Short Sales and Loan Modifications: A Drag or Life Line for the Housing Recovery

By Logan Mohtashami
Benzinga Columnist
November 13, 2011 3:49 PM

It’s no secret that housing has problems. I am reminded of the old Pogo cartoon, “We have found the enemy and he is us!”

Solutions remain elusive. One of the reasons for this is that the “housing market problem” is really a host of problems.   A partial list includes home prices which continue to fall, a foreclosure backlog, high numbers of current delinquent homeowners, poor home sale figures, a weak general economy and the negative effect on consumer confidence because of all these problems. Each of these problems spawns more problems, until we have so many interconnected problems that who can count them all?

During a recent interview with Benzinga, I was asked what solutions would help the housing market.  My answer is the same as it was a year ago. De-leveraging takes time. We need time for the economy to recover, for the jobs picture to improve, and for all the homes in distress to either go though loanmodification, short-sale or foreclosure.

As grim as these so called solutions sound, the quicker this happens the better it will be for the economy overall. I decided to turn to housing professionals who are in the business of loan modifications and short sales and ask them what the main difficulties are in moving these processes along.

Here are four views from the those in the business.

Kristin Mancuso is the Operation Manager and lead short sale Negotiator at Hope Mitigation Rockford, Illinois

I believe some of the biggest problems with short sales today fall into the hands of the agent processing the file. Submitting a complete package initially is key. All documents need to be current! Then following up almost daily is huge…I have seen several agents make the mistake of submitting the package and then sitting back to wait for the approval. That is not going to happen without consistently following up with the lender and verifying the file is moving within their system. Another mistake agents make is they take no for an answer. The agent submitting the file should be confident in their offer and package. They are the real estate professional and yet so many of them allow the lender to tell them what the value of the property should be or what they will take as a payoff for the property. I don’t submit an offer unless I have comparables to justify that offer. Odds are the agent is negotiating this file with the lender whom is located in another state…it’s our responsibility to paint a clear picture of what this property is actually worth in our market. If we can do that, the short sale should run smoothly. Bottom line , agents need to be better educated in the short sale process. It really is rather easy but you must be diligent in your efforts at seeing the file through to approval.

The lenders are inundated with files; short sales and loan modifications. The only files that are getting attention are the ones that attention is being given too. The agent must have a good team and system in place in order to efficiently process these files within a timely manner!

Several agents will turn their files over to a law firm to negotiate the short sale were it takes 6 to 8 months mean while they go through several offers, lose value to the property and cause the home owners to incur more missed payments. This is a huge problem.

The agent needs to either become more educated on the lenders process with the different types of loans or interview the law firm or short sale specialists that is facilitating the short sale to ensure they will provide the best service to their clients.

Liz Ryan is a Top 1% realtor at Tarbell Realtors in Irvine, California

My main gripe right now is with inexperienced agents or unprofessional agents that don’t know how to navigate through this and end up misinforming their clients while wasting everyone’s time. I recommend mandatory training, not really sure what can be done with stupid agents we have always had them around just that when things are serious business like short sales to prevent foreclosures you shouldn’t have to deal with them.

Angelo Pilato is a Certified Mortgage Planner at Waterstone Mortgage Corporation in Gilbert, Arizona

My feelings on the present loan modification process are both encouraging and discouraging at the same time. Even though I feel the number of approved loan modifications remain lower than originally anticipated, I am encouraged by the sheer amount of recent home loan modifications that have been successfully processed and approved by many of the bigger banks.

I believe the increased number of completed loan modifications is partly due to improved systems and processes put in place by the banks and also in part by the assistance of non-profit organizations like N.A.C.A (Neighborhood Assistance Corporation of America) who assist today’s homeowner in the communication, rules and regulations side of the loan modification process. Loan modifications continue to help homeowners remain in their home and avoid foreclosure.

As for the discouraging aspect of loan modifications; For most consumers attempting to modify or short sale their home, they must first stop making payments for an extended amount of time before the bank will accept their loan modification or short sale submission. The banks call this a necessary requirement for most consumers in order to substantiate the homeowner’s financial hardship.

As a mortgage planner this is a devastating factor for my clients who attempt to purchase another home a year or two after a loan modification or short sale and is sadly turned down due to a tattered payment history and decreased credit scores. This factor is one of many slowing our current home sales and holding back our markets overall recovery.

Robin Milonakis is President of The Robin Milonakis Group and OC Asset Management & Broker Associate of Windermere Real Estate in Dana Point, Califonia

Major problems regarding loan modifications:

Plain and simple…its an unorganized mess that is very frustrating for borrowers.  You can call the bank 3 times and get 3 different answers.  They will request the same thing over and over and claim they never received it. One guy I know had a letter from Bank of America (BAC) asking him to send forms in by a certain date so they could proceed with his loan modification. They foreclosed on his home prior to the date on the letter and he found this out by someone knocking on his door saying he had just bought the house at auction.  There was a total lack of communication and lack of correct notes and follow through on the bank’s part whereas the borrower had extensive notes and a paper-trail showing that he had kept on top of it. Also very few borrowers can even qualify for loan modifications; The banks need to make the terms different and they MUST start taking the principle down.

