"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

Comments

[monster24]

Wow, that's a great article. I have been looking for such clear distinction a long time. This article should be printed and give a number of property and foreclosre lawyers - I will do so .. :-)
Cheers
Thomas
http://foreclosure-houses.submit-articles.biz/

[Jonathan Christopher]

Great post! I had no idea about that fannie mae announcement. Good to know, thanks.
Jon Christopher of Short Sale Way