Why Lenders Push Homeowners Around

Why Lenders Push Homeowners Around

According to this Mish's Global Economic Trend Analysis article, Government and Lender Policies of Fear and Shame Help Keep Homeowners Debt Slaves, lenders offer loan modifications to financially distressed homeowners only if doing so financially benefits the lender (i.e. it as a business decision), while homeowners view walking away from their homes as a moral decision. The article concludes that the result of these differing view points is that homeowners are at a distinct disadvantage compared to mortgage lenders when trying to make sound financial decisions regarding their homes. Without going into all the details described in the article (if you would like all the details, I highly recommend that you read it), I would like to mention the following points made in the article.

• Homeowners heavily factor in personal responsibility and morality into their decision to keep paying their mortgages even though they are financially struggling and/or may owe more than their homes are worth (although this view is changing somewhat - see my blog post Underwater Homeowners Walking Away From Their Homes).
• Lenders are more responsible than homeowners for the real estate boom and bust due to lenders' superior real estate market knowledge including appraisals to determine property/collateral values, complex default models, deciding to require lower down payments even though the lenders knew that higher loan to value mortgage loans had higher default rates, etc.
• Due to lenders being more than 50% responsible for the housing bust, lenders should be willing to voluntarily write off some of the debt in order to reduce the amount that homeowners are underwater (i.e. negative equity), but they are not doing this since when lenders are trying to decide on how to best handle struggling homeowners, they do not factor in "responsibility" for the housing market crash.  Instead, lenders strictly desire an outcome that will maximize profits or minimize losses.
• Due to the difference in the way that homeowners and lenders view mortgage loan default (personal responsibility/morality versus business decision), mortgage lenders are able to manipulate homeowners to do things that are to the financial benefit of mortgage lenders, but to the financial detriment of homeowners.

The article states "First, lenders know that borrowers with high credit scores are unlikely to default even at high levels of negative equity. To modify loans for these homeowners would be to throw money away – and to encourage more homeowners to ask for modifications. Second, a significant number of homeowners who temporarily default on their mortgages "self-cure" without any help from their lender – though self cure rates have dropped precipitously in the last two years. Again, to modify the loans of individuals who would otherwise self cure would be to throw away money. Third, homeowners with poor credit, or who end up in arrears because of “triggering events” such as unemployment, divorce, or other financially devastating circumstances are likely to default on the modified loan as well. To modify loans for these individuals is to waste time and risk housing prices falling further before the lender eventually has to foreclosure and sell the property anyway. Given these economic incentives for the lender, a seriously underwater homeowner with good credit and solid mortgage payment history who responsibly calls his lender to work out a loan modification is likely to be told by his lender that it will not discuss a loan modification until the homeowner is 30 days or more delinquent on his mortgage payment. The lender is making a bet (and a good one) that the homeowner values his credit score too much to miss a payment and will just give up the idea of a loan modification. However, if the homeowner does what the lender suggests, misses a payment, and calls back to discuss a loan modification in 30 days, the homeowner is likely to be told to call back when he is 90 days delinquent. In the meantime, the lender will send the borrower a series of strongly-worded notices reminding him of his moral obligation to pay and threatening legal action, including foreclosure and a deficiency judgment, if the homeowner does not bring his mortgage payments current. The lender is again making a bet (and again a good one) that the homeowner will be shamed or frightened into paying their mortgage. If the homeowner calls the lender’s bluff and calls back when he is 90 days delinquent, there is a good possibility that he will be told that his credit score is now so low that he does not qualify for a loan modification. Most lenders will, in other words, take full advantage of the asymmetry of norms between lender and homeowner and will use the threat of damaging the borrower’s credit score to bring the homeowner into compliance. Additionally, many lenders will only bargain when the threat of damaging the homeowner’s credit has lost its force and it becomes clear to the lender that foreclosure is imminent absent some accommodation. On a fundamental level, the asymmetry of moral norms for borrowers and market norms for lenders gives lenders an unfair advantage in negotiations related to the enforcement of contractual rights and obligations."

The information above is why:

• Lenders take as long as they want to respond to homeowner loan modification requests.
• Lenders frequently reject loan modification requests.
• Financially struggling homeowners can frequently stay in their homes for many months despite not paying their mortgage loans (the lenders are frequently deciding to do nothing until foreclosure is absolutely imminent).
• Homeowners do sometimes walk away despite the personal responsibility - they get completely frustrated with the games lenders play.
• Walking away needs to be a viable option (albeit not the best one) for homeowners.
• Short sales and foreclosures will continue to increase.

