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This is a question we get a lot – foreclosure is rarely right for anyone, however there are exceptions.

Generally speaking, we usually advise people to attempt a loan mod and/or short sale, before allowing the foreclosure process to proceed – if for no other reason, to give themselves the ability to at least say they tried something other than walking away.

In the case of short sales, there is an amount left over (the deficiency) between the amount you owe and what you actually sell the property for. Should the bank choose to foreclose, they reserve the right in many states to pursue the borrower for the deficiency. In states where lenders cannot pursue, they can still ruin your credit simply by foreclosing. In both instances a short sale will lessen the damage to your credit, however in states where lenders reserve the right to pursue, a short sale could see that deficiency significantly reduced – or even waived completely.

What the lender decides is largely based on you – your hardship, income and current assets.

Keep in mind though, the bank has no legal obligation to work with you – they’ll consider your application for a loan mod or short sale, because it’s often in their best business interest to do so. Since there are no “rules” so to speak (in most instances) on how much of the deficiency they can ask for, they (attempt) to base what they ask of you on how much you currently have, how much you make and how collectible you might be.

Foreclosure is not cheap for a bank. Between legal fees, taxes, homeowner association dues, maintenance/upkeep, etc., your lender can spend upwards of $50k on the process. Further, they aren’t likely to receive an offer on the property as high as the one you’d bring them. If they feel the cost to pursue will be greater than the amount they stand to make on the short sale, the chance of approval is good.

If the lender feels that a person is collectable, they still might be willing to consider a short sale, but they’re more likely to ask for something in return. The better your situation, the more they’re willing to ask for. The worse your situation, the less your lender is likely to seek.

That said, there are two people where foreclosure is a better option:

• Those who don’t have the amount their lender is requesting
• Those who do but aren’t willing to spend anything.

Concerning the former, you simply cannot give what you don’t have. If your lender requests more than you have and won’t consider your hardship, etc., there isn’t much more you can do. However, there is a silver lining – in most states, you can live rent-free for at least four months once your last payment is made, giving you a little time to set aside funds for a new home or apartment.

Some states offer a redemption period, adding extra time after the four-month foreclosure process to redeem the property – you can’t be evicted until the redemption period has expired. Here in Michigan, the redemption period is 6 months; giving you a minimum of 10 months after your last mortgage payment has been received to live for free in your home and save money. Often, with lenders grossly overwhelmed, it can go even longer. We regularly hear about people STILL in their homes after going 2 years without making a mortgage payment. That’s a lot of time to save money.

As for those who have the money and don’t want to make a contribution towards the closing, it’ll be difficult to convince a bank to take a loss while you walk away, simply because you’re “tired of throwing good money at bad.” For the record, I don’t necessarily disagree with this stance – sometimes you simply have to cut your losses and move on – but that really only leaves foreclosure as an option.

An infographic I came across at deadlinenews.com does a decent job of illustrating when a foreclosure might be right for you – though, I would caution using foreclosure as “leverage” to negotiate with your lender. More times than not, going delinquent is enough.

Most importantly, remember that as long as you’re realistic about your situation, foreclosure should always be your last option…

On Tuesday, Freddie Mac issued a press release stating they were updating their timelines on processing short sales, in order to add transparency and expedite the process.

Today, we learned that Fannie Mae would be instituting the same changes.

Primarily, they hope to have servicers provide more updates to borrowers on the status of the process, while having decisions on short sales made within 30 to 60 days of receiving an offer.

The full details (from Freddie Mac’s website), include:

• Freddie Mac’s new short sale timelines require servicers to make a decision within 30 days of receiving either 1) an offer on a property under Freddie Mac’s traditional short sale program or 2) a completed Borrower Response Package (BRP) requesting consideration for a short sale under HAFA or Freddie Mac’s traditional short sale program. (BRPs are standardized assistance applications developed as part of the Servicing Alignment Initiative.)
• If more than 30 days are needed, borrowers must receive weekly status updates and a decision no later than 60 days from the date the complete BRP is received. This will help servicers who may need more time to obtain a broker price opinion or a private mortgage insurer’s approval on a BRP or property offer.
• In the event a servicer makes a counteroffer, the borrower is expected to respond within five business days. The servicer must then respond within 10 business days of receiving the borrower’s response.
• Freddie Mac will use the new timelines to evaluate servicer compliance with the SAI and its own servicing requirements.
• Freddie Mac completed 45,623 short sales in 2011, a 140 percent increase since 2009. Overall, Freddie Mac has also helped more than 615,000 distressed borrowers avoid foreclosure since the housing crisis began.

