Bloggers and the mainstream press get a lot of mileage out of the increase in foreclosures during a real estate downturn. Originators need to be prepared to deal with fact, not emotion, in order to help clients in difficulty.
“Banks Steal Black Children’s Futures,” rails Glen Ford on BlackAgendaReport.com. “The institutional banking practice of racist home mortgage interest gouging guarantees that successive generations of African Americans will lag further behind their white peers in wealth accumulation.”
Emotional rhetoric like this is nothing new. “How the government and big banks help second-mortgage companies prey on the poor” was a headline 15 years ago, in the June 1992 Washington Monthly.
There’s a sense, fanned by such journalism, that banks and originators funnel cash-strapped borrowers into a trap from which there is no escape. The bank doesn’t want a piddling 7 or 8 percent on its investment; what it really wants is your house!
Nothing could be farther from the truth.
Short sales (preforeclosure sales) can be a useful tool to keep a borrower out of foreclosure. If you as the originator are knowledgeable as to the FNMA guidelines for such a sale, you will help the client, the real estate agent and the lien holder.
In cases where Fannie Mae is the insurer, here’s the definition of a “short” sale: It is “the sale of a property in which Fannie Mae, the mortgage insurer, and the borrower all agree to accept its proceeds as satisfaction of a defaulted mortgage, even though the amount of those proceeds may be less than the amount owed on the mortgage.”
Complaint: “The bank won’t even discuss it with me.”
That may be because you’re jumping in too early in the process. FNMA Guidelines require the bank to exhaust “all other available means” before discussing a preforeclosure sale with a borrower. An appropriate workout plan may include mortgage modification or mortgage assumption.
In a mortgage modification, the purpose is to bring the borrower current in such a way that the mortgage will not default. This can be done by extending the term of the mortgage, reducing the interest rate for a period of time (usually two or three years,) recasting the balance of the mortgage (re-amortizing the outstanding debt) or capitalizing delinquent interest and escrow items.
Complaint: My borrower has experienced financial hardship, and the bank won’t work with him/her.
That may be because the borrower’s financial hardship “must be the result of an involuntary reduction in income or an unavoidable increase in expenditures.” Here are some examples FNMA lists:
- a long term layoff
- a job loss
- an involuntary reduction in pay
- a disability or illness that results in a decrease in income or in major medical expenses
- the death of the primary contributor to the mortgage payment
- a decline in a self-employed borrower’s earnings
If the circumstances are a result controllable circumstances, a short sale is unlikely to be approved. Your borrower can’t quit his job, voluntarily reduce the number of hours worked, or decide to go back to school, and expect that the bank will accommodate their desires.
If this is helpful, and if you would like me to answer a particular question, leave a comment below.
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4 responses so far ↓
1 Paul // Nov 2, 2007 at 3:10 pm
Mike, excellent article on FNMA LM! More LOs need to be familiar with the process and become leaders in their respective communities in the LM arena. In talking with HUD counselors, what I’ve found is that far too many troubled homeowners wait too long to attempt a workout.
2 Gina Gardner // Nov 2, 2007 at 3:43 pm
Great post. Will refer my writers to it. Some of them are under the impression that a hardship letter should be as weepy and maudlin as possible to get a workout. The bottom line is that the situation has to be fixable and not the borrower’s fault; a workout that only puts off the inevitable foreclosure is unlikely to be granted.
3 Robert // Nov 12, 2007 at 4:12 pm
Short sells are great ways for a buyer to get into the market at below market prices. In foreclosure, many times in the Bay Area the homes sell for just as much if not more.
4 Robert // Nov 12, 2007 at 5:55 pm
In addition, you will many times in a short sell have to get pre-qualified by the mortgage broker of the insurer’s choice. Having a pre-qualification by your own personal mortgage broker would not work.
Rob (http://www.yourmortgageworld.com)
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