I frequently get asked to explain the difference between a short sale and a foreclosure / Real Estate Owned (REO) property. Buyers in today?s market who are cash heavy and have a flexible time frame may be in the best position to purchase one of these foreclosed properties.

A Quick Comparison: Short Sales

A short sale means that a property owner who wishes to sell owes more money on their loan than the actual market value of their property. Some characterize this seller as “distressed” but the lender and/or bank has not started the foreclosure process or taken title from the owner. Therefore, in a short sale situation:

· The homeowner still owns the property

· The owner usually occupies the home (or has tenants)

· The property will be sold “as is,” meaning there will be no property disclosures, surveys, repairs or credits for any inspection items.

· The buyer enters into a contract to purchase with the homeowner, but needs lender approval to forgive the difference between the sale price and the balance on the mortgage.

· The bank will often wait on signing off on the agreement until they receive more than one offer.

· The time frame from contract to close is generally between 3 -6 months.

Foreclosed Properties

A Foreclosed / REO property is owned by the lender, usually a bank. The lender usually hires a company to oversee the management and sale of the property.

· The bank owns the property.

· The home is usually vacant, and unfortunately, may be missing appliances, is damaged, or in need of repair.

· Utilities are generally disconnected which can make previewing the home in the evening or in cold weather difficult.

· Property usually sold “as is.” The bank does not provide any property disclosures or guarantees any information.

· Buyer enters into a contract with the bank/lender.

· Cash offers generally win out, even when other offers are more. The banks generally don?t want to risk selling to a buyer who may be unable to secure financing.

· Response time from a bank can be as quick as 30 days or as long as six months. It can vary drastically depending on which bank it is.

We would like to thank thetruthabout for sharing today?s photo via the Creative Commons License.

Many people out there are wondering if we are on our way to an economic recovery. That is a good question. Many factors are contributing to our sluggish recovery, including the recently enacted Home Valuation Code of Conduct or HVCC program. The HVCC program and its regulations are lengthening underwriting times, increasing costs to the buyer and seller, and lowering property values.

Can Short Sales & Foreclosures Be Used in an Appraisal?

New HVCC regulations will affect how appraisers measure your property values.

Another question being asked today is how short sales and foreclosures affect market value. Market value can be best defined as the amount for which a property can be exchanged for on a particular date between a willing buyer and a willing seller. Market value also assumes that both parties to the transaction acted knowledgeably, prudently, independently, and in the case of an arm?s length transaction, that they have no conflict of interest. In today’s market, market value is dropping because a large number of sales are foreclosures and short sales. Sellers and buyers alike may ask if these short sales and foreclosures can be used in an appraisal. Under the new HVCC rules, an appraiser is only allowed to go back three months to find comparable properties. This causes serious problems for the appraiser since recent sales are often short sales and foreclosures. Before HVCC went into effect, the appraiser could go back an entire year to look for comparable properties. These new rules put appraisers in a tough spot. Short sales and foreclosures are often not arm’s-length transactions, so they should not be used to determine the current value of a property.

More Inexperienced Appraisers Mean More Problems

As I’ve written before, HVCC has inserted a new player into the appraisal process: Appraisal Management Companies (AMC). AMCs act as brokers between appraisers, real estate agents, and mortgage brokers. Writers of the HVCC legislation believed that AMCs would prevent undue pressure being put upon appraisers to place a certain, and bias, price on a home. However, AMCs have had many unintended consequences, both to homeowners and appraisers. Appraisers are getting paid less because AMCs take a slice of the appraisal fee while leaving the individual appraiser responsible for completing the additional paperwork required by HVCC rules. As you may guess, more and more appraisers are leaving the field?they can’t make money. This means that more inexperienced appraisers are entering the field and getting paid less and less for what they do.
Inexperienced appraisers have a huge impact on the economy and upon your property value. Many rookie appraisers who work for AMCs often violate the Uniform Standards for Professional Appraisal Practice (USPAP) and Fannie Mae guidelines because they figure comparable sales of the past three months (including short sales and foreclosures) as well as sales that were not arm’s length transactions into their evaluations.

