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Some form of compensation for the homeowners was expected, but what surprised many was the speed at which the Fed came to this decision – previously, officials were going through complaints on a case-by-case basis, a lengthy and time consuming process that would have taken many months to complete. While the agreement announced last week probably means that lenders get away with paying less, the Fed says that the advantage is that borrowers will receive the financial assistance they need “in a more timely manner”.

As part of the agreement, lenders will hand out more than $3.3 billion in cash to those homeowners that were wrongly foreclosed upon, with another $5.2 billion set aside for other forms of assistance, such as forgiveness of deficiency judgments and loan modifications. The amount of compensation due to each former homeowner will vary depending on their individual circumstances, but officials said that payouts will range from a few hundred dollars to more than $100,000 in some cases.

Opening a Can of Worms

Several observers have said that with any luck the payout will have brought an end to this long running issue, but these people are seriously mistaken. In all likelihood, all the lenders have achieved is to give themselves an even bigger headache, for the small matter of dividing up the payouts so that everyone entitled to compensation receives a fair amount will be no walk in the park.

One of the most controversial issues, and something that is absolutely likely to cause arguments later on down the line, is that dozens of affected homeowners that may or may not receive adequate compensation from the deal, have been denied the right to an “independent foreclosure review”, as is stated in the FAQ section of the review.

The problem here is that in order for such a review to be independent, both the lenders and the federal regulators representing the homeowners should have been given the chance to nominate a neutral third party to carry out this review – sadly, it seems that the lenders themselves actually chose these reviewers.

As ProPublica explains in this article:

“Federal regulators designed the program to work like this: Each of the banks would hire an ‘independent consultant’ (approved by the regulator) to conduct reviews of the bank’s foreclosure cases. The bank was supposed to foot the bill, but the consultant, not the bank, was supposed to decide which of the bank’s customers deserved compensation and how much.”

Clearly then, the consultants chosen to do the job cannot be seen as ‘impartial’ reviewers, and so their fairness in deciding who is entitled to how much compensation will inevitably come into question. In fact, the awards will be paid out according to the stipulations of the agreement, which would appear to be arbitrary at best, and will likely be anything but fair. For an example of this ‘arbitrariness’, consider the actual rules for eligibility, which state that only those foreclosed upon between 2009 and 2010 can be considered for compensation – irrespective of the fact that millions were foreclosed upon before 2009.

Like It or Lump It

Perhaps even worse than this arbitrary decision making is the fact that homeowners will have no rights to appeal the independent review process. The FAQ page states:

“The decision of the review is considered final and there is no further recourse within the Independent Foreclosure Review process. The Independent Foreclosure Review will not have an impact on any other options homeowners may pursue related to the foreclosure process of their mortgage loan.”

The Neighborhood Assistance Corporation of America was quick to jump on the agreement, pointing out these deficiencies and underlining my own concerns that homeowners will not be properly compensated.

It pointed out that more than 65,000 cases had been submitted to the review process so far, and that these reviews were turning up even more evidence that huge numbers of homeowners were wrongly foreclosed upon, without being informed that they could apply for loan modification. Furthermore, it states that the $8.5 billion is simply an insufficient amount to adequately compensate concerned homeowners, and slams the $5.2 billion earmarked for ‘other assistance’, saying “this will do little in assisting homeowners stay in their homes since it is not dedicated to principal reduction.”

Who Gets What?

At the end of the day, lenders are left with an even more pressing headache – which former homeowners are entitled to compensation and which aren’t? How do these people go about filing a claim? And what about those who are not ‘entitled’ to any of this compensation, because their homes were foreclosed upon outside of the Fed’s extremely narrow window?

There remain many other unanswered questions too, such as why the arbitrary $8.5 billion figure (which is surely inadequate), and why was the Neighborhood Assistance Corporation of America not allowed to take part in the settlement making? Is there any avenue of appeal for homeowners that miss out?

Until these questions are answered adequately, this problem won’t be going away anytime soon…

FreeDigitalPhotos.net

But that is exactly what happens to many borrowers who are desperate for help in dealing with their mortgage lender.