If you are a Middle TN homeowner, property owner, real estate investor, home builder or real estate developer who cannot pay your mortgage payments (due to losing your job, having your income reduced, illness, health problems, adverse business conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), know that you will not be able to pay your mortgage, have defaulted on your mortgage, are already in foreclosure, or owe more than your home is worth, please contact me to discuss your options including a loan modification and a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home). I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I primarily help sellers (homeowners, property owners, real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in and around Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN).  If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

Underwater Homeowners Walking Away From Their Homes

Underwater Homeowners Walking Away From Their Homes

According to this New York Times article, Homeowners Walking Away, a study produced by the Financial Trust Index (a financial and economic research group formed by the Kellogg School of Management at Northwestern University and The University of Chicago Booth School of Business) states that more than 25% of foreclosures are actually strategic defaults where the homeowners walk away from their homes and mortgages even though they can afford to pay their mortgages. The Press Release, When Homeowners Walk Away: New Research Reveals More than 25 Percent of Mortgage Loan Defaults are Strategic, and Study, Moral and Social Constraints to Strategic Default on Mortgages, show that while most homeowners generally believe that walking away from a home is immoral, many will still do it if their negative home equity situation reaches a certain threshold. According to the Press Release "17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of the house." Given that information and the fact that a Deutsche Bank report published this past summer (See my blog post on the subject - SCARY STUFF: About half of U.S. mortgages seen underwater by 2011) predicts that about 50% of all US mortgages will be underwater by 2011, it is highly probable that the foreclosure crisis could actually accelerate in the near future rather then settling down as several organizations have suggested. I predict that there will be record numbers of loan modifications, short sales and foreclosures over the next 3 years.

According to the Press Release "People under the age of 35 and over the age of 65 were less likely to say it was morally wrong to default compared to middle-aged respondents." I guess that younger people and older people view the strategic default decision more as a business decision than a moral one. There are in fact consequences of walking away from your home and mortgage including damaged credit, which will make it very difficult to borrow money in the future, get credit of any kind, obtain insurance (insurance companies frequently check credit as part of the insurance underwriting process) and even get a job (employers frequently check credit as part of the job application process). Another pitfall of the strategic default is that you are open to a potential deficiency judgment where the mortgage lender could pursue you for their losses not recouped by selling your foreclosed home. For these reasons, I highly recommend trying a short sale instead of a strategic default.

If you are a homeowner in Middle Tennessee who cannot pay your mortgage (due to losing your job, having your income reduced, illness, health problems, etc.), or your home is already in foreclosure, or you owe more than your home is worth, please contact me to discuss your options including loan modifications or short sales. I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I serve real estate owners, homeowners and investment property owners in Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN. If you do need to short sell your home (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home), or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

Effects of a Loan Modification, Short Sale, Foreclosure, Bankruptcy and Walking Away/Doing Nothing on Credit Scores

Effects of a Loan Modification, Short Sale, Foreclosure, Bankruptcy and Walking Away/Doing Nothing on Your Credit Score

There seems to be a lot of conflicting information out there regarding the negative effects of a Loan Modification, Short Sale, Foreclosure, Bankruptcy and Walking Away/Doing Nothing on a person's credit score. I would like to try to clear some of that confusion up.

According to this Los Angeles Times article, Mortgage problems are walloping Americans' credit scores, loan modifications, short sales, foreclosures, bankruptcies and walking away/doing nothing effect your credit score differently. Below is a brief summary of the different options.

• Loan Modification Type 1 - This Loan Modification type rolls late payments and penalties into the principal debt owed. According to the LA Times article, this type of loan modification may modestly increase your credit score.
• Loan Modification Type 2 - This Loan Modification type is a refinancing of underwater (i.e. negative equity) mortgage(s). This is what is offered under the Obama administration's Making Home Affordable Program through government controlled Fannie and Freddie Mac. According to the LA Times article, this type of Loan Modification "may have little or no negative effect on scores, even though the homeowners might have been tottering on the edge of serious delinquency before refinancing."
• Short Sale - A short sale is a sale of a property where the net sale proceeds are not sufficient to pay off the mortgage balance(s) and there is no party willing or able to make up the shortage. According to the LA Times article, a short sale may lower your credit score by 120-130 points. I have heard from other people that a short sale lowers a person's credit score by 80-100 points. For sake of simplicity, let's say that a short sale will drop your credit score by about 100 points on average (This does not include the negative effects of any missed mortgage payments. You do not need to miss any mortgage payments in order to successfully complete a short sale). While this seems bad (it certainly is not good), it is much better than foreclosure, or doing nothing. In fact, according Question 7, "If a borrower has completed a short sale and was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?", in this this Fannie Mae publication, Announcement 08-16: Bankruptcy, Foreclosure, and Conversion of Principal Residence Policy Changes; and Revised Property Value Representation and Warranty Requirements, "If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer who completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment." In other words, you can short sell your existing home and immediately buy another home as long you did not have a 60 day or more delinquency and your short sale lender did not require you to pay the shortage (normal loan underwriting criteria applies). This publication clarifies the previous Fannie Mae publication, Announcement 08-16.
• Foreclosure - Homeowners that allow their home to go to full foreclosure (i.e. be auctioned off by the lender and/or become a bank owned property) should expect their credit scores to decline by 140 to 150 points plus negative marks on their credit bureau files for as long as seven years. Having a foreclosure on your credit report will also make it much more difficult to buy a home. Fannie Mae requires foreclosed home buyers to wait at least 5 years before buying another home and even then Fannie Mae will require larger down payments. Freddie Mac generally requires a waiting period of 7 years. The FHA currently has a waiting period of 3 years, but is expected to increase that waiting requirement.
• Bankruptcy - The LA Times article states "People who file for bankruptcy protection covering all their debts (mortgage, credit cards, auto loans, etc.) will get hit with an average 355- to 365-point drop in their scores. Bankruptcies remain on borrowers' credit bureau files for 10 years." Having a bankruptcy on your credit report will make it very difficult to buy another home. Fannie Mae requires that people who file a non-Chapter 13 bankruptcy wait a minimum of 4 years from dismissal or discharge before obtaining a new home loan. For Chapter 13 bankruptcy, the waiting requirement is 2 years from discharge and 4 years from dismissal.
• Walking Away/Doing Nothing - according to the LA Times article the "strategic default" has become common in large foreclosure laden markets such as California (and Florida, Nevada and Arizona). Homeowners who choose this option should expect the same consequences as a Foreclosure (described above).