Do AMCs Sacrifice Quality for Speed and Money?

I have also heard rumors from other appraisers that AMCs are telling their appraisers to just meet the unreasonable turn times at the expense of quality. Why would they do this? Simply so everyone from AMCs to their rookie appraisers can make more money. Unfortunately, as of right now, AMCs are completely unregulated and their only concern seems to be the bottom line.
To the casual buyer or seller, it might appear that AMCs are out to protect the consumer in regard to how they figure appraisals under HVCC law, but to anyone experienced in appraising, they are undermining the process, wrecking home values, and slowing economic recovery. To a trained eye, lower values seem to be a product of using unqualified appraisers who often have little to no knowledge of the local market.

Automated Valuation Models Use On the Rise

Last, Fannie Mae, some major banks, and other real estate-driven businesses have begun to embrace and use Automated Valuation Models or AVMs. AVMs can produce tainted results depending on the knowledge of the person inputting the data and the market parameters. AVM administrators will often insist on using foreclosures and short sales to find the fair market value of properties. But many “declining area” markets have a mixture of falling values and stable or even increasing property values in their neighborhoods. That matters little to AMCs. Some appraisers feel that AMCs are deliberately lowering values so their shadow inventory of foreclosures can be written off with less financial loss to their companies. If that’s true, isn?t this market manipulation by the banks and the AMCs? And at what cost to you the buyer or you the seller?
We’d like to thank for sharing today’s photo via the Creative Common’s License.

8 October 2009 ? Former 3rd Ward Alderman Dorothy Tillman played an integral role in opening Bronzeville’s Harold Washington Cultural Center in 2004, which relied on $7.7 million in public grants and employed Tillman’s daughter as its executive director. Shore Bank recently filed a foreclosure suit against the center in an effort to recover almost $1.3 million owed by the center. Tillman envisioned a revitalization of the 47th street area to its role as the “Chicago Blues District.” While efforts are underway to resolve the issue between the bank and the center, City officials have started investigating alternate uses of the building, which is currently available for use by artists and community groups. In the first half of the 20th century, the strip along 47th street was a hot entertainment spot for African-Americans, but the revitalization effort has slowed with the weak economy and Tillman’s defeat as alderman in 2007.

The Good News

Chicago's Air and Water Show will also be going up and down all weekend

As we reported two days ago, Chicago and Illinois are on a roll; we’ve had five consecutive months of increased month-on-month home sales. It turns out that we are not alone. Many news outlets are reporting that home sales grew in the second quarter in the majority of the country: 39 states saw housing sales increasing a combined total of 3.8% over the first quarter of this year. However, these numbers are about 3 percent below last year’s numbers. Idaho, Hawaii, New York, Wisconsin and Nebraska are doing quite well with 20 percent or more increases in sales. On the other end of the scale, Alaska, Wyoming, California, Colorado and Michigan have all dropped by at least 6 percent.

Bad News #1: Housing Prices are Down

Nationally 129 out of 155 metro areas have seen price drops with the median sales prices down almost 16 percent when compared to last year. Fort Myers, Florida was hit the hardest with prices down 53 percent. Other big price losers are Phoenix and Las Vegas. However, there are cities that are seeing price increases: Davenport, Iowa saw 31 percent increases and Cumberland, Maryland saw 22 percent.

Bad News #2: Housing Foreclosures are Up

More than one third of all sales in the second quarter were of foreclosures or distressed properties. Foreclosure tracking company RealtyTrac Inc. is reporting that one out of every 355 homes (a total of 360,149) received a default or auction notice or were seized last month. That is the highest the company has seen since it began keeping record in January 2005. This is the third record-breaking month they have seen in the last five months.

Economists Upbeat

National Association of Realtors® chief economist, Lawrence Yun is quoted as saying that the sales increases are, “a hopeful sign for the economy.” More and more economists are saying that the worst of the real estate recession is behind us even though foreclosures will likely continue to rise for the next year.