Mortgage Fraud Blog is reporting the case of one such company, working in Ohio, called Diversified Real Estate Consultants LLC (DREC).

“DREC accepted fees ranging from $500 to $3495, while promising desperate borrowers reduced mortgage payments, lower interest rates or a “100% money back guarantee”.”

Even though charging up-front fees for such services has been banned by the Federal Trade Commission, the large number of delinquent borrowers who are desperate for a solution has triggered a growing number of such scams. Some of the scammers are even legal firms, who, as attorneys, are the only group allowed to charge a fee up front to help with foreclosure avoidance.

The fact is, NO ONE can offer a guarantee that a foreclosure will be avoided. Every situation is different, and every borrower has different circumstances. Some situations are easy to work out, and some are very difficult. It’s never a “cut and dried” process.

Sometimes a borrower gets a loan modification, a reduced interest rate, a reduced payment, or some other type of workout arrangement from their lender. Sometimes the only realistic option is a short sale. So, companies that offer up front guarantees are often scammers.

I recently got a call from a personal friend who owned a 2.2 million dollar home in north Georgia. Because of the recession he had lost most of his income, and found himself behind on his mortgage payments. He contacted a law firm that advertised help for homeowners in foreclosure. He paid this firm an up-front retainer of $3400 to negotiate with the foreclosure attorney on his behalf.

The law firm my friend had paid to negotiate his foreclosure advised him not to make up the $12,000 in back payments, as they were still negotiating with the foreclosing attorneys office. Several months later, the house went into foreclosure, and this gentleman lost his home and the $3400 retainer fee he had paid, and that firm was no longer returning his phone calls. This event was made even more painful by the fact that the home owner had the $12,000 to make up the back payments, and could have brought the loan current. But on the advice of his attorney, he did not do so. He lost his home after paying thousands of dollars for “loss-mitigation” from a law firm that clearly had no more expertise in foreclosure mitigation than most of the scammers out there preying on the public.

In another case, I was asked by a delinquent borrower to review the documents provided by a loss-mitigation firm that was attempting to collect a $1000 up front fee. The scammers were not only trying to charge an up-front fee for services they could not provide, in reality, had this borrower signed the documents, he would have transferred his deed to the scammers!

Many times these companies are actually trying to dupe a desperate borrower into assigning their property deed, which then gives the scammers the right to sell the property to someone else. This scammer had no intention of helping this borrower, they were trying to steal his property. Had they succeeded, I suspect they would have sold the property to another buyer for another up front fee, and left the original owner and the unsuspecting buyer with an empty wallet and a big problem.

Having stopped many foreclosures for dozens of homeowners, I can tell you that the best thing to do if you are behind on your mortgage payments is to contact the bank early, before you are more than two months behind, and find out what options are available. Usually, the first course of action is to file paperwork asking for a loan modification. If you still have enough income to afford a payment, but your current payment is simply too high, this is your best course of action and the earlier you start, the more likely it is that you can find a way to get something done.

If you’ve lost income and can’t make a mortgage payment due to being unemployed, there may be state or federal programs available, depending on who owns your mortgage. It can get confusing because mortgages are owned by a variety of entities. Some, such as Fannie Mae and Freddie Mac, are controlled by the federal government, so they are subject to programs offered at the federal level.

Other lenders are independent, and the mortgages may be owned by private investors such as insurance companies or banks. These types of mortgages are not subject to federal programs, but may be subject to FHA guidelines if the loan is FHA insured. The first thing a delinquent borrower needs to know is “who owns my loan?” That helps determine what programs are available. You may also contact your lender to find out what programs you can apply for based on your situation. And keep applying…just because you’ve been turned down for one program does not mean you can’t keep trying. Borrowers give up too quickly. Often just submitting these forms can help delay a foreclosure for months.

And finally, if you do rely on a third party to help you, monitor their progress very carefully. Don’t assume that they will stay on top of your case. Be involved in this process. Get a referral to a local non-profit counseling service that is recommended by reputable sources. Stay in touch with them and monitor their progress. Do not pay any firm that wants to charge you an up-front fee to help you negotiate with your bank.

