Foreclosure Docket

Short Sales and Workouts - Fannie and Freddie Increase Incentives to Servicers

Who'd a thunk it!

Freddie and now Fannie seem to have figured out that if they actually pay servicers to do workouts and short sales they might increase their popularity with the companies responsible for handling these operations. Before going into what's wrong with these new programs, let's be positive.

At least they are trying to do something!

We'll defer discussion of the extension of time prior to filing for foreclosure till the next post. Looking at the programs by Loss Mitigation Strategy we have the following:

                                                        Fannie Mae                           Freddie Mac

Repayment Plans     Previous Policy      $200                                   $250

                              New Policy            $400                                   $500

Workouts                Previous Policy         uk          a                       $400

                              New Policy            $700                                   $800

Short Sales              Previous Policy        uk           b                    $1,100

                              New Policy         $1000-$1500 c                    $2,200

Deeds-in-lieu           Previous Policy       uk           a                             uk      a

                              New Policy          $1,000                                       uk      a

Fees allowed            Previous Policy        uk          a                             uk      a

                               New Policy            $ 0 uk       a                            uk      a         

Notes:                     a-Previous Policy - unknown or unclea

                              b Previous Policy - not described, prior policy unknow

                              c No definition as to how fee is to be determined Repayment Plans-

Why Fannie and Freddie feel the need to offer incentives for repayment plans in the first place is a mystery. Servicers pushing repayment plans to homeowners has been widely recognized as damaging to distressed homeowners. Why would Fannie and Freddie pay incentives for these at all in the first place, much less double the incentives.

There is a small minority of homeowners for whom repayment plans are appropriate, but they are in fact the favorite alternative "offered" by servicers. As most know who assist homeowners with workouts, including many of the homeowners unfortunate enough to have had such a plan foisted on them, these repayment plans are initiated by the servicers "collections" departments.

The primary goal appears be to extract as much cash out fo the homeowner as fast as possible. The are not created to assist homeowners get over a difficult financial period. In fact, most homeowners fail to complete these plans for obvious reasons.

Don't believe it? The typical plan will require thousands of upfront payments including, attorneys fees, of arrearages and take the balance of mortgage payments in arrears , divide it by 3 or 6 and add it ot the homeowners regular payments. Servicers seem to love repayment plans.

They employ the collectors to fend off borrowers who are really seeking a reduction in their payments and treat them to manhandling by "collectors".

Workouts - Despite a lot of hype, servicers, have not had a strong track record of offering workouts. I think this is primarily because they have been very successful in pushing homeonwers into repayment plans instead.

So, increasing, strike that, creating incentives for workouts is a step in the right direction. (Apparently there were no incentive paid to servicers prior to this new policy). The way it is structured actually makes some sense, or at least it would if Fannie didn't offer more up from for repayment plans.

Apparently the servicer will be offered $200 to get the borrower signed up for the plan and an additional $500 if the borrower makes the first 3 payments.

Lender fees for workouts-The problem with workout fees from the borrowers standpoint, is that they may have difficulty coming up with the upfront fees demanded by the servicers. On the other hand, eliminating, by eliminating all lender upfront fees (not all ask for them, but certainly some borrowers can reasonably pay them) takes with one hand what was given with the other.

It might have made more sense to limit upfront fees to $1,000 or $1,500. Eliminating them entirely will undoubtedly take away the incentive for workouts for at least some Fannie loans. After all, where the lender may have previously collected $1000 to $1500, they will now only receive $200 from Fannie for getting the borrower signed up for a workout.

Freddie has doubled their incentive for workouts to $800. Again, this would make a lot more sense if no, incentive was offered for doing repayment plans.

Short Sales - Freddie has increased their incentive to $2,200 from $1,100. Hopefully non Fannie Mae Lenders will increase their incentives to servicers, too. Fannie doesn't say so, but it is hard not to conclude that they had no incentives to servicers for doing short sales previously. Now they are offering $1,000 to $1,500 to servicers doing short sales.

A little cognitive dissonance here: Fannie came out with a policy in June of this year enabling homeowners who do short sales to qualify for a new Fannie Mae loan in as little as two years. At the same time, they announced that homeowners giving deeds-in-lieu of foreclosure would have to wait a minimum of 4 years to qualify for another Fannie Mae loan.