We’d like to thank cikaga jamie for sharing today’s photo via the Creative Commons License.

Chicago's Centenial Fountain on The Chicago River

Finally Home, a mortgage program designed to help Illinois residents buy a home or keep their existing homes from going into foreclosure, changed a key guideline that will allow more Chicago home buyers and home owners to take advantage this state program. The program raised the qualifying average median income (AMI) from 115% to 150%. In Chicago, a single person who earns $ $79,200 or a family of 4 earning $113,100 now can qualify. This program helps borrowers who cannot obtain conventional, sustainable mortgages from credible lenders because of factors such as bruised credit or a high debt-to-income ratio.

Officials Listening to the Realtor^® Voice

This change resulted from when Ben Noven, a representative from Illinois Treasurer Alexi Giannoulias?s, attended the Chicago Association of Realtors® Government Affairs meeting as one of its monthly guests. He spoke and then listened to concerns of the committee. The way the guidelines were written, the program was ineffective for Chicago due to income levels and property values. By raising the qualifying AMI, many more Chicago residents will be able to take advantage of this program and keep people in their homes as well as creating more new homebuyers.

?Over the past year we have had the opportunity to have several guest speakers at the C.A.R. GA meetings, primarily public officials and civic thought leaders who are listening to REALTORS® about their issues and real sharing is taking place,? said Brian Bernardoni, C.A.R. Government Affairs Director, “Providing opportunities for sharing of ideas beyond just practitioners but to decision makers was something leadership and Chairman Bob Floss asked of us. I am happy that our input is respected and these important efforts are making a difference.?

As the upcoming chairperson of the C.A.R. government affairs committee I look forward to participating in continuing efforts to create opportunities that result in helping our members and the communities they service.

We’d like to thank Payton Chung for sharing today’s photo via the Creative Common’s License.

29 July 2009 ? PrivateBank & Trust Co. has filed to foreclose on Pearson on the Park (222 E. Pearson St.) a 219-unit condo conversion that as of late has been struggling to sell its remaining twenty percent of units. According to records found in MLS (Multiple Listing Service), three developer units have sold since the beginning of the year. In order to counter this significant slow-down in sales, the developer, Ganesan Visvabharathy, has reduced prices in the past few months by an average of 13%. According to records in the MLS, it looks like that has resulted in one unit going under contract.

According to today?s Crains Chicago Business: The developer paid $46.6 million for the apartment building in July 2005. He borrowed $52.5 million from Hypo Real Estate Capital Corp. and $7.5 million from American Mortgage Acceptance Corp. to finance the purchase and convert the apartments to condos.

The loans came due in August of 2007, and he refinanced the development with a new $17 million loan from PrivateBank. To secure the loan, the developer, pledged 55 acres of undeveloped land in downstate Mount Vernon and signed a personal guarantee. The loan originally matured last November but was extended to March. The developer asked for another extension, to March 2010, however, the bank just wants its money back.

7 July 2009 ? More foreclosures are to come. While the housing market has been showing signs of stabilization, we may see another surge of foreclosures before the end of summer, according to several major banks. Why now? Since the end of last year many lenders have held off on foreclosure proceedings, instead offering loan modifications made possible by President Obama?s home-stability plan, to qualified borrowers. But as these programs expire, many lenders have indicated that they will move aggressively to clear huge backlogs of delinquent mortgages. Additionally, with layoffs still on the rise, the pool of buyers qualified for modifications keeps shrinking. Obama?s administration has indicated that they are unlikely to implement another moratorium. This potential dumping of foreclosed properties into the inventory pool may counteract the balancing of supply and demand that has driven market improvement over the spring months, and could drag prices that were slowly improving in some areas back down.

