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By Allan S. Glass | Broker in Los Angeles, CA
  • Real Estate Market Q&A - Mortgagerates.com

    Posted Under: General Area in Los Angeles County, Market Conditions in Los Angeles County, Property Q&A in Los Angeles County  |  August 2, 2011 4:07 PM  |  1,718 views  |  No comments

    Last week I was honored to be interviewed by the staff at bankrate.com and mortgagerates.com with questions on the housing market in Los Angeles, covering everything from affordability to financing, foreclosures to short sales.  I'd like to share excerpts from that interview here.


    This week we focus our efforts on the real estate market of California. Allan  Glass joins us to answer some questions on the housing markets of Los Angeles and Orange County.

    How is housing affordability in your city?

    I work throughout Los Angeles and Orange County. Both are considered high cost areas by HUD and traditionally have a low affordability index. Most areas and cities in these two counties have experienced price drops which, combined with extraordinarily low interest rates make for improved and historically high affordability. However, the answer to that question is slightly different depending on the specific market. For example, beach cities like Newport Beach and Santa Monica, and high end markets like Beverly Hills, Brentwood and San Marino are still relatively expensive to the median income for the area. Although prices have dropped in these areas, demand is always strong. As a result affordability is low relative to moderately priced areas in the counties, such as Anaheim, Costa Mesa, Culver City, or Hollywood.

    On the contrary, the traditionally low cost areas and outlying suburbs in the two counties have not been this affordable in the past 15+ years. Lancaster/Palmdale, South Los Angeles, Compton, Santa Ana are areas where the cost to own has again become comparatively cheaper than renting.

    What’s going on with down payments – are buyers having to make bigger down payments nowadays? And how does that affect the housing market?

    As I mentioned in the previous question, I work throughout both Orange and Los Angeles Counties. As a result I handle transactions in different price groups, ranging from $100,000 to $5,000,000 plus. The answer to this question is again different depending on which price group of buyers we are addressing.

    The largest group of buyers fall within the traditional FHA conforming loan limits, those with loans at or below $417,000. This group is almost 100% driven by FHA borrowing thus down payments tend to mimic the FHA requirements of 3.5% to 5% down. The biggest issue these buyers face is strict lending guidelines which make the underwriting process difficult. Secondly many of the homes for sale in this price range are either bank owned REO, or short sale properties. The uncertainties FHA borrowers face in the underwriting process makes it difficult for them to compete with cash buyers or investors who can give distressed sellers a better “certainty of closing.” As a result many distressed homes are being snapped up by investors who later resell them for profit to FHA buyers.

    The second group of buyers fall within the high cost conforming loan limits ($418,000-