My question to Fannie & Freddie is: or what? If servicers don’t comply with this list of changes, what’s going to happen to them? Will you begin paying a portion of the servicing fee to them on the back end and, if your standards aren’t met, withhold a portion of that payment? If a servicer doesn’t meet the above standards on a set percentage of files, will they lose the right to service these files?

One of the biggest problems with the whole loss mitigation process has been accountability. From government mandates to bank executive directives, it’s hard to enforce policy when no one will be punished for ignoring it. Simply put, consequences for non-compliance must be put in place.

Don’t get me wrong – if a sincere attempt to improve the process is being made, then I applaud it. However, my BS detector tells me this is another attempt to win public favor and I’m going to need to see servicers actually begin complying, before I buy in…

Recently we had been advised that Fannie Mae and Freddie Mac would no longer be considering short sales on properties that were still within the redemption period.

A number of emails were forwarded to me, all with the same basic message: “Freddie Mac is no longer reviewing offers on redemption properties. I would advise you or the seller or both of you to call Freddie Mac to voice your concerns over this issue”.

Since then, the Michigan Association of Realtors (MAR) sent out the following email:

“UPDATE: Freddie Mac Short Sale Cancellations

Freddie is now reviewing these situations on a case by case basis and working to resolve the current situations, and then deal with the redemption issue as a whole. To deal with immediate concerns, there are account teams going back to the servicers who have changed their policies since the bulletin was issued on March 13th. Freddie has reached out and is trying to go back individually-as soon as possible. In the meantime, it is recommended that REALTORS® should get back in contact with the lenders that cancelled the short sales, citing Freddie’s policy change and tell any lenders that they are still being considered on a case by case basis. Where MAR members meet resistance from the lender to reinstate, we have been asked to take each case to Freddie on their (800)-FREDDIE number and press option “2″ and mention “short-sales during the redemption period” and the name Dan Smith.”

Hopefully, this issue has been resolved going forward. On average, it still takes far too long for lenders and services to process short sales. If we lose the valuable time offered by working through the redemption period, it will become very difficult for short sales to be approved in the required time frame – especially, if the lender requires the borrower to be delinquent first!

I’m happy to see MAR and the National Association of Realtors (NAR) taking the fight to Fannie & Freddie on this, keep it up!

For those who haven’t read it yet, an unbelievable article from Rolling Stone/Matt Taibbi - I was going to blog about this, but I really have nothing to add… the article is perfect as it is. A must read!

On Tuesday, Reuters reported on the potential for hedge funds and private equity firms buying up foreclosed homes – primarily from government owned Fannie Mae & Freddie Mac – and renting them out.

With the U.S rental market “red hot”, investors believe the foreclosed homes could offer returns of 8% - 25% as rental units. Now, firms are beginning to line up for the opportunity to bid on the 200,000+ foreclosed homes Fannie and Freddie have stockpiled – with more to come.

As I mentioned in my last blog (Bank Of America Defrauded HAMP), it’s hardly shocking to learn that the very people who helped create this mess will now profit from it, at the expense of the middle and lower working class.

For decades, it’s been the American dream to own your own home. For a good chunk of that time, it became a reality for more and more families. Then, things got carried away: Banks provided mortgages to people they knew couldn’t afford them; Appraisers inflated the true value of properties; People overextended themselves, as prices skyrocketed.

In the end, it probably makes sense for many to become renters again – we tried to provide homeownership to the masses and it didn’t work. In time, I hope we’ll be able to figure out a better way to go about it and try again.

Until that time comes, hundreds of thousands of former homeowners are set to become renters. And hundreds of investment firms are set to become landlords.

Scary. Why does it make sense that many of these firms with close ties to a banking industry that arguably had the largest hand in contributing to the housing crisis, should not only escape any real liability, but also profit from it?