22 June 2009 ? Signs are appearing that both inventory and pricing in the housing market are starting to level. Banks modifying existing mortgages are keeping people in their homes who thought they would have to sell. A large number of foreclosure units will not be hitting the open market as reported in Friday?s Chicago Tribune. Bank of America’s REO (bank owned property) department  will be working with City of Chicago?s Department of Community Development through the Neighborhood Stabilization Program grants from the U.S. Department of Housing and Urban Development. (Bank of America recently acquired Countrywide Bank.) Developers are renting rather than selling new construction and conversion buildings. This trend is expected to continue which will remove hundreds, eventually thousands of units from the area marketplace.  The decrease in number of market priced, short sale, and foreclosure units will contribute the stabilization of housing prices.

So, you are facing foreclosure, and are worried and scared and don?t know what to do? Well, you are not alone. Millions of people nationwide have been foreclosed on or will be soon. There?s been all kinds of blame and finger-pointing (see my Who?s to Blame post for further info on that), but that’s not what this article is about. Something happened, and you got behind on your mortgage (and surely a lot of other things), and now you?re in a pickle.

What is foreclosure?

You Can Push Back on Foreclosures...Despite What You're Told

Foreclosure, or FC for short, is when a bank or lender takes steps to take your house away because you have not made the payments. You took out a loan, and for whatever reason fell behind on your payments, and the bank is trying to cut their losses by taking the house and selling it. It?s perfectly legal, and although it may appear that they are your nemesis, they aren?t necessarily the bad guys. I?m not taking the banks? side or defending them, I?m just telling you that they are in business to make money, like any business. Some time ago, you signed a promissory note saying you would send them a check every month, and for whatever reason, you couldn?t hold up your end of the bargain. I?m not here to judge; it happens to a lot of people, but if you don?t make your payments, they get to take your house. Maybe it?s not really your fault, and there were circumstances out of your control, but that?s just the way it is.

What is the Foreclosure Process?

I want to start off by saying don?t panic too soon. Some people think that if they are 15 or 30 days late on a payment, the hammer is going to get dropped on them, but this just isn?t so. Banks don?t want to foreclose on a house. Almost all of the time, they are going to lose money on a foreclosure. They would much rather get your monthly check and go about their business. Banks don?t want to take your house; they have to take it because they aren?t getting the money that was promised to them.

Typically, the foreclosure process doesn?t get started until the homeowner is 120 or 150 days past due. So, if you become 30 days past due, but keep sending in one payment every month, that is called a ?rolling 30?, and you honestly aren?t in any risk of foreclosure at that point, despite what the schmuck from the collections department is telling you. I have heard of times when a homeowner is 60 days down, and they offer up one month payment, but the lender refuses it. If you are 30 days down, they may take only one payment, but once you become 60 days delinquent, the answer is ?No, you cannot give us one payment, you now owe us two, and it?s two or nothing.? This one has always mystified me; it just doesn?t make sense. So, the moral is, if you can prevent becoming 60 days late by hook or crook, do it. I don?t want to throw out bank names for fear of getting sued for libel or slander, but some of the big names are guilty of this.

Try to See Trouble Coming Before It’s Too Late

If you had some unexpected expenses, and it looks like you might not be able to make a payment, but you are still working, and you aren?t late yet, and your credit is still OK, you can possibly refinance. There are programs out there for people who have current loans with Fannie Mae, Freddie Mac, or FHA that allow people to refinance with little or no equity. You do need to have a job, though. If it?s the end of May, and you don?t think you are going to be able to make you June payment, call to do a refinance NOW. Even if you can only lower your rate and payment just a little bit, you can likely skip one or two mortgage payments, maybe get an escrow refund, and have a new, lower payment. It may be just enough of a shot in the arm to keep out of trouble.

How Can I Fight Foreclosure?

So, 120 days passes. You get a knock on the door from the sheriff, or maybe a bonded messenger because there are too many being served for the sheriff?s department to handle. This can be a scary moment and very intimidating. ?Are you Joe Homeowner?? he asks. ?Umm, yes I am,? you reply. He hands you the envelope with court papers and your heart sinks. Maybe you want to cry. This would be one of the times that it is OK for a grown man to cry. After you are done sulking, inevitably you will say, ?What now?? That?s what I want to help with.