If Fannie is clearly telling homeowners they prefer short sales to deeds, their policies for incentives to servicers should be consistent with that policy. In other words if the waiting time for a deed-in-lieu is twice as long as for a short sale, wouldn't it make sense that the incentive is at least twice as much for a short sale as for a deed-in-lieu?

After all, the reason for the distinction in the first place is that Fannie knows they lose considerably less on a short sale then they do when there is a deed-in-lieu. In fact, Freddie apparently offers no incentive at all for deeds-in-lieu.

"The Result of a Foreclosure or Short Sale is Basically the Same" NOT!

The quote in the title for today's post is found in Elizabeth Razzi's column of July 22nd in the Washington Post.  (When I figure out how to get a link to it, I'll do so, so that you can read it yourself.)  The quote was presented more or less as a statement of fact.  It disturbs me greatly to see someone with such a wide audience disseminating, I'll put it diplomatically, mis-information.    This is information which many distressed home owners will rely on, no doubt, to make decisions about their houses. 

Leaving aside the jabs at paid consultants, below are the essentials of my reponse to this Column.  You'll get a pretty good idea of how I view the Loss Mitigation from the Borrowers side after reading this:

1. The column states: “The result of a foreclosure or a short sale is basically the same”
   1. Absolutely untrue. Fannie Mae has drawn a clear distinction between how they view Short Sales, Deeds-in-lieu of foreclosure, Foreclosure and Bankruptcy. 
   2. Effective June 25^th, 2008 per Fannie Mae Announcement 08-16 :

                                                               i.      Time before Fannie Mae will consider Lending to an applicant who has had a Short Sale – 2 years

                                                             ii.      Time before Fannie Mae will consider Lending to an applicant who has given a Deed-in-lieu of foreclosure – 4 years

                                                            iii.      Time before Fannie Mae will consider lending to a borrower who has had a foreclosure – 5 to 7 years.

2. The column states “A foreclosure and short sale inflict equal damage to your FICO score.  Either will make you ineligible for three years for a mortgage insured by the FHA.”
   1. Credit evaluation regarding short sales, foreclosures etc. is highly dynamic.  The implication is that because the big three don’t currently distinguish between Short Sales, Deeds-in-lieu and Foreclosure they’ll never make a distinction.  Given the size and scope of these problems and as reflected by Fannie Mae’s recent actions referenced above, it is extremely likely credit agencies will change their reporting and scoring for the different ways the home owners deal with default.
   2. HUD makes clear their preference for resolution to a homeowner’s inability to pay their mortgage in HUD Mortgagee Letter 00-05 as follows:  “pre-foreclosure sale (“PFS”) is preferable to a deed in lieu (“DIL”) of foreclosure.”
   3. Elsewhere the Mortgagee Letter states: “Lenders may not initiate foreclosure until all loss mitigation options have been considered.”   And “DIL is preferred by HUD (over a foreclosure) because it avoids the time and expense of a legal foreclosure action…”
   4. As far as HUD is concerned, if the homeowner can’t afford to make their payments and other Loss Mitigation options won’t work their preferred outcome in order is as follows and they clearly don’t consider a Short Sale and Foreclosure to be “basically the same”:

                                                               i.     Short Sale (pre-foreclosure sale)

                                                             ii.      Deed-in-lieu of foreclosure

                                                            iii.      Foreclosure

HUD notes: The Department's recent Pre-foreclosure Sale Demonstration has confirmed the beneficial nature of the pre-foreclosure sale option for distressed homeowners, for mortgagees, and for HUD. 

3. “Probably the best solution if your finances haven’t disintegrated beyond rescue, is to work out a loan modification with your lender” 
   1. True without a doubt, but about as useful as throwing a life line to drowning man who’s unconscious and 10 feet underwater. 
   2. I am not suggesting that the homeowner shouldn’t have their finances evaluated for possible loan modification--we do this every day--but to present loan modification as the “best solution” without realistically addressing the circumstances of the vast majority of homeowners facing foreclosure is not particularly helpful..

