THERE has been a lot of fines and penalties that the banks have assessed from all these claims of foreclosure abuses, including bungled loan modifications and wrongful evictions of borrowers who either current or still making their reduced modified payments. Federal regulators announced an $8.5 billion agreement with 10 mortgage servicers to settle these claims.
Consider the last big mortgage settlement. Last February, the federal government and 49 state attorneys general reached a $25 billion deal with the country’s five largest mortgage servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). They promised to help save homeowners from unnecessary foreclosure.
A year later, it’s clear that the settlement hasn’t worked as planned. Banks have dragged their feet in modifying first mortgages, much less agreeing to forgive part of the principal on homes that are underwater (As I have always written). In fact, the deal contained a few flaws. It has allowed banks to push homeowners into short sales; an alternative to foreclosure whereby the distressed homeowner sells the property for less than the debt that is owed. Not all short sales are bad — some homeowners are happy to walk away with the debt cleared — but as a matter of social policy, the program has failed to keep borrowers in their homes.
Another big problem involves second mortgages, which millions of homeowners took out during the housing bubble. It’s estimated that as much as a quarter of all mortgage debt in the United States is in the form of second mortgages. Some of these loans were taken out to finance home improvements; others were part of a sub prime product known as an “80/20 mortgage,” in which 80 percent of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage, often with a much higher interest rate.
The second mortgages have given the banks a loophole: each dollar a bank forgives goes toward fulfilling its obligation under last year’s settlement. But many lenders have made it a point to almost exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages.
Why would a bank forgive a second mortgage completely but move forward with foreclosure on the first mortgage?
Surprisingly, such a tactic often makes sense for banks. When a lender forecloses on a first mortgage, the house in question is typically sold at auction. If the house is worth less than the loan amount, the bank gets only part of its money back. But after the sale, of course, there’s no asset left to pay off any of the second loan. The holder of that second loan — which has lower priority than the holder of the first — gets nothing. But banks get to write off or charge off the second lien.
So a lender can forgive a second mortgage — which in the event of foreclosure would be worthless anyway — and under the settlement claim credits for “modifying” the mortgage, while at the same time it or another bank forecloses on the first loan. The upshot, of course, is that the people the settlement was designed to protect keep losing their homes.
The five banks covered under last year’s settlement are wiping out second mortgages in record number.
Hopefully if you are somewhat underwater with your property your lender has offered you a settlement to wipe out your second mortgage. Again, second lien released thru bankruptcy is still unclear to a lot of consumers, please double and triple verify with an actual attorney the process to get the second lien removed and released by your lender.
They say this is the year of the Short Sale, but I kind of think its behind us. I am seeing more and more homeowners selling their properties at a higher price and starting to buy move up homes. Which is also what I have been hoping for. These are homeowners selling their maybe smaller home and buying either bigger or in a different area to relocate to upgrade their living stats. We need more move up sellers to come out in droves to bring more inventory to the market. Housing Starts by homebuilders are also up meaning, homebuilders getting more permits to start to build more homes.
Pick up the paper you will see that mostly all news talking about Real Estate Housing Markets are on the positive side, home prices going up! We have been pre-qualifying more new buyers and move up buyers now compared to the past few years. Mortgage Financing is still a challenge but with the right tools there might be a home and a mortgage loan for you. You have to start to explore now even if you are not quite ready to buy. Know what to prepare for and how to prepare for a home loan that will be the smartest thing to do if you are not that ready to buy today.
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Please call Ken Go of 1st Innovative Finance for your Financing needs, Loan Modification inquiries and your Short Sale listing needs, Call (562) 697-7028 or write to [email protected]. Thanks so much.