Sometimes the papers will have a court date already assigned. Most of the time, it will give you 30 days to file a response with the court. And then if a response hasn?t been filed (it will cost over $100 to file, by the way), the plaintiff (bank and their attorneys) will file for a default judgment of foreclosure because of a failure to respond, which you will get a copy of, along with the date and time of the court hearing. GO TO YOUR COURT HEARING. On your first time through, the judge will almost always grant another 28 or 30 days continuance to respond, but usually only once.

So what kind of ?responses? can you file? Well, I want to start off by saying that I am not an attorney, but I know what I know because I talk to a lot of people, and kind of know the ropes. Two of the most common, and most effective, are alleging RESPA violations, and requesting that the servicer, ?produce the note,? which I will get into shortly. There are many things that can count as RESPA (Real Estate Settlement Procedure Act) violations, many of them small technicalities, but enough to help your case. I can tell you from experience that most loan officers aren?t terribly detail orientated. This means there can be small mistakes on your paperwork you can use to your advantage. The documents you?d likely want to focus on are the Truth-in-Lending disclosure, the Good Faith Estimate, the Servicing Disclosure, and the HUD-1 Settlement Statement. If you are going to try this route, it may be wise to get an attorney, as they will know what mistakes are ?fatal blows? and which ones aren?t. These mistakes are more common than you might expect.

If you do nothing, a default judgment of foreclosure will be entered. With the judgment comes a 90 day ?redemption period?, meaning that you get 3 months to get caught up, should you win the lottery, get a big bonus, or maybe an inheritance. Assuming you haven?t gotten any windfall, after the 90 days is up, they can set a sale date for your house to be sold. They must give you a minimum of 60 days notice prior to the sale date. After the sale you have a minimum of 30 days after to get out, or risk being thrown out, which you really, really don?t want to happen. If the sheriff knocks on your door with an eviction order, you have about 15 minutes to get your bare essentials, and they change the locks, and put your stuff in storage, which you can pick up later. This is a very ugly scene you want to avoid. So, from the time you get papers, you should have a minimum of 7 or 8 months to get out (30 days to file a response, 30 days continuance, 90 days redemption, 60 days for sale, and 30 to eviction), and like I mentioned earlier, you don?t get papers until you are 4 or 5 months down, so you are probably looking at a year or more from the time you made your last payment until you have to get out. Another sad fact is that after foreclosure, many houses sit vacant for a year or more. There was even one non-profit agency advocating the evicted break back in and take back their house because it ?s better for the neighborhood to have an occupied house than a vacant house. Not that I?m recommending anybody do anything illegal, but if you resume residence, and can prove it (with utility bills and such), they have to go back through the whole eviction process again, even though the house isn?t yours anymore.

Produce the Note Defense

The other defense I like is the ?produce the note? strategy. As you probably know, your mortgage note can, and probably has, be sold one or more times. A common scenario is you close with mortgage company XYZ. Within the first month, they sell the servicing (who takes your checks) to mortgage company ABC. ABC might sell it again to mortgage company DEF. Now, theoretically, all the paperwork gets moved with the sale or transfer. But, in reality, many times it does not. And, even if it does get transferred, it may be lost, or may be stashed in a warehouse with tens of thousands of others, and very difficult to locate. There are a few steps to this process. First you have to mail a legal request to the lender and their attorney to ?produce the note,? and file this request with the county. After that you wait 30 days and file a ?motion to compel? asking the judge to order the bank to come up with the original promissory note. They then have 30 days to produce it. If this is done before the judgment of foreclosure, it may not make it to foreclosure. There was a story on TV about a lady who was basically living free for 2 years because the lender couldn?t come up with the note, and about a judge who threw out many foreclosures because of this. They have to prove you owe them the money. If you do this after the judgment has been entered, and the note is not produced, you may have to file an appeal, or a motion to vacate the judgment, or a motion for a stay on the sale and eviction. If the judge grants a stay until they can produce the note, you are still technically ?in foreclosure,? but your house won?t get sold, and you won?t be evicted. It?s sort of ?in limbo,? but it beats getting kicked out. And, if they do produce the note, you go back to the 60 days notice before sale, and another 30 to vacate, so it?s not like they can just come up and throw you out with no warning. There is a great site that details how to mount this defense, and has template forms you can fill in.  Again, you can probably do most of this on your own, but it?s not a bad idea to hire some legal help.

