Short Sales and Loan Mods

Many homeowners are having trouble making their mortgage payments. They have three options – sell the home, let the home go into foreclosure or attempt to get some help from their mortgage lender.

Clearly, foreclosure is the least desirable option. It is definitely not in the best interests of either the lender or the homeowner.

If the homeowner is still employed but has had an income interruption or a drop in their income, they probably would like to retain their home. They may need their lender’s help to reduce the ongoing monthly payment. Or they may be able to start making current payments, but not past due payments that have accrued. They may need for their lender to defer those past due payments, or add them to the balance of the loan. If their lender agrees to any of those things, that is called a loan mod (slang for loan modification) or forbearance agreement.

If the homeowner has no foreseeable ability or desire to make mortgage payments, they may choose to simply sell the house. If the house is worth less than they owe and they do not have the cash assets to pay the difference between what they owe and the proceeds from the home sale, they have a problem. Responsible homeowners will contact their mortgage lender and ask if they will accept a mortgage payoff for the net proceeds from the home sale, rather than the full amount due. If the lender allows this, it is called a short sale.

A derivation of the short sale can be accomplished through refinance of the mortgage. If the value of your house has dropped below what you owe and you can find a lender who will refinance your loan based on the lower value, you can approach your existing lender and request a discounted loan payoff. If they are anxious to get mortgages off their books that have inadequate collateral, they might accept a short payoff. One of the recent housing stimulus bills created a program that allows FHA insurance for loans that are refinanced into a new loan based on a payoff discount from the existing lender. That is an example of this strategy.

I have spoken to many frustrated homeowners about this. For loan modifications and short sales, there is no standard that lenders must follow. Each lender can make their own decision based on the financial consequences to them. When a lender modifies a loan, they must record a financial loss related to the restructure of the loan. They will compare that loss to the amount they might lose if they foreclose on the home and sell the property. They will also assess the financial condition and prospects of the borrower to keep their end of the bargain – just as if they were making them a new loan. The loan modification terms to which they agree, if any, are primarily based on that assessment.

When a lender approves a short sale, they will compare the loss they will take – the difference between the full payoff and the amount they will receive from the short sale – to the amount they will receive if they foreclose on the home and sell the property. They also assess the amount of cash assets that the homeowner might have available to pay or participate in the loss. Their willingness to accept the short sale is primarily based on that assessment.

That is the cold, hard financial reality of the situation. However, lenders have social responsibilities and self-interests to preserve home ownership and home values. Due to the recent support that many lenders are receiving from the government bailout, that responsibility is strongly implied, if not mandated, by the terms of the bailout. For those reasons, there is presently a strong lender bias for approval of loan modifications and short sales. And many lenders have announced programs to help struggling homeowners.

A great deal of the frustration that I hear relates to the practical administration of the approval process for short sales and loan mods. This is a new phenomenon for most lenders. Their systems and past experience for handling large volumes of such requests did not exist twelve months ago. Lenders are also getting volumes of request from homeowners who are current on their mortgage, but are asking for help because their financial situation has deteriorated or will soon deteriorate. How does the lender fairly assess who needs help and who is trying to take advantage of the circumstances? All of these things often make lender reaction times, the clarity of their responses and the consistency of their responses less than perfect.

I have a friend who has his loan with a large national lender. A couple of years ago, he financed his home purchase with a fixed rate loan at about 11%. He paid a higher rate because his credit was spotty and he could not document his income. His house is worth more than he owes on his mortgage. But he is in the real estate business and his income has decreased. He is struggling to make payments, but has continued to make them on time. He feels he can continue to make the payments if his lender will lower his interest and payment rate. He is uncertain of his ability to make them at their present level. His lender recently announced a financial hardship plan to help their struggling mortgage customers. He called them for assistance. They told him that they do not presently have a program to help him because their financial hardship program is only for borrowers with adjustable rate mortgages who are facing large interest rate and payment adjustments, or for borrowers who are delinquent. He is neither, but he needs help. His lender will not help. Will he continue to “struggle through” and avoid foreclosure? I don’t know.

I have another friend who has been trying to buy a home from a homeowner who is requesting short sale approval from their lender. After waiting three weeks to hear from the lender, they simply bought another house. I don’t know what happened to the homeowner, but one can presume the home will now go into foreclosure.

Those are two very real examples of how complicated and frustrating this whole mess is. With all of that said, there is hope and there is movement. Lenders are gradually developing systems, initiatives and policies to help struggling homeowners stay in their homes. And they are coming to terms with the nuances of the situation. Thousands of mortgages have already been modified. And many short sales have been approved.

If you are a struggling homeowner and need a loan modification or short sale approval, don’t give up. Here are a few tips.

> Be patient. It will likely take at least two weeks for a response, and more likely four weeks. Plan accordingly.

> Document your situation and your request in writing. Get the name of a specific person or department to whom you can send the request. Don't just leave a message or mail something to a P.O. Box.

> If you are financially struggling, provide the lender with third party evidence of that – pay stubs, bank statements, tax returns, the tax assessed value of your home. Remember that you are asking them to help you, and it will require that they lose money. Build a good case for why they should do that. For instance, you might document that your house is worth “x” they will only get 80% of “x” if they foreclose and helping you out will only cost them “y.”

> Try to stay away from emotional statements and dwell on the facts. You must differentiate yourself from the thousands of request they are receiving. Be straightforward and back up all of your statements with written evidence and/or facts.

> If the person with whom you are dealing is not responsive, politely ask for the name of their supervisor and escalate the request.

> Be persistent.

> Ask questions and seek advice from professionals that you know - Realtors, attorneys, bankers, mortgage professionals.

> Look on the Internet for government agencies or consumer credit counseling agencies that will help or counsel you without charge.

> There are really only a few practical ways that the lender can help you - lower your payment by extending the term of the loan, lower the interest rate which results in a lower monthly payment or accept a discounted payoff amount through either a short sale or payoff from a refinance. In very extreme cases, they might agree to forgive part of the mortgage balance and lower your payment accordingly. But most lenders will consider the discounted payoff or balance forgiveness only as last options. To win that battle, you will need to build a very good case of financial hardship and evidence that their losses will be less than their alternatives.

In closing, be persistent and don't give up. If you have a valid and documentable hardship, there is a very good chance you can get help.