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Whenever you start discussing our nation’s foreclosure problem at a party, you never know what response you are going to get. Some people only focus on the macroeconomic effects and the recession. Others side with the emotional plight of those who are losing their homes to foreclosure. Yet, no one seems to even consider the predicament of the collector who tries to defend the integrity of the bank despite the tsunami of legislation that threatens to bury them. In this article we will focus on current laws and some practical ways to deal with them. In future articles we will take a look at what is on the legislative horizon and how the collector can be prepared.
True Story Borrower was very hard to work with and took advantage of the collector to get more time in the property. The collector, very upset, would not offer any cash-for-keys and went straight to the eviction. The borrower now even more upset destroyed the home causing $300K in damage on a $400K-valued home.
Yet, no one seems to even consider the predicament of the collector who tries to defend the integrity of the bank despite the tsunami of legislation that threatens to bury them. In this article we will focus on current laws and some practical ways to deal with them. In future articles we will take a look at what is on the legislative horizon and how the collector can be preparedNote that how this practically affects borrowers and collectors is very different. The borrower views this as an opportunity at different levels.
The Borrower’s Perspective of Moratoriums:
1. There are borrowers who honestly need help through a temporary hardship. In most cases, the collector will work with these individuals. The borrower isn’t concerned whether there is or is not a moratorium.
2. The borrower who has the true and permanent hardship. In most cases, there is no immediate solution to the hardship. So the borrower tends to drag out the foreclosure process as long as possible. They can’t afford their payment, but they can’t afford rent either. If they have a $2000 a month payment and they can stretch the process out one year, they save $24,000. That is like having a second job!
3. The discouraged borrower who bought the house as an investment, but now finds the home is upside down. They are looking at a default as a strategic financial decision to save the same $24,000. The borrower/investor who has a renter in the property. Just as above, they realize that the property will not be experiencing market appreciation so they collect and keep the rent from the property.
Moratoriums do a couple things to the psychology of borrowers in the public. First, the image of the innocent borrower being victimized by “evil lenders” is perpetuated. Second, they feel a sense of entitlement that they should be allowed to stay in their homes, with monthly payments being voluntary. This effect is intensified by federal and state programs like HAFA, HAMP, and state laws like California’s SB-1137.
You may be thinking, “I don’t need to worry about HAFA, HAMP or the other state regulations because I don’t manage a Fannie Mae or Freddie Mac portfolio, and my state hasn’t made any ominous extra rules.” Unfortunately, public opinion does not distinguish between Bank of America and a credit union with a very small loan portfolio. Borrowers will call and demand protection under HAFA guidelines or complain that they didn’t get the proper notification under SB-1137. As a collector, it is important that you understand these programs in order to assist the borrower to see the reality of their personal situation and then help them focus on how you as a collector can help them.
Quick Reference Guide
Below is a general guide of the basics you should know about the Federal programs and good practice for each real estate default. This is a great resource to make part of your audit manual. At that time when you have the FDIC or NCUA auditors in your office, you will have a comprehensive understanding of State and Federal Law, and you will be able to go beyond the normal scope of duty in protecting the interest of the borrower and the integrity of your institution.
HAMP (Home Affordable Modification Program)
This program’s purpose was to give a defined set of parameters by which a person could qualify for a loan modification by a government-controlled loan. Much like lending guidelines, HAMP is restricted to help those who fit in specific parameters.
1. Must be an owner-occupied property, with a mortgage amount less than $729,000, obtained before 01/01/2009.
2. Must have a valid and documentable hardship for the reason that the borrower seeks assistance. (This is the subjective part of the program). 3. Borrower’s current PITI must be higher than 31%.
Watch out for Loan Mod Fraud:
- Obtain a proper VOE. Make sure that there is no conflict of interest in the ownership of the business. Also, keep an eye out for non-arms length employment (i.e., family member).
- Be sure to get the signed 4506, and verify the tax returns.
- It is also very important to do a simple exterior-only or a full interior Broker Price Opinion inspection. Many times the owner is pretending to still live in the property and often an interior inspection will uncover the fact that it’s actually a tenant-occupied property.
- Obtain a proper VOD, which certainly can be a challenge. A fraud audit of the original loan file can really help you make good decisions today. Find out what happened to the borrower’s retirement accounts that they say they don’t have any more, by getting a proper VOD.
