Posts Tagged ‘short sales’

Fannie Mae’s Wrong Headed Gambit To Staunch Strategic Defaults

Last week, Fannie Mae issued a press release announcing that it was putting into place policy that would block strategic defaulters from getting a new Fannie Mae backed loan for seven years following the foreclosure.  In addition, Fannie Mae will also instruct its servicers to pursue deficiency judgments against borrowers where they are allowed.

Clearly, mortgage lenders do not like strategic defaults. They don’t like them because they’re kind of a wake up call to reality. Once lenders are forced to take back a home, they must face the immediate loss in value, which is why they want people to continue to pay. As long as they’ve got a paying mortgage, they can keep pretending the property securing the mortgage is worth the note value.

Yet, you’d have to have been living under a rock not to know that neither the lenders nor the servicers have done much to help homeowners avoid foreclosure. They’ve been recalcitrant when it comes to both loan modifications and short sales and many homeowners have, understandably, thrown up their hands and decided that walking away could save them a whole lot of stress and aggravation.

Instead of actually forcing its servicers to engage in meaningful work-out solutions with borrowers, Fannie Mae is, in effect, sticking its head in the sand and pretending that we aren’t in a foreclosure crisis at all.  The lenders do not want to face any losses at all, which meaningful work-out solutions would invariably force them to do, though not as steep as they would face in foreclosure.

New Law Exempting More Borrowers From The Threat of Deficiency Judgments Will Have No Effect Today

Under current California law, no borrower is liable for a  deficiency judgment on a purchase money loan. A borrower may be held liable for a deficiency judgment on a refinance, however, but only if the lender chooses to foreclose through the court system in a long and expensive process known as a judicial foreclosure.  Most California foreclosures are non-judicial, and in that case, the lender would never be entitled to a deficiency judgment.

Where the deficiency judgment debate matters is in negotiations for short sales on non-purchase money loans. Currently, lenders can require homeowners to sign an unsecured promissory note for the difference between the sales price of the home and the amount of the note as a condition for accepting the short sale. They use the threat of pursuing a deficiency judgment to coerce homeowners into such agreements. Accordingly, the current rules merely serve as a dis-incentive for short sales as opposed to allowing the lender to foreclose.

Savvy homeowners may call the lenders’ bluff by making them start the foreclosure process. A lender has the choice as to which remedy it may use to recover its money, but it may not choose both. Therefore, if a non-judicial foreclosure has been started, usually by the recording of the Notice of Default, the lender has already made its choice.

A law currently being debated in the California legislature would have ended the threat of deficiency judgments completely. As it stands, if the law does pass, it would only affect borrowers who used refinanced money for home improvements and only on new loans. So, for most homeowners, this new law, if passed, would not change anything.

Short Sales vs. Foreclosures

As the foreclosure crisis continues largely unabated by the Making Home Affordable program, we are now seeing a push from the government for servicers and lenders to consider short sales. A short sale is where the property is sold for less than the balance of the mortgage note.

Pushing short sales is not an acceptable answer to the foreclosure crisis. No amount of coercing from the government, absent the force of law,  will get mortgage servicers to accept the kind of offers  a homeowner is likely to receive, especially in areas where home values have plummeted over 20%. 

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Treasury Lowers Expectations For HAMP Program

More than a year after launching HAMP, only 210,000 families have received permanent modifications. This puts the program’s original goal of helping 4 million families far behind schedule and highlights the program’s weaknesses.

So what does the Treasury do? Instead of doing things to improve the program, such as giving it some actual teeth to force banks to cooperate and actually modify loans, the Treasury now says that when it made the original  projection of helping 4 million homeowners, it only meant that up to 4 million homeowners would be “offered” a modification, not that they’d actually receive  one.

The Treasury has revised its projections and claims that HAMP will help 1.5 to 2 million homeowners. It is now pushing the idea of other foreclosure abatement solutions such as short sales where the beleaguered homeowner sells his home for less than the value on the note and finds “more suitable” housing.

It seems the Treasury is adopting the stance of one banker who actually said that his bank only offers modifications. They don’t actually do them. Do we need any further evidence that Treasury Secretary Geithner is  in the pocket of the big banks? Of course, it is not him alone, it is  his entire department. Who, there, is actually looking out for the well-being of the American people who have long been bamboozled by Wall Street and Big Finance?

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