                                                               i.      By the time most homeowners are facing foreclosure their finances have already disintegrated.  Typically in order to qualify for a modification, the homeowner will need to have excess cash flow (as much as 20%) above the amount of their monthly expenses.  In other words, they don’t have enough money to pay their bills much less excess cash to be able to qualify for a loan modification. 

                                                             ii.      To suggest that the best option for a homeowner facing foreclosure or short sale is to pursue a modification demonstrates substantial ignorance of the financial state of the typical homeowner facing foreclosure.  We bought the hype for a while but have found that many lenders haven't substantially changed their approach to loan modifications. 

                                                            iii.      Attempts at loan modification will work best for homeowners who are not currently behind but facing big resets which will make it impossible to continue to make their payments.

                                                           iv.      Generally, the best case outcome for the typical homeowner in distress is likely to be a temporary forbearance, moratorium on payments or reduction in their interest rate.  Saying so and explaining how one achieves this result would be much more helpful than advising homeowners that their best option would be to seek a modification. 

                                                             v.      Regarding a homeowner’s ability to seek a modification themselves, of course they can--assuming they have large blocks of free time available to sit on the phone on hold.  For those who can’t or won’t, we offer a valuable service.  But most homeowners will never make it past the Collections Department gatekeepers to get to the folks who actually handle loan modifications.  We talk to homeowners on a daily basis that come to us because they have been totally unsuccessful in their attempts to deal with their lender directly. 

3. We’ve all heard the hype offered by the big lenders about how they are being more flexible in offering modifications.  While Fannie Mae has cranked up their loan modification efforts, most have not  Example: Aurora has indicated they have actually tightened their criteria for loan modifications from what they were earlier this year

                                                               i.      Ask almost any negotiator or loan modification specialist that actually evaluates and recommends workouts on behalf of the lenders, how many files they are handling.  Their answer:  between 100 and 300 files each

                                                             ii.       If anything waiting times are getting longer.  And as the column correctly pointed out, the countdown to foreclosure doesn’t stop (necessarily) while the homeowner waits for an answer

Short Sales - Why They Take So Long

Without diving too deeply into the detais, the investor groups that own mortgages that are being foreclosed on, rely on loan servicers to handle the pre-foreclosure sales (generally short sales). Servicers are severly understaffed with a typical "negotiator" handling in excess of 100 files at a time.  The question is why don't the servicers add more staff?  Why aren't the investors insisting that they add more staff?  Delay means their losses are mounting daily.

Buyers and their agents are becoming extremely gun shy of short sales, knowing it will probably be at least 45 days to get a yes or no on their bid and may well take 60 to 90 days or more.  Many agents counsel their buyers against pursuing short sales and many buyers no longer need to be told, they know from experience.

That said, many agents don't really know what it takes to get a short sale done, which exacerbates the problem.

Investors set their approval criteria for short sales based on discounts from appraisals.
However, there is clearly an added discount being taken by buyers now because of the time it takes to get a response, the odds against getting a favorable response and the additional loss in value the property incurs while the process grinds out.

The investors who own the mortgage don't seem to recognize the added discount.

Given the obvious losses generated by the inefficiency of the (pre-foreclosure) short sale process, it's hard not to conclude that the investors are waiting for the big government bail-out they anticipate will ultimately arrive.

Perhaps it will come after the passage of the pending Dodd legislation minimizing lenders losses at 30% of prinicipal to the tune of $300 billion of taxpayers money.  Oh, incidentally, the word is much of the original legislation language was provided by Bank lobbyists.

Once the lenders have gotten approval to foist their worst loans onto the taxpayers, maybe they'll start to unload.  After all, a 30% loss is way better than a 50% loss or more.

Mike Davis is a Loss Mitigation Specialist with Equity Loss Mitigation, LLC, a firm that specializes in Short Sale Representation, Loss Mitigation and Loan Workouts for borrowers as well as an Associate Broker with Davis-Resnick Group, LLC which is affiliated with Keller-Williams Crossroads in Annapolis, MD.

Short Sales, Foreclosure and Workouts and Fannie Mae

After a lot of time thinking about creating this blog, or more accurately procrastinating about creating this blog, I have...finally created this blog! 