If you choose to do so, you may deal with your lender directly. Taking a pro-active approach will help you find out about all of the programs that may be available to help you modify your loan, obtain forbearance, or make other payment arrangements.

Beware of those who would have you believe that paying them will solve your mortgage problem.
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Donna S. Robinson is a 16 year veteran of the real estate industry. She is an expert in residential real estate investing, and currently provides coaching and consulting services to real estate investors and investment companies. Her website is www.RealtyBizConsulting.com
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Banks are determined to push ahead with short sales in some states, whatever the cost. Image courtesy i_spec via flickr.com

The report, first published in CNN Money, says that many homeowners have been taken by surprise at their bank’s desire to push through a short sale.

Elizabeth Weintraub, a realtor in Sacramento, California, told CNN Money that most homeowners are skeptical of their bank’s offer at first. That skepticism is quite understandable she claims, as many homeowners have previously been rejected in their efforts to secure a loan modification.

“Then they call and say, let us give you some money,” Weintraub added.

So why are the banks so keen to give away all this money?

Apparently, foreclosures are getting to be just too damn expensive for the banks, so much so that it’s often cheaper to pay homeowners to proceed with a short sale. Furthermore, processing a foreclosure isn’t that easy any more, with many homeowners these days willing to fight tooth and nail in the courts, delaying any action for months or even years.

The problem for banks is that the longer these cases are dragged on, the more expensive things become. Homeowners typically cease all payments on their mortgage, their property taxes, and even household maintenance. As a result, the home slowly deteriorates and quickly begins to lose value. By the time the dust has settled and the bank takes possession of the home, the property may have lost thousands from its pre-foreclosure valuation.

As Tom Kelly, a spokesperson with Chase Mortgage tells CNN Money, there are three choices for banks. The preferred choice is loan modification, but if that isn’t possible then a short sale is usually faster and much more efficient than foreclosure, which is increasingly becoming the least favorable option.

For those interested in a short sale incentive, the chances of receiving such an offer will depend on several different things, including who you bank with and where in the country you live.

Homeowners who bank with Wells Fargo may be in luck. The bank is quietly offering such incentives in a number of states, mainly those which are known for their lengthy foreclosure process, such as Florida. Wells Fargo have typically been offering around $15,000 to homeowners to agree to a short sale.

Bank of America were running a pilot program in Florida last year, paying out between $5,000 and $20,000 to those who agreed to short sell, although this program has now expired, and it remains to be seen if it will be introduced in other states.

The growing number of foreclosures and people on the brink of losing their homes has prompted the emergence of non-profit organizations specifically designed to help people who need loan modifications and other forms of financial assistance. These organizations must follow strict government regulations, one of which prevents them from requiring homeowners to pay up-front money for any assistance.

Many con artists have seized the opportunity to exploit already vulnerable homeowners by imitating these assistance organizations and promising to help save their homes. In this case, the three real estate agents involved in the scam were Magdalena Salas, Angelina Mireles, and Julissa Garcia. Their business, Legacy Home Loans and Real Estate, promised to help homeowners modify their loans, but required them to pay $5,000 to get started. They advertised on the radio, on fliers, and even on billboards. In some cases, those families they failed to help ended up losing their homes.

“There is nothing worse than those who seek to capitalize on this devastation by defrauding Californians who have already been victimized in this crisis,” said California Attorney General Kamala D. Harris.

The arrest was a joint effort of the California Attorney General’s office, the Stockton Police Department, the San Joaquin District Attorney’s Office, the Office of the Special Inspector General for the Troubled Asset Relief Program, and the California Department of Real Estate.

Any homeowner could be a potential target for scams such as this and should report any solicitations for money to the appropriate authorities. The FDIC offers a free printable pamphlet with tips to help homeowners avoid foreclosure and loan modification scams.

Scammers targeting homeowners in forensic loan audits - Image courtesy MARIEL SINCE 88 @ Flickr.com

A number of organizations which claim to be associated with well known auditors and attorneys have sprung up in the last couple of years, offering services for forensic loan audits. According to the Better Business Bureau and the Federal Trade Commission, complains about these types of companies have shot through the roof over the last 9 months.

