.

You’ve been doing your homework if you understand that mortgages secured only by your primary residence cannot be “crammed down,” reduced in bankruptcy to the value of that residence, unlike lots of other kids of secured debts.

But there’s a big exception, one that keeps getting bigger as home values continue to decline in many areas. If your home is worth less than the balance of your first mortgage, so that there is no equity at all in your home for the second mortgage, then through a Chapter 13 case you can “strip” this lien off your home. That means that your second mortgage debt can be paid very little—sometimes even nothing—during your 3-to-5 year Chapter 13 case, and then written off completely. This not only saves you from paying the 2nd mortgage payment from then on, it reduces your debt on your home forever, making hanging onto your home economically more sensible. If this second mortgage strip applies to your situation, then you will pay less each month for a home with less debt on it.

3. You may be induced to do a short sale not just because of your voluntary mortgage debts on your home, but because of various other usually involuntary ones which have attached to your home’s title, like one or more tax, judgment, support, utility, or construction liens.

You may have found out that your title is saddled with other obligations, and in fact you may well be under a great deal of pressure to pay one or more of these obligations. The IRS and support enforcement agencies can be especially aggressive. So you would understandably feel that you have no choice but to sell your home to get that aggressive creditor paid. And since you have no equity in your home, you can only sell it on a short sale. But the problem is that the more lienholders you have, the more challenging a short sale becomes. And even if it does succeed, the troublesome lienholder may agree to sign off for less than the balance, leaving you still being pursued by it.

I can’t cover here how a Chapter 7 or Chapter 13 case would deal with each of these kinds of lienholders. That’s a many-blog discussion, and would depend on each person’s circumstances. But often you would have options that would give you more control over your home and over your financial life than would happen in a short sale. Considering what is at your stake, it certainly makes sense to consult an attorney who is ethically bound to explain all the options in terms of your own goals and best interests.

Fannie Mae and Freddie Mac Now Say that Mortgage Principal Reductions are Good for BOTH Homeowners AND Taxpayers

Will Fannie and Freddie finally be making mortgage principal reductions now that their own analysis shows that doing so would benefit their own financial health—and make them better able to repay billions owed to U.S. taxpayers?

My last blog described Fannie and Freddie’s conflicting purposes: to make home ownership more accessible, but to do so profitably for themselves. And I showed how this inherent conflict has led to a political dispute between the Obama Administration on one side pushing for greater flexibility in helping distressed homeowners keep their homes—and specifically to allow principal reductions, while on the other side Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) and Fannie and Freddie’s overseer, disallowing principal reductions in order “to preserve and conserve [Fannie and Freddie’s] assets.”

Helping Homeowners Also Helps Taxpayers

But what if there is no conflict between these purposes? What if reducing mortgage balances would help hundreds of thousands of homeowners stay in their homes and at the same time would save money for Fannie and Freddie?  

That is the conclusion of a very recent not-yet public analysis by Fannie and Freddie presented to the FHFA, according to the ProPublica article: “Fannie and Freddie: Slashing Mortgages Is Good Business.”

The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January.  ... . The companies now find that reducing principal on troubled mortgages has a “positive net present value” — in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.

The two companies’ analyses showed that upwards of a quarter million borrowers who owe more on their mortgages than their homes are worth could benefit from principal reductions. The companies would take a loss upfront, but over the long run these mortgage modifications would save the companies money because they would lead to lower default rates.

FHFA’s Response

DeMarco is thinking about it. In a statement he said:

“As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”

But he also stated:

“FHFA’s previously released analysis concluded that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool. FHFA’s assessment of the investor incentives now being offered will follow the previous evaluation, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects.”

DeMarco seems to be saying that this new analysis may well not change their policy. Why not? After looking at all their options (“the eligible universe”), and considering how borrowers would react to principal reductions (“incentive effects”), it seems to come down to “operational costs”—changes to their accounting and computer systems—which could outweigh the other benefits. It just might be too hard to change Fannie and Freddie’s operations so that principal reductions would work for them.

The Bigger Picture      

So is the FHFA so institutionally ingrained with the short-term profit motive that it would reject Fannie and Freddie’s own conclusions about principal reductions being good for their long term financial health? Does it have SO little ability to adapt? Does the FHFA have such tunnel vision that it can’t give any consideration to the potential benefits to the national housing market, where home values STILL continue to slide? And where in DeMarco’s comments is there any hint whatsoever of compassion for the millions of Americans—about half of them under his control—at continued risk of losing their homes?

The National Mortgage Settlement's Actual Terms Finally Released

The settlement documents of the deal that was announced more than a month ago were finally completed and filed at court on Monday, March 12. They catalog page after page of serious wrongdoing by the banks in their servicing of mortgages and processing of foreclosures.

In my last blog I said that the settlement would be finalized and made public “any day now.” It actually happened only hours later.

The settlement documents consist of hundreds of pages, but I’ll make it easy for you.

One document talks about the past, the wrongdoing by the banks. That’s the Complaint. The plaintiffs are the United States, 49 of the 50 states (all except Oklahoma), and the District of Columbia; the defendants are five of the biggest banks—Bank of America, JPMorgan Chase, Wells Fargo, Citi, and Ally/GMAC, and their subsidiaries, totaling 18 named defendants. This 99-page Complaint is the subject of today’s blog.