The only real way we will be out of this mess if for all home loans to be taken back to a certain loan to value. The banks would be better off lowing principles, and doing loan modifications than foreclosing.  Its the same as a mortgage, they were able to originate the loans to begin with there is no reason why they can’t handle this, most the loan were all originated around the same time so they cant use the excuse that there are too many.

Most times when people try for loan modifications, when they get approved they payment isn’t much less and sometimes it is more because they include both principle and interest, insurance and taxes.

The bank are also telling borrowers they have to be behind to get approved which then puts them in default…the foreclosure process starts and then….short sale or foreclosure is in their near future.

Lastly there are so many scams out there. You can take care of the loan mod yourself for free however you have to keep emotion out of it which is hard since its your home. It’s like representing yourself in divorce court…. People are vulnerable and unfortunately crooks are taking fees and not doing any work.

As far as short sales:

There are some main nightmares going on right now.

The servicers (banks) are now using servicer’s themselves (3rd parties) to help process their short sales…there is a HUGE lack of communication between them and the investors. The investors control the foreclosure dates. Many homes have foreclosed because the servicer dropped the ball and forgot…or just plain didn’t request the postponement of the short sale. Banks are telling borrowers they can’t get a short sale unless they go into default…forcing them to go into foreclosure and then while trying to sell, even with an offer…they foreclose….The worst case I saw was one that was in escrow, approved and documents were being drawn and the bank foreclosed.

They only gave the seller 14 days to close. The buyer was FHA…the buyer in the middle of those 14days gave birth to a child. This home wasn’t even years late like most…just the 3 months and then the 21 days as CA law…it was so awful for everyone. The reason…. Servicer dropped the ball, lied about what she did and didn’t care at all about the file and never returned any callsthrough the entire process.

Another problem is the servicers keep asking for the same thing over and over again. Its extremely unproductive for everyone. Then after months of waiting, they will request something and if you don’t have it within 24hours they cancel your file and make you start over again. It’s absurd….you have to wait months but they can’t wait more than a day.

The people (negotiators) working the file…most have never even owned a homes. It reminds me of the height of the real estate market when every breathing person got a real estate license and thought they would get rich not knowing they actually would have to work. Now the banks have hired any Tom, Dick and Harry, some not even English speaking, to handle these files.  They don’t care at all and they don’t know what they are talking about.

Appraisal…I have no idea how they pick agents for BPO’s or appraisers but a lot of them are clearly smoking crack! The values they come up with are hilarious. One property had to have 7 valuations (it was a high-end property with a 2 million loss). The bank would not get it through their head that YES the market is what it is.

Another frustrating thing is the agents that have no idea what they are doing! It is selfish of them to take on such a task if they are not working in it everyday.  They are only hurting their sellers. The clients need a calming force behind them that knows what their doing.  The first thing the seller should ask an agent is how many short sales have you closed? How long have you been doing short sales? What banks have you worked with? And make them prove it.

One agent told my client before I took their listing that they were a short sale “specialist” but the agent had only sold one home that year.  Going to a seminar or getting a “certification” in something that doesn’t require one, doesn’t make you an expert… Experience does! And you must CARE! This is an emotional time for people. If you are not going to care about what they are going through refer it to someone that does.

So there you have it from 4 different housing professionals. Clearly, a more efficient process is the goal of everyone.  Streamlining the process for foreclosures and short sales would be a good start.

The only comment I would add is in regards to the loan modification  process.   There is a very practical and real reason that loan modifications have a high default rate. The borrower simply cannot afford to carry the housing debt either in the short, medium or long term.  Also allowing a homeowner to modify to an extremely low interest only loan very likely will just prolong the inevitable foreclosure or short sale because all interest only loans become a much higher principal and interest payment eventually.

The only loan modification which makes sense to me is to a 30 year fixed product with property taxes included in the monthly payment.  This will give the homeowner a realistic picture of what their home will cost them. Even with a 30 year fixed rate loan modification option, many homeowners who are underwater on their homes by 10 – 50 % will decide to take the hit on their credit and give their home up to foreclosure.

Some have called for a principal reduction program to assist those who are deeply underwater, in order to keep them in their homes.   The reason I believe this has not taken place, and won’t, in a large scale manner is because it will result in a huge upfront loss for the loan holder, be it Freddie, Fannie or the bank– and a federal subsidy would just be too expensive.

Additionally, the logistics of such a plan would be complicated and tremendously divisive. If President Obama thought this would be a good idea he could easily mandate the FHFA to write down principal on Freddie and Fannie loans immediately. However, spending billions of tax payers dollars to help underwater mortgages isn’t a political winner for the President and wouldn’t be supported by the Republican party either.

With regards to principal write downs of bank held loans, this issue has caused a major time delay in the robo signing settlement with the White House and State Attorney Generals. So if you are hoping a national principal write down program will help solve the housing crisis, I wouldn’t hold my breath.

The reality is millions of homeowners will eventually short sale or foreclose. Anything to help this process become more efficient will help housing recover faster. In regard to loan modifications, we need to focus on those borrowers who can actually afford to pay a modified principal and interest loan.

For those who can’t, let’s not waste resources delaying the inevitable and instead provide assistance on how to move on to their next stage of life– one without the huge burden of a big mortgage debt and unrealistic mortgage payments in relation to their real income. Any forward movement on this front will make short sales and loan modification less of a drag on the housing recovery.

Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California since 1988.