Loan Modification Can Help

One other option may be loan modification. This is where a lender agrees to modify the original loan terms to allow for you to stay in the home under new terms. These can be hard to get, and I have heard stories where a servicer has agreed to a modification over the phone, the homeowner has signed the papers and sent them in, but their house has gone into foreclosure or continues through the process in the meantime. The right hand may not know what the left hand is doing, so don?t put all of your proverbial eggs in the ?loan modification? basket, because the lender likely isn?t. You can try to make a loan mod go through, but don?t ignore the above advice either. It?s also noteworthy that above defensesw (produce the note and RESPA violations) can be used as leverage to force the bank into a modification.

Ownership Defense

Another option is called term ownership. It?s something between renting and owning, and relies on an obscure aspect of the law known as conditional ownership. A good description of the system can be found at www.termownership.com. Stephen Weeks is the attorney that developed this defense. I?ve corresponded with him a bit, and his a good guy, and very knowledgeable. He can be contacted at Weeks@WeeksLaird.com

Final Option: Bankruptcy

One last option is bankruptcy. There are two kinds of bankruptcy, or BK. One is a Chapter 13. This is where the court mandates a repayment plan over the course of 3 or 5 years, and all of your debt is included. You must prove the ability to repay for the court to approve a Chapter 13. And if you fail to make the required payments, the bankruptcy can be dismissed, and the foreclosure is back on. Most BK attorneys will give a free consultation to those interested in filing. Chapter 7 is where all of your ?unsecured? debt (credit cards, etc-not mortgages or car loans) is wiped out. You must be current on your mortgage if you plan on keeping your house, and there are very tight income requirements now (as opposed to a few years ago) for filing Chapter 7.

As you can see, there are several ways to help you fight foreclosure. I hope I?ve given you a better understanding of the process of foreclosure, and maybe some hope for those of you in trouble now. I also want to ask any of you who are behind on your mortgage or facing FC to take a hard, honest look at your situation. For many people, if you lost your job and have been out of work for several months, or had some sort of medical problem where you couldn?t work, but now are back on track, fighting to save your home may be a good idea. For some, if you are just in over your head, you have to ?know when to fold ?em?. Don?t let your emotional attachment to your house cloud your logic. Sure, you love your house. It?s your home. You have memories built there. But if you are making much less now than you were previously, or maybe just bit off more than you could chew, you might want to consider the steps here as a stall, so you can save up as much as possible so that when it comes time to move, you have money for a security deposit and all the other costs associated with moving, and be in a better position when it?s ?go time.? Yes, uprooting your life and you family to move to a new (and probably much smaller) place is no fun, but having to move with no money saved up and no plan in place is even worse.

I sincerely wish the best for anybody reading this. I know we are living in trying times right now.

We would like to thank redjar for sharing today’s photo via the Creative Commons License.

Ok, so just about everybody has heard about loan modifications, or loan mods for short. They are also called loan workouts, loan restructuring, among others. I’m going to explain what types of loan mods exist, and who can or can’t likely get them.

What kind of loan modifications are there?

The stress of problem mortgages can be overwhelming

There are a few different flavors.

Tack it on the back A common one is for people who are behind in their mortgage payments right now, to take the past due and put it on the end of the loan. Let’s say somebody has a $200,000 mortgage, and is behind three payments at $1500 each. If there was a temporary reason the homeowner got behind, like a job loss, and now they are making income again, the bank can put the past due at the end of the loan and give the homeowner a fresh start.