HAFA (Home Affordable Foreclosure Alternatives)
When a loan modification is not an option for the borrower, HAFA offers two other options. These are deed-in-lieu and short sale. First, deed-in-lieu --- be very careful with this option. You must ensure that you really have done a complete fraud review of the file and have a perfectly clean title. Any imperfections in title will come to haunt you later if you haven’t done the proper homework. It will be worth it to spend the necessary money upfront before you choose this option. Plus, recognize you will be assuming all maintenance and liability the day the deed-in-lieu is signed. Make sure your Asset Management Company is right there with you, so that as soon as you take ownership of the property, the property is being immediately managed. Any lapse in management could negate your insurance coverage and open your institution to liability. Second, and more common of these options, is the Short Sale.
Short Sale Benefits:
- The financial institution never takes ownership of the property and therefore doesn’t have to carry any of the maintenance, repair, or other liabilities that come with homeownership.
- Property is sold now instead of after a lengthy foreclosure process.
- If you are proactive and follow a “Bank-Directed Short Sale” model by pre-approving everything in the short sale in the beginning you can achieve 5-10% higher yields than an REO sale or standard short sale. Pre-approved short sale is more appealing and therefore, more and higher offers to choose from.
- The property is maintained in a short sale instead of being potentially vandalized during an REO eviction.
- There is also an opportunity to negotiate with the borrower. HAFA designates $3,000 in relocation funds to be given to the borrower. Borrowers hear about “government money” and expect to benefit, even though their loan may not qualify. You can use this as a negotiating tool to get the borrowers to use it for the upkeep of the property and/or to stay current on utility bills. You may also have the opportunity to negotiate a private note to offset some of the loss.
Watch Out For Fraud With Short Sales:
- Proper VOE. Make sure that there is no conflict of ownership in the business, as well as non-arms length employment. The person may have an occupation in which they depend heavily on their credit. Be sensitive and aware of this because it can be a strong negotiating point.
- Get the 4506 to verify those taxes.
- It is also very important to do a full interior Broker Price Opinion inspection. Many times an owner has claimed to still live in the property and often a simple interior inspection will uncover the truth of a tenant-occupied property. Additionally, the BPO will help to validate the purchase price of offers received.
- Proper VOD can be the most difficult. A fraud audit of the original loan file can really help you make good decisions today. Find out what happen to those retirement accounts that they say they don’t have anymore by getting a proper VOD. You may have the leverage to get them to bring money in at closing to help offset loss.
- Verify the offers. It is vital to have complete transparency in the sales process. Asset Management Companies have the technology to allow you to see all the marketing on a property, and to be able to see all the offers. Be wary of non-arms length offers and ensure you are getting maximum dollar.
State Laws To Be Aware Of:
- Proper Disclosure. Many state laws -- like California’s SB-1137-- mandate that borrowers in default be made aware of all their options. How do you do that? Make sure that you document all attempts to call. If you hire an asset management service to do it, make sure they have the proper disclosure, and try a door knock at least three times and document it for you. It is important that people know their rights. In addition, many times a door knock motivates the borrower to call and work something out.
- County registration of REOs. This is a new fad that is really increasing in popularity. Local governments need revenue and they see financial institutions as an easy source. Make sure if you take any property through foreclosure or deed-in-lieu that your asset management company is properly registering them.
- Maintenance must begin immediately. Don’t delay on little things like pool and lawn maintenance. A couple of hundred dollars a month can save you upwards of $1,000 a day in fines.
In summary, many borrowers will attempt to take advantage of our country’s current financial situation and this complicates things for those who honestly need the assistance. But if you follow some simple fraud prevention steps and are proactive in the management of your defaults, you will avoid most of the scams and fraud occurring today.
When you give borrowers multiple options to avoid foreclosure a partnership is created versus an adversarial relationship. This partnership creates a win-win situation where the borrower feels that the lender cares about them on a personal level, while also protecting the integrity of your institution.
Your Graceful Exit (The Government’s Youtube video)
Watch a video to learn more about the Home Affordable Foreclosure Alternatives Program. |
Author:
Jay Kister, Pres.
Infinity National Asset Management
For more specific State questions or if you have an individual scenario contact
so available for speaking engagements and training events. To reserve a time or request a list of topics, please email here
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