If private investment firms become landlords, I think we can all agree flexibility will be at a minimum. As long as unemployment stays high and the economy remains shaky, there will be a need to assist people in navigating the various hiccups in employment that are a bi-product of the current economic environment.

Worse, I’d have no trouble believing homes will be flipped as needed when the potential for additional profit arises, likely without giving the tenant the benefit of, well, anything – notice, compensation, etc. What about the laws you say? Sure, those have proven to go a long way towards protecting homeowners over the past few years.

If a government entity were created to manage the current portfolio of homes, it might provide a little more stability to the real estate market. Working to keep people in their homes, as opposed to evicting them the moment financial issues arise or “opportunities” for greater investment are presented, will do far more to drive home values up and allow communities to remain vibrant. It won’t take values as high as they went over the course of the past decade, but we’ve all seen how that strategy worked out.

I see nothing wrong with selling a portion of the current backlog of homes to private investment firms if a decent profit can be turned. However the overwhelming majority should remain as government owned rentals. They’ll likely make just as much money on the properties via rental income versus a quick sale at the bottom of the market. More importantly, it might provide some much needed stability to families and communities…

Last week Reuters reported, per a recently unsealed whistleblower lawsuit, that Bank of America had prevented homeowners from receiving loan modifications under HAMP in order to avoid millions of dollars in loses while benefiting from financial incentives for participating in the program.

Shocking. That BofA would be guilty of such actions is probably the least surprising part of the story.

However, it’s remarkable that after all the damage caused to our economy by our nations lenders, a better system wasn’t in place to monitor how they were handling these incentive-based modifications.

The complaint, which was part of the False Claims Act settlement announced by BofA and the U.S. Attorney’s Office for the Eastern District of New York on February 9th, claims BofA and it’s subsidiary BAC Homes Loans Servicing LP, implemented “business practices designed to intentionally prevent scores of eligible homeowners from becoming eligible or staying eligible for permanent HAMP modification.”

According to Reuters, the bank and its agents routinely pretended to have lost homeowners’ documents, failed to credit payments during trial modifications and intentionally misled homeowners about their eligibility for the program.

The complaint also noted that “… BofA had it both ways. BofA has continued to maximize the value of its mortgage portfolio with anit-HAMP modification practices and managed to make money by committing fraud on homeowners.”

This should enrage people. I’ve seen the pain of the load modification process first hand, and it is rough. Unlike a short sale, where people have typically already come to terms that they’ll be leaving their home and moving on, people applying for loan modifications are desperately trying to hang on to their homes.

Constantly sending the lender more and more information, while re-explaining your situation over and over again takes people past the point of frustration and well into the realm of insanity. Believing that making it through the loan mod gauntlet would save their homes, was likely the only motivation to keep them going.

Now it appears that for many of those people, it was all for nothing – they never had legitimate chance from the start and were simply delaying the inevitable. Even worse, BofA was able to profit off this experience.

I have no doubt that tens of thousands of people – with loans owned or serviced by various lenders, not just BofA – shared in the experiences the complaint alleges. Hopefully, people will continue to come forward and report these practices. We simply can not trust lenders to do the right thing and it’s time proper measures are put in place to ensure that people who need assistance get it – especially, if a lender is to receive or has received ANY measure of financial assistance from U.S. tax payers…

For some time now, USAA has been running national commercials about their dedication to the U.S. Military. One particular commercial that’s been running regularly here in metro Detroit features the tagline: “Financial advice, for people who share our military values”. My advice to USAA? Take a closer look at your loss mitigation practices, before boasting about your moral code.

To be fair, I don’t make a habit of taking bank slogans seriously, then holding those lenders accountable when they fail to live up to their own billing.

However, as the housing crisis drags on, we’re seeing one segment of homeowners getting hit harder than others – active military.

Service men and women, who purchased homes near whichever base they were stationed prior to the housing bubble bursting, are now finding that the stress of a transfer to a new base has multiplied considerably when it comes to selling their current residence.

While several lenders currently feature advertising campaigns that promote their military relationships, one lender in particular serves the military community and their families exclusively – USAA.

Formed in1922 by a group of U.S Army officers, USAA lends primarily to active military, veterans and their families – a segment of the population, some would argue, deserve a little more understanding and flexibility, due to the nature of their jobs.