My intent here is to provide comment, some entertainment but above all some useful information for home owners: those seeking loan workouts, those fearful of foreclosure and those facing foreclosure, and those considering shortsales and deeds-in-lieu of foreclosure.   You can check the bottom of this post to decide whether my bona fides for setting my self up to comment on these matters qualify me to...comment on these matters. 

If I am successful in accomplishing my aforementioned goal, I expect this will become a lively blog with comments by homeowners, real estate agents, mortgage brokers, investors  some of those folks who work in the Loss Mitigation and Workout Departments for Lenders and Loan Servicers and maybe even a Trustee or two. 

Ok enough of that.  Now some very important information.  This is big and I mean REALLY BIG NEWS for homeowners facing foreclosure. 

I learned somewhat belatedly today that a potential earth shaking policy statement was issued by Fannie Mae on June 25th.  (Learned courtesy of CinOC on the Short Sale Think Tank Forum on  www.easyhud.com, kudos to Chris Daigle.  As far as I can tell this is the premier site for investors for real short sale information without having to wade through some Short Sale Guru's "get rich doing short sales" pitch. )

So how did Fannie Mae announce this BIG NEWS?   Well they didn't buy TV ad's trumpeting the event, at least that I am aware of.  They did it the way large bureaucratic institutions usually do things, by issuing a bland policy statement. This earthshaking information is found in the Announcement 08-16 published by Fannie Mae at the end of June.   (link  https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf )

In brief the Announcement says the following:

Mr. Homeowner, if you do a short sale, we will let you buy another house in as little as 2 years. If, however, you give a deed-in-lieu of foreclosure to your lender, we will make you wait at least 4 years before you can buy another house.  Now, if you do nothing and wait for the house to be sold at the foreclosure auction, you will have to wait at least 5 years and maybe as many as 7 years before you can buy another house. 

(A little inside baseball: Fannie Mae has settled a raging debate among Investors as to whether there is an advantage to the homeowner to doing a Short Sale vs a deed-in-lieu of foreclosure or a fulll foreclosure sale.  No more debate:  Short Sales win hands down over deeds-in-lieu and full foreclosure.)

it makes sense that action taken to minimize the lender's loss (short sale) should be preferable to taking minimal action (deed-in-lieu), or no action (letting the house go to foreclosure).  But the credit reporting agencies heretofore have given no "credit" for having taken action to mitigate the lenders loss, reporting Short Sales, DIL's and Foreclosures identically.  Expect that to change.   

It is hard to underestimate as well as difficult to know the full impact of this distinction by Fannie.   Fannie, as the biggest purchaser of mortgages on the Secondary Marekt Set's the Standard (ever hear of a "conforming loan?  That means it meets Fannie Mae standards, and whether the loan is actually purchased by Fannie, the fact that it could be pretty much guarantees it's marketability.)

As far as unintended consequences of this policy go: let your imagination run wild.

One of the unintended consequences I anticipate stems from the work we do everyday with homeowners who are upside down on their mortgages and who are seeking modifications of their existing loans in order to hang on to their homes.  I believe many of these homeowners are afraid that if they lose the home they are in, by whatever means, they will never be able to buy another one.  In many cases, these homeowners are willing to put themselves under enormous financial and emotional stress working 2, 3 even 4 jobs in an effort to keep their homes. 

When they find out that they may be able to buy another home in as little as two years, I think we will see a tsunami of Short Selling (in case you don't think we've seen one already).  Hmmm!? maybe that will really be the bottom of the Sub Prime Mess.  

Think about it, though: Mr and Mrs homeowner are struggling to make payments they can't afford. Meanwhile their credit is getting hammered from various missed payments and they're borrowng from every place they can just to try to pay their mortgage.  Suddenly they learn they can dump their house which is worth $50,000 less than they owe, wait two years and buy a house that' will be worth what they pay for it.  What would you do? 

Mike Davis is a Real Estate Agent with Davis-Resnick Group, LLC in Annpolis Maryland affiliated with Keller-Williams Crossroads and does Loss Mitigation, Short Sales and Loan Workouts through Equity Loss Mitigation, LLC.  Mike has more than 20 years experience in Real Estate Sales, Managment and Business Operations.  You can reach Mike Directly at mdavis@equitylossmitigation.com