The scam goes like this: the forensic auditors approach struggling homeowners, carry out a review of their documents, purportedly to see whether or not their mortgage lender had followed federal and state lending regulations, and then promise homeowners they can secure a quick loan modification and potentially even a reduction in their mortgage as well.

The catch? They need to pay an upfront fee – typically around $3,000.

And you can bet your bottom dollar you know what happens next… That’s right, usually not a thing. Hundreds of homeowners have complained that they hear nothing after the audit, they don’t get their loan modification, even if the ‘auditors’ discovered errors in their mortgage documents.

According to the Federal Trade Commission’s Josh Fuhrman:

“They lure consumers to believe that by hiring them for a review of a loan modification package, they can expedite the process and get better results, or they make false promises that they can get a loan mod or principal reduction. But homeowners are not typically getting any results. [Scammers] are just stringing [home owners] along, or they disappear.”

Mortgage lenders and servicers were initially given a 45-day deadline by federal regulators to come up with their plans – a deadline which would have finished next Monday. However, the lenders now have another month to work out what they will do, regulators say.

Banks including Wells Fargo are given more time to address their foreclosure practices. Courtesy of Minnpost

The regulators have already asked lenders and servicers to reimburse those borrowers who have had their homes wrongly foreclosed, they say. Originally, the banks were given 45 days to work with auditors and find out how many of their foreclosed borrowers could have kept their homes had they been given access to workout plans.

Federal regulators have asked servicers to submit workable plans to show how they will improve foreclosure practices and minimize similar problems in the future.

Under the deal, mortgage servicers have also agreed to take steps to make the loan modification process easier for delinquent borrowers by providing them with a single point of contact to discuss their case. Additionally, mortgage servicers have been banned from carrying out loan modification negotiations while working on foreclosing properties at the same time.

Mortgage lenders and servicers need more time to identify and compensate those wrongly foreclosed, say regulators. Courtesy of Huffington Post

Federal officials say that the deadline extension will also give them more time to try and work out a broad settlement with all mortgage lenders and servicers over accusations of widespread foreclosure practice abuses. It’s thought that the ongoing talks may lead to a settlement which includes a $20 billion fine and a requirement for lenders and servicers to revamp standards and cut some borrowers loan balances.

Amongst the banks involved are the Bank of America, Wells Fargo, Ally Financial, JP Morgan Chase, HSBC and others.

Rejected. Image courtesy of Investutah

Some of the investigations findings have been mind-blowing, with over 50% of loan modification firms demanding an upfront fee from homeowners before they take on their case. While this might not seem such an unreasonable demand to make, it is in fact quite illegal in many U.S. states.

Meanwhile, nearly half of all firms investigated (43%) claimed that they could guarantee a loan modification despite not even seeing the homeowners’ financial or mortgage details, which makes those guarantees an extremely dubious claim.

Waste of money? Image courtesy of My China Connection

Probably the most disturbing finding however, is that 19 of the companies under investigation actually told their clients to default on mortgage repayments. This incredibly disturbing advice has resulted in a number of homeowners suffering severe damage to their credit ratings or worse, ending up in the very foreclosure they are trying to avoid.

Of course, any loan mod company will deny such a thing, but several of those investigated were caught on tape recommending this course of action, saying such things as “It’s breaking the law to tell you this, but friend-to-friend, if you are not behind on your mortgage repayments there’s no way you’ll get a loan modification.”

President Obama's HAMP is also coming into question. Image courtesy of Stop the Hype

The Federal Home Affordable Modification Program, or HAMP, was not part of the investigation, yet President Obama’s much vaunted program has also been swamped with numerous complaints from people who feel they have been cheated or disadvantaged by the program.

The investigation has in our opinion, brought the whole practice of loan modifications into question. While it seems like a good idea on the surface, the practice is fraught with danger – it encourages homeowners to get into trouble so that they can qualify.

It is clearly very difficult to provide assistance to those who genuinely need it without tempting others to ‘play the game’ with questionable firms so that they can get lower rates too.

Perhaps the very existence of home loan modifications needs to be looked at more closely?