Recasting If somebody had an adjustable rate mortgage (ARM) that went up after 2, 3, or 5 years, and the payment jumped up, the lender can “re-cast” the ARM for a longer period to keep the payment the same. Let’s say somebody had 5.5% on an ARM, and on the adjustment date it went up to 7.5%. Depending on the loan size, the difference can be hundreds of dollars monthly. This can obviously cause some hardship for the homeowner, especially if they are making less now than before, like much of the country is experiencing. What the bank might do in this case is either “fix” the rate for another 2 or 3 years so the payment stays the same, or just convert it into a fixed rate at the same rate. These types of modifications are almost always contingent on the homeowner having good payment history prior to the adjustment.

Debt forgiveness A third type is debt forgiveness or principal reduction. This is common in short sale scenarios. Let’s say somebody owned a house that was once valued at $300,000. They had 90% LTV financing for a loan amount of $270,000. And now they have to sell the house because of job relocation or because their income level has changed and they need to downsize. But the problem is that the house that was once worth $300,000 can now sell for only $240,000 (a 20% drop from peak value is not uncommon these days). The bank knows that if they have to foreclose on the house, it would sell at auction for much less than the $240,000, so they agree to accept a smaller payoff because it is a smaller loss. Short sales are also common for somebody facing foreclosure for the same reason-the bank is taking the lesser of two evils. If a $300,000 house goes into auction, it may sell for $170,000 or $200,000, but if the homeowner sells it, it will go for much higher, and the bank will save thousands in principal and legal fees.

Payment or rate reduction One last type is payment reduction or rate reduction. Again, if somebody is struggling, but the lender believes they could stay current with a lower rate or smaller payment, they might agree to it because it is the lesser of two evils. They are making less on the loan, but it beats foreclosure. If somebody is making less income now, the bank may agree to lower the payments to help the homeowner stay current. Another way to lower the payment is to stretch out the note for 40 or 50 years. Many banks will do this in lieu of lowering the interest rate because then they can lower the payments to help the homeowner and still make the same interest. In a settlement with the State of Illinois, mortgage giant Countrywide had to re-cast all of its stated loans that their retail branches originated to do the new payments on full documentation, and give homeowners payments they could actually afford. There were people who got 2 or 3% over 40 or 50 years because of this.

But why can’t I get a loan modification?

So here is the hard pill to swallow: most borrowers who have been perfect on their pay history cannot get any help. “But I pay my mortgage on time, why won’t they help me? That doesn’t make any sense!” Oh, if I only had a nickel…

Banks, lenders, and investors (who buy mortgage paper) do it to make money. It’s a business. They don’t care about you, or your home, or your kids’ college fund. They care about the bottom line. I’m not bashing them; that’s why any business exists, be it insurance, car dealers, or any of the hundreds of retailers at the Woodfield Mall: to make money. UNICEF doesn’t do mortgages. Once you understand this, you’ll understand why you may or may not be able to get a loan mod. If the bank doesn’t see you as a risk for default, they won’t do a loan mod, plain and simple. If you make timely payments, and have been doing so, and are still living in the house, your odds of getting a loan modification are slim and none. (And slim just walked out the door.) Because, “I want a lower payment, and because I don’t want to be upside-down on my house,” are not compelling reasons for a lender to do a loan mod. I’m sorry to say it, but that is the harsh reality.

And loan mods will likely not be offered to somebody who has a lot of equity. If you owe $100,000 on a house that is worth $250,000, and you are having trouble with the payments or facing foreclosure, you are also unlikely to receive help. Why? Because if that house goes into foreclosure, the bank will get all of its money and then some. If that house goes to auction, it might fetch $135,000 or $150,000, more than enough to cover accrued interest and legal fees. Lenders and investors will take the route that is the most profitable or causes the least loss. Again, it’s a business, and they make business decisions. The president wants to stop foreclosures, the lenders just want to stop their losses.

