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.

The End of HAMP?

I know its just January, almost February but for fiscal minded politicos, its spring time and its time to clean, a little weeding if you will.  We are seeing it here in Washington as cities like Everett and Lynnwood cut back on teachers and other staff, and even at the state level as Governor Gregoire puts the axe to under-preforming programs and asks for whole sale cut backs in expenses and personnel.   News from the other Washington (D.C.) that there are further cuts on a national level.  One in particular is HAMP.

From a professional stand point, I have been less than accepting of the program.  The Home Affordable Modification Program (HAMP) for short has been an abject failure.  Nationwide, until last summer we had seen the modification to application ratio sit at about 3.6%.  Recent news has shown that number climbing to about 7% and in particular locals where the states have implemented special hotlines and other foreclosure deferment programs like Colorado, the number has climbed to 12%.  Not exactly favorable numbers.

To be fair to HAMP, a lot of applicants cannot qualify for the modification.  The target is 31% of pre-tax income.  With the loss of jobs, loss of overtime, or any combination of decreased earning capacity will cause some homeowners to be in a situation to where they simply cannot afford to stay, even if a modification was made to meet 31%.

The issue that I take is that in many instances is that the bank essentially gets to look at the value of the current loan as a starting point for determining if it will in fact modify.  If the bank is not better off, it has not incentive to modify and won't.

Jim Jordan, Darrell Issa and Pat McHenry, all Republican congressmen have introduced a House Bill that would clean out HAMP due to its failure in meeting the projections of 3 to 4 million modifications as opposed to the 579,000 that had been accomplished through December. 

The repeal of these bills in of itself will do nothing to cure the foreclosure crisis.  In fact, for the handful of people it helped, it would be detrimental.  The problem with those bills is taht there is no private enforcement, no consumer protection act application, no provision requiring good faith action on the part of the bank.  When there is no enforcement, the bill or regulation is worth about as much as the paper it is written on. (Sorry for the dangling participle)

The beauty of the Foreclosure Mediation bills that I have commented extensively upon this week, is that there were finally some teeth.  No more paper tigers here.  The attorney could, on good facts, get a finding that the bank had acted in bad faith.  Bad Faith suits are enough to make executives soil themselves and that is why the banks and their big law lackeys have made many arguments against the passage of these bills.

Though I applaud the removal of under-preforming and broken vestiges of government, it is much like a garden with weeds.  You can pull weeds all day long, but if you don't put something good in its place, the weeds come back.  Spring clean, put things in order, but don't leave us without any tools to fight the bank, the weed will just come back.