The LA Times article goes on to state that Americans overall credit scores have declined significantly over the last couple of years. The article refers to the Vantage credit score, the main competitor to the well known FICO credit score, which "rates borrowers on a scale range of 501 (subprime, the highest risk) to 990 (super-prime, the lowest risk). Unlike Fair Isaac Corp.'s FICO scoring system, whose scores can vary by 50 to 100 points based on which bureau supplied the underlying credit data, Vantage scores are about the same for each consumer."

Regarding the negative effects of this financial mess on people's credit scores, the article states "For example, roughly 36.6 million of the 213 million consumers tracked by the three national credit bureaus in the first quarter of 2008 had Vantage scores above 900 -- the super-prime credit rung. That select group represented 17.2% of the country's consumers.But by the end of the second quarter of this year, just 15.4% -- 33.3 million out of 216.9 million individuals' files -- were left among the elite. By credit industry standards, that's huge. More Americans' scores are slipping into the worst credit category as well. In the third quarter of 2006, 34.4 million consumers were in the lowest segment -- 16.6% of 206.9 million individuals. But by the second quarter of this year, 18.3% of all files were in that category -- 39.8 million consumers out of 216.9 million. Most of these changes -- fewer people with excellent credit, more people in the lowest brackets -- have been caused by late payments on home mortgages, serious delinquencies, short sales and foreclosures, according to VantageScore researchers."

The article does offer a glimmer of good news - the same information I have been saying for months. That is "the bottom-line good news about scores is that homeowners facing financial stress can experience minimal dings to their credit if they contact their loan servicer or lender early in the game -- when they first discover that they may have trouble making their monthly payments -- and take the first steps toward a loan modification or refinancing." In other words, doing nothing is the worst thing you can do. The article cautions financially distressed homeowners not to "wait and fall several payments behind before seeking a modification". The article quotes Barrett Burns, a former lender and now chief executive of VantageScore, as saying "Start that conversation early. You can lose 240 points on your score" and damage your ability to obtain credit for years.

Based on the above, if you are a home owner who is experiencing difficult financial times and cannot afford to pay your mortgage, you should try to get a loan modification first. If a loan modification is not approved, or you cannot pay your mortgage even after a loan modification, then a short sale is your next best option.

Due to the declines in people's credit scores as described above, the large number of homeowners in financial distress (due to a loss of income, unemployment, etc.), the large number of homeowners underwater (see my previous blog post, SCARY STUFF: About half of U.S. mortgages seen underwater by 2011), the relative attractiveness of short sales and the large numbers of homeowners who do nothing/walk away (this is a terrible decision) there will be a lot of short sales and foreclosures over the next several years.

If you are a homeowner who cannot pay your mortgage (due to losing your job, having your income reduced, illness, health problems, etc.), or your home is already in foreclosure, or you owe more than your home is worth you should contact a real estate and/or bankruptcy attorney to discuss your legal options. You should also contact your mortgage company to inquire about a loan modification. If you a homeowner in Middle Tennessee and would like help and assistance with a loan modification please contact me for free no obligation assistance. If a loan modification will not work for you, or is not granted by your mortgage company, I can help you with a short sale of your property. I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I serve real estate owners, homeowners and investment property owners in Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN and Belle Meade TN. If you do need to short sell your home (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home), or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.