Thursday, March 3, 2011

Dual Track Foreclosures and Forbearance Agreements

Tools are good, tools help us save time, save money, and sometimes even save lives.  The term, forbearance is defined as refraining from something.  In the context of underwater homes and homeowners attempting to salvage their upside down property, forbearance sounds like a god send, the relief from the storm, a life-saver, a good tool.  When forbearance is coupled with "dual track foreclosure," forbearance shouldn't sound anything like a life-saver but more like a mill stone hanged about the neck of the homeowner.

Legislators in California are trying to implement a law that would make the activities of some home loan servicing firms illegal, the act of offering a forbearance agreement while simultaneously moving down the foreclosure path.  That would be the definition of a dual track foreclosure.  Senator Mark Leno (D-San Francisco) (no relation to Jay Leno) said "Banks should not foreclose on a  family's home until they inform the owner whether the loan can be modified to an affordable level...homeowners who qualify for modifications should get them - not a foreclosure notice."

The turn of phrase used in the news article, "modified to an affordable level," caught my eye and reminded me of a class action lawsuit I had read about.  The sign up for the case is found here, and is being brought against Aurora Loan Services LLC of Littleton, CO by Hagens Berman, a national law firm with offices here in Seattle.  The interesting thing about this case is that it is taking a judicial tack at what the legislatures are trying to make illegal.

THe complaint is being handled in U.S. District Court in California and can be read here, but the gist is as follows:  The homeowner goes into default by missing payments and seeks modification help to save the home from foreclosure.  Aurora Loan Services LLC continues the foreclosure process but finally comes to the homeowner and offers them a "forbearance agreement."  The agreement requires the homeowner to make a sizable up front payment followed by 4 to 6 monthly installments.  The amounts paid will not bring the mortgage current, so the homeowner continues to be in default.  The servicer is "checking to see if the homeowner qualifies for modification," and then when the homeowner magically doesn't qualify at the end of month six, the home is foreclosed, no additional notices are provided.

This is plausible scenario even here in Washington under the Deed of Trust Act.  The act requires direct notices to the homeowner in the form of the Notice of Default and the Notice of Trustee's sale which come a minimum of 120 and 90 days before the sale, but the sale can be unilaterally pushed back by the Trustee for up to 120 days.  Thus a forbearance agreement could be signed after an original date of sale is issued, the agreement would not interfere with the propriety of a sale as long as it occurred within 7 months of issuing the original Notice of Trustee's sale.  Do you see where this going?

The trustee issues the Notice of Trustee's Sale and almost simultaneously the Servicer issues a forbearance agreement which uses the possibility of a loan modification as inducement for signing.  The agreement asks for roughly two months worth of payments up front and then four additional installments to paid on a recurring day each month, like the 20th.  The agreement states that if the homeowner will provide required documentation, the Servicer will determine if the homeowner qualifies for a modification.  This is music to the desperate homeowner's ears, but its a sham.

The success rate of modifications under HAMP or otherwise is between 3.5% and 12%, depending on which governmental metric you want to follow.  The modification program is routinely used by the banks to keep loans that would otherwise seek refinance at another institution.  Thus the number of modifications for those that are desperate is probably even lower. Consequently, most of the forbearance agreements are not really promising to do anything for the homeowner.

The real problem with these forbearance agreements is the payment.  Under the Deed of Trust act, the homeowner can walk away from the underwater home and make no payments during the time of the foreclosure process.  So, each payment received under the forbearance agreement is essentially free money to the servicer who would not normally see any money during the process.

To add insult to injury, the Servicer receives higher fees when the loan is in default than it does when the payments are current.  The investors in the Mortgage Back Securities are thus not seeing a very high percentage of the money flowing from the homeowner, rather it is being siphoned off at the servicer and Trustee level.  I am sure you wouldn't be surprised to learn that the servicers and trustees are generally subsidiaries of large mortgage banks.

Bottom line, the forbearance agreement is most likely a tool to take money out of your pocket and not a tool to save your home.  Don't be a tool, tell the bank to shove the forbearance agreement and short circuit the dual track foreclosure before it gets started.

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