The rest of the documents—one Consent Judgment for each of the five banks—talk about the agreed penalties for the banks’ past wrongdoing, but mostly focus on the future: 1) where the money from those penalties is going to be spent; and 2) the new standards by which these banks are now required to service mortgages and process foreclosures.  In my next blog I’ll talk about these penalties, and how they are supposed to help homeowners who have been hurt by the banks.

To say that the Complaint is 99 pages long is misleading, because it actually ends on page 48, followed by signature pages for each of the 51 plaintiffs. And In fact the document doesn’t really get to the point until the Factual Allegation starting on page 21. The detailed litany of bank misconduct goes on relentlessly for the following 16 pages, totaling 55 paragraphs of allegations, some including many subparagraphs of even more detailed allegations. It’s difficult to do justice to all this in one blog. To try to show both the breadth and depth of the alleged misconduct, I’ll give you most of the Complaint’s outline of the types of wrongdoing, and one or two examples quoted under each one:

A. The Banks’ Servicing Misconduct

            1. The Banks’ Unfair, Deceptive, and Unlawful Servicing Processes

Failing to timely and accurately apply payments made by borrowers and failing to maintain accurate account statements; imposing force-placed insurance without properly notifying the borrowers and when borrowers already had adequate coverage.

             2. The Banks’ Unfair, Deceptive, and Unlawful Loan Modification and Loss       Mitigation Processes

Providing false or misleading information to consumers while initiating foreclosures where the borrower was in good faith actively pursuing a loss mitigation alternative offered by the Bank; miscalculating borrowers’ eligibility for loan modification programs and improperly denying loan modification relief to eligible borrowers.

   3. Wrongful Conduct Related to Foreclosures

Preparing, executing, notarizing or presenting false and misleading documents, filing false and misleading documents with courts and government agencies, or otherwise using false or misleading documents as part of the foreclosure process (including, but not limited to affidavits, declarations, certifications, substitutions of trustees, and assignments).

 B. The Banks’ Origination Misconduct

   1. Unfair and Deceptive Origination Practices

In the course of their origination of mortgage loans in the Plaintiff States, the Banks have engaged in a pattern of unfair and deceptive practices. Among other consequences, these practices caused borrowers in the Plaintiff States to enter into unaffordable mortgage loans that led to increased foreclosures in the States.

 C. The Banks’ Bankruptcy-Related Misconduct

Making representations that were inaccurate, misleading, false, or for which the Banks, at the time, did not have a reasonable basis to make, including without limitation representations contained in proofs of claim under 11 U.S.C. § 501, motions for relief from the automatic stay under 11 U.S.C. § 362, or other documents.

 D. Violation of Servicemembers Civil Relief Act (SCRA)

The Banks foreclosed upon mortgages without required court orders on properties that were owned by service members who, at the time, were on military service or were otherwise protected by the SCRA.

 The 55 paragraphs of wrongdoing resulted in these five banks agreeing to pay about $26 billion in a combination of cash and other forms, to the states and to individual homeowners. As I said, I’ll tell you how this is supposed to be divvied up in my next blog.  

Will You Benefit from the Just-Completed $26 Billion Home Mortgage and Foreclosure Settlement?

The long-awaited joint federal-state settlement with the major banks for their alleged fraudulent documentation and processing of mortgages and foreclosures was announced on Thursday, February 9. Will it help you, and if so, how?

I interrupt my ongoing series on small business bankruptcy to answer your most immediate questions about this huge settlement.

1. Who is included in this settlement?

• Only five big banks are currently signed on: Bank of America, Wells Fargo, J.P. Morgan Chase, Ally Financial and Citigroup.  Only mortgages owned and held by them are directly affected.  Negotiations continue with nine other mortgage servicers, which if successful could bring the total amount of money involved to $30 billion.
• 49 states joined in the settlement; only Oklahoma did not.
• Mortgages held by Fannie Mae and Freddie Mac—consisting of the majority of U.S. mortgages—are NOT covered.

2. What does this settlement resolve and what is open for further negotiation and litigation? In other words, what liabilities are the banks escaping from for their $26 billion?

• The claims against the banks that are released in this settlement are limited to mortgage servicing and foreclosure claims. Claims for a variety of other alleged wrongdoing are not covered and so remain open to being pursued by the federal and state regulators, investors, and homeowners. Claims that are NOT covered include those related to the securitization of mortgage-backed securities that were at the heart of the financial crisis, and those against or involving MERS (Mortgage Electronic Registration Systems).
• Individuals’ rights to bring their own lawsuits or to be part of a class action against any banks for any claims are not affected by this settlement.
• The settlement does not limit any potential criminal liability for any individuals or financial institutions; it provides no immunity from prosecution whatsoever.

3. How does the settlement help you if your mortgage is held by one of these five banks?

• If you need a mortgage loan modification, these servicers will (finally!) be required to offer principal reductions, for first and second mortgages, to a value of up to $17 billion. This is where the bulk of the settlement funds are earmarked.
• If you’re current on your mortgage but your home is worth less than the mortgage, $3 billion of the settlement is to provide refinancing relief.
• If your home has already been foreclosed, $1.5 billion will be paid out by the banks as a penalty against them--around  $2,000 per homeowner--without you needing to show any damages or releasing any claims against the bank.

4. Where do you go for more information and to find out whether you will be helped in any of these ways?

• Go to the new settlement website for current and upcoming information about it:

http://www.nationalmortgagesettlement.com