Short Sale Legal Services has dealt with USAA only twice, but both experiences were horrible.

In each instance, the people who contacted us were active duty (Army & Air Force), being transferred across the country. As those in the military know, roots aren’t often planted while on active duty; transfers are a common part of the job. Still, that hasn’t prevented those who serve our country from buying homes for decades, living there for a couple years, then selling. These purchases typically aren’t made with the anticipation of a significant profit in mind; rather, they are made to provide some stability for themselves and/or family, in a very unstable profession.

Based on their history, USAA should have a solid understanding of how common military transfers are, however it seems they do not. Both borrowers we counseled were advised by USAA that they must agree to pay back the entire amount of the deficiency, or a short sale would not be accepted; this rigid policy is hardly standard practice with most lenders in our current market.

To be fair, USAA has no legal obligation to consider a short sale. They aren’t required to work with people and are well within their right to collect what is due to them. However, that doesn’t make it the correct thing to do – professionally or morally.

For starters, it makes sense from a business standpoint to consider a short sale. Getting a home off the books for fair market value, without having to spend money on the foreclosure process and pursue someone who will, most likely be unable to cover even fraction of the deficiency, allows lenders to minimize losses.

Further, short sales will not financially ruin a customer, who, likely, is a casualty of the mortgage meltdown, not a cause of it.

A military transfer, typically, is not an option. USAA is aware of this; this lender, over all lenders, should also know that when it lends money, there is a solid chance that the home will need to be sold well before the end of a 30-year mortgage period. USAA was able to safely assume for decades that whomever was borrowing the money would be able to sell the house and pay back the mortgage; isn’t a borrower entitled to the same mindset?

Sadly, we were unable to assist either of our two potential clients. USAA demanded upwards of $125k in both instances – amounts that were nowhere near what our clients could afford. Both clients are now in financial ruin; both contemplate bankruptcy. This is a bitter pill for service men and women in dealing with a lender who’s customer service statement includes:

“Industry leading service that puts our memberships’ needs first. We’re dedicated to the financial well-being of members of the military and their families for generations to come.”

The housing crisis is not going away any time soon; thousands more service men and women will find themselves in the same position as our subject clients did and many will be customers of USAA.

Refusing to provide realistic options for customers who have virtually no control over their situation– treating our service men and women in a manner not even on par with the policies of most other lending institutions – puts neither it’s members needs first, nor helps USAA’s financial well-being. If USAA is serious about “values” (military or any other), working with people in a professional, compassionate and realistic manner makes far more sense then its current policy of all or nothing.

Last Thursday, the U.S. Government announced a $25 billion deal with the nations largest banks, over foreclosure abuses related to the housing bubble burst.

Since then, I’ve been promising to deliver my thoughts on the settlement, so here they are: in short, not good.

For starters, the $25 billion is a drop in the bucket - last summer alone these same lenders made $35 billion, so this penalty equates to nothing more than a brief time-out compared to what could have been. It’s been estimated that the fallout from the housing crisis has led to somewhere in the ballpark of $700 billion in negative equity in U.S. households, so any settlement that might be less than say, $175 billion, is a win for the banks.

Further, anyone foreclosed on between September 2008 & December 2010 is set to receive between $1500-$2000 – hardly adequate compensation, considering the fact that so many were either foreclosed on illegally. I think Yves Smith put it best in her blog on The Huffington Post:

“We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.”

Also of concern, was any immunity lenders might receive from future prosecution as part of the deal. As the Los Angeles Times reported last Thursday:

“The settlement releases the banks from claims involving foreclosures, mortgage customer servicing and loan originations. However, authorities can still investigate various fraud claims, including those involving the mortgage bonds whose meltdown triggered a global financial crisis. What’s more, there is no criminal immunity or release from private claims by individuals or class-action lawsuits.”

So, it’s a bit gray. Some seem to think that there will be accountability for those responsible – particularly those in the finance industry who had significant involvement in helping to inflate the housing market bubble.

Most – especially those out in the blogesphere – seem to think including Nevada and Arizona’s suits against Countrywide in the settlement, will set a precedence that will make it difficult to go after lenders in some of the ancillary crimes committed in relation to the housing bubble, such as the MERS mess, robo-signing, HAMP/customer fraud violations, etc. Smith profiles “The Top 12 Reasons Why You Should Hate the Mortgage Settlement” in her blog and it’s hard to argue most of her points.

For my money, however, I would say that my views on this lie directly with the views of Brian O’Conner of The Detroit News. Last week, he wrote what I feel is a good an article as any explaining why he doesn’t like the deal. Check it out – it’s worth the read!

In this past Sunday’s Detroit Free Press, President Obama submitted a commentary piece on the state of the current housing market in the United States and the urgent need to provide aid to struggling homeowners. Specifically, the importance of assisting those who borrowed responsibility and are now trapped in their homes, primarily due to those who acted irresponsibly.

The piece echoed his weekly address, delivered a day earlier.

The President intends to send a plan to congress, which will offer those responsible homeowners the chance to refinance their mortgage and save roughly $3,000/year on their payments.

To date, very few people have qualified for loan modifications and with millions of homes now worth less than the amount owed on them, refinancing wasn’t a realistic possibility. Now, it will be.

Keeping people in their homes should be a priority. It’s better for property values, it’s better for safety and it’s better for the greater good of our neighborhoods and communities. Few can argue that.

Additionally, he proposes a “Homeowners Bill of Rights” that will streamline and simplify the mortgage process – ideally, providing full transparency throughout the home-buying experience.

However, it’s up to Congress to pass his plan and the President encourages you to contact your congressional representative and urge your support. Take a look at this link to the Fact Sheet on the housing plan. If you agree with it, contact your representative and let them know.

Prior to last weeks State of the Union address, Van Jones and George Goehl wrote a blog on The Huffington Post questioning whether or not President Obama would make a “sweetheart” deal with the banks – one that would cost them far less than what they’ve cost the American homeowner, in turn for full immunity from future lawsuits.

Well, it’s been a week and no announcement has been made yet, but that doesn’t mean we’re in the clear. Big banks hold enormous power in Washington and from everything I’ve read and heard, it’s unlikely a deal that supports the 99% will ever be realized. Still, Jones & Goehl have a very good idea of what real accountability would look like and I think it’s worth sharing some of their thoughts. Here are some of the guidelines Jones & Goehl believe the administration should follow:

1. Banks must pay a minimum of $300 billion in principle reductions for homeowners with underwater mortgages and/or restitution for foreclosed-on families.

Agreed. I’ve long been an advocate for principle reductions and it increasingly seems that people are coming around to feel the same. As the blog notes, U.S. banks raked in $35 billion in profits last summer alone, while sitting on cash reserves of $1.64 trillion. With the economy still in shambles, those profits would have been significantly less had the banks not been provided with TARP money. Keeping banks strong was one reason the money was leant out, ensuring that banks remained solvent. However, the money was also intended to provide assistance to homeowners in need and only a fraction of the money made available was sent in that direction.

2. There must be a full-fledged, full-blown investigation into Wall Street financial fraud, by the Department of Justice.

I agree with this as well. It would be virtually impossible for us to avoid a scenario like this again in the future, if no one is held accountable. Those responsible need to pay for their crimes. Fines, jail time and the inability to be in a position to commit these crimes again are all methods that must be used. Sadly, to date no one from the SEC has lost their job due to their oversights, while few charges have been brought against those in the banking/finance industry, minus a handful of ponzi-schemers. Unacceptable.

3. There should be no civil or criminal immunity for the banks from future lawsuits.

Just like the second point, accountability is a must. A strong banking system is essential (no argument here) but regulations are essential. There is no reason we can’t have appropriate banking regulations in place – which still allow capitalism to thrive – but with the appropriate checks and balances. Banks that acted irresponsibly must be exposed and regulations based on those actions must be put in place. Once again, if we don’t learn specifically how we got here and hold those responsible accountable for their actions, it’s going to be extremely difficult to put the necessary measures in place to keep history from repeating itself.

Many people argue that President Obama has done a poor job in his handling of the banking/housing crisis. Standing up to the big banks, forcing accountability and not letting them off easy, will go a long way in reversing that assessment – especially, with the 99%…