Loan modifications often depend on your lender

And it matters matters a lot who has your loan. If yours was a Fannie Mae or Freddie Mac “conforming” loan, you are more likely to get a loan modification. This is because Fannie and Freddie are government-controlled; they are better able to absorb losses, and they are under pressure to help stem foreclosures. And if you have a HUD-backed FHA loan, your odds are even better. FHA rules state that a lender MUST try to work something out before foreclosure. Since the loan is insured by HUD, they can call the shots. Now, a FHA lender may not offer a modification up front, but if the borrower asks for it, they are obligated by law to try to come to some resolution before foreclosing. This certainly slants in favor of the homeowner, but most people aren’t aware of this, and just throw their hands up in defeat. And certain lenders, including Countrywide and Chase, have made headlines for their efforts to try to stem foreclosures.

What if your loan isn’t a Fannie Mae, Freddie Mac, or FHA loan? Well, unfortunately, your odds are much worse. If you have a “sub-prime,” “portfolio,” or “alt-A” loan, you will likely only get a modification if you fit one of the above described scenarios. Lenders and investors have taken huge losses on these types of loans, and if they aren’t at risk of taking further losses, it is unlikely you will be able to accomplish any kind of loan modification whatsoever.

Don’t kill the messenger, I’m just telling you like it is.

It looks bad for me getting a loan modification, but I want to try. What do I do?

This part won’t make me any friends. I’m sure you have probably heard of loan modification companies. Many of them are very good at what they do. But, they aren’t doing anything for you that you likely couldn’t get done yourself. As a loan officer, I get approached by loan modification companies all the time, but I can’t, in good conscience, charge somebody (who is already in financial trouble and doesn’t have much to spare) for something they can do themselves. Now, I want to forewarn you, it will be an uphill battle regardless of your situation. If you think it is worth it for somebody else to fight for you so you don’t have to worry about it, then a loan modification expert may be for you. When you call, you don’t want to talk to the customer service schmuck. He can’t do anything for you. You want to get to the loss mitigation department. It’s an entirely separate department from the general customer service. They should be able to give you a phone number and an address for them. Loss mitigation is the department that tries to minimize losses, and that’s who you want. The best advice I can tell you is to be the “squeaky wheel.” Call them and write them. And call again and write again. You may spend an awful lot of time on hold. You may wait days or weeks to have a call returned. It absolutely will not be easy. But, if you are talking to right department, and are persistent-call, write, fax, send smoke signals if you think it will help and you fall into one of the groups that should quality for a loan mod, you should eventually get it done.

Thoughts on loan modification companies? DON’T pay up front

I have a few final thoughts on loan modification companies. This is for the most part uncharted territory, and the rules and regulations around them are murky at best. Sometimes the law has to catch up with modern day reality. First and foremost, DON’T pay huge fees up front. I have read a press release from the Illinois Attorney General’s office saying that it was illegal for loan modification companies to charge anything up front, and that they can only get paid once the mission is accomplished. I don’t know where the legal battles have ended up, but it seems fair to only charge people that you accomplish something for, or to keep the up front fees modest. I have heard of companies that charge a smaller fee up front, like $300, and a larger one once it is worked out. I have heard of companies charging $3500 or more for their services. The going rate seems to be around one mortgage payment, or maybe one and a half. Like almost all things in life, these fees are negotiable. The people who do loan mods are making commission, I promise you. Not that commission is a bad thing; loan officers and real estate agents typically get paid commission also, but you should know up front what you are dealing with. I heard one story where a homeowner was asked to pay a few thousand up front, but it would be refunded if they couldn’t complete the loan modification for him. What?! Why would you take anything at all up front then? That makes no sense to me.

Bottom line is: do your homework. Just like if you were going to buy a car or get a mortgage, you would do some digging, ask some questions, get some advice, and maybe shop around some. If you are going to hire a loan modification guy, do the same thing.

I wish the very best to anybody reading this in these trying times.

We’d like to thank spaceodissey for kindly sharing today’s photo via the Creative Commons License.