INFO FOR HOMEOWNERS WITH CLOSED, BANKRUPT LENDERS AVAILABLE The Federal Trade Commission, which oversees consumer affairs, has produced a new Facts for Consumers publication created to assist homeowners whose mortgage lenders may have closed or gone bankrupt in the wake of the mortgage lending crisis. “How to Manage Your Mortgage if Your Lender Closes or Goes Bankrupt,” provides answers to important questions pertaining to loan servicing transfers; changes to escrow accounts; payment disputes, and more. To download a copy of the pamphlet, go directly to http://www.ftc.gov/opa/2007/12/bankrupt.shtm. To order a hard copy, write to the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Ave., N.W., Washington, DC, 20580.
Short sales happen when a lender agrees to accept less than the amount owed by the borrower – there is not enough equity to sell the house and pay all the costs of the sale. Some lenders will not consider a short sale if the payments are current, and in addition may try to tap into other accounts where the borrower has assets. Generally speaking, the borrower must be unable to pay the existing mortgage, and the property must be worth less than the borrowed amount.
Short sales come with advantages and disadvantages for both borrower and lender. For the homeowner, short sales will appear as a “pre-foreclosure in redemption” status, which will reduce their FICO by 75-100 points. (Foreclosures will hit someone’s FICO by about 250 points, and can appear up to 10 years later.) For lenders, foreclosures are much more time consuming and costly and in some states the process can take up to 280 days as interest payments go uncollected, taxes pile up, and attorneys and agents are compensated. The structure may be neglected or damaged during that time. On the other hand, selling a property short of what’s owed on the mortgage can get an unproductive asset off an investor’s balance sheet quickly. Tax-wise, and this is about to change, the IRS treated the difference between what the homeowner borrowed and what the lender accepted to settle the mortgage as income to the homeowner and is taxable. Lastly, not all lenders will accept short sales as a complete solution to the debt owed and a few banks want promissory notes from borrowers that require them to pay the full amount of the mortgage even after the short sale has been closed. In California purchase money loans are not subject to deficiency judgments, but hard money, home equity, and refinances are.
“Here are some of the preliminary details of the Bush administration’s proposal. According to press reports, loans originated between January 2005 and July 2007 with first scheduled resets between January 2008 and July 2010 would be eligible. Priority for loan modifications would be given to borrowers with FICO scores less than 660 and that have not risen more than 10% since the loan was sold. Borrowers with FICO scores greater than 660 would require closer scrutiny (ie, additional labor by servicers). In addition, to be eligible, it appears borrowers cannot be more than 60 days delinquent, must occupy the property, and must have at least 3% equity in the home. The 60-day delinquency cut-off is important because the number of eligible borrowers could drop significantly if the restriction were to change to having never been delinquent.
Most of these filters are easily applied to screen eligible loans; however, FICO scores are not updated regularly enough in LoanPerformance (if at all, and the proposal to use FICO scores as an indicator of propensity to pay would require wholesale rescoring of mortgage loan pools) to determine which borrowers’ FICOs meet the criteria. As a proxy, we assume that borrowers who have been current on their loans for the past 12 months presumably have seen a sufficient increase in their FICOs to meet the criteria, whereas borrowers who had an incidence of delinquency in the past 12 months have not. It is this latter set of borrowers that would appear to qualify for the freeze, which still leads us to the conclusion that rate freezes may be given to borrowers least likely to pay back.
Based on all the filters, we estimate that $115bn of subprime loans will be eligible. This compares with the $304bn of subprime loans facing reset from January 2008 through December 2010 ($227bn in 2008, $65bn in 2009, and $12bn in 2010). An average of 115,000 loans per month (averaging $19bn per month) are expected to have first resets through December 2008. The numbers drop significantly heading into 2009, with an average of 25,000 loans per month (averaging $5.5bn per month). While final details of the plan may differ, and implementation issues have yet to be worked out (ie, any large-scale modification proposal will require immense efforts on the part of servicers), our initial take on the proposal is similar to other government-backed plans put forth to date: while it may help on the periphery, it really just represents a band-aid fix for subprime RMBS investors. In addition, the hot-button issue of servicer liability for making (or not making) large-scale loan modifications remains a huge impediment.”