subject: Inducing Distressed Homeowners Into Default [print this page] Inducing Distressed Homeowners Into Default
I touched on this topic briefly in my last blog, but once this article on Housingwire.com popped up, I figured no time like the present to expand.
Traditionally, it was impossible to qualify for a loan modification without being delinquent, however that wasn't always the case with short sales. Increasingly, we're seeing more and more lenders request that a borrower be delinquent before they'll consider a short sale as well.
Considering the state of the economy and the housing market, it's a truly ridiculous requirement.
Prior to the real estate collapse, you'd be hard pressed to find anyone who could argue that a homeowner need to be late on their payments, before a bank should consider adjusting their loan or agreeing to a short sale. The majority of people had equity in their homes so while they might not make as much as they'd like, they could still sell and at the very least break even. The few who couldn't, likely had borrowed against it so many times that they had no one to blame for their hardship but themselves.
Times are very, very different now. Property values are down from 30% to 50% or greater across the country. Unemployment is around 10% nationwide, creeping up to 15% in several metropolitan areas. Most importantly, homes are being foreclosed on at a pace not seen since the great depression. Clearly, the need for assistance is real.
We regularly work with people who are on time and want nothing more than to honor all of their financial obligations, but the realities of today aren't allowing for that. They're underwater, out of work, can't afford their payments anymore at least, not long term and can't sell their home for more than what they owe.
For many others, the hardship is the real estate market itself the most common scenario being a job transfer that requires an out-of-state move. They might be employed or need to make the move in order to stay employed but they can't afford two house payments while they wait for the market to return in order to sell their home for more than what they owe on it, nor do they have the money lying around to cover the deficiency.
Instead of waiting for the roof to cave in on them, they're proactively seeking out assistance from their lender, either in the form of a loan modification or a short sale. They can see that the window of time in which they'll be able to continue to make payments is closing, so they want to work with their lender to make sure that the worst for all parties involved doesn't happen foreclosure.
Unfortunately, banks don't tend to see these requests for assistance in that light. In general, banks just assume that everyone seeking assistance can in fact afford their payments, but simply don't want to make them anymore.
We've even had various bank employees from low level loss mitigation reps to high level vice presidents state that they need the customer to "feel some pain" before they'd ever consider working with them. I guess the tens of thousand of dollars lost (not to mention losing your home) isn't enough pain.
Requiring people to go delinquent in order to be considered for assistance essentially rewards bad behavior, while punishing those who are trying to do the right thing.
Let's hope the class action suit being brought against Wells Fargo servicer ASC by New York law firm Harwood Feffer makes some noise. Lenders need to do a better job of differentiating between those who are trying to take advantage of the mess we're all in, and those who are truly trying to make the best of a bad situation. A great first step is rewarding those who can keep making their payments until a mutually agreeable resolution is available, not forcing them into a position that carries the potential for much greater harm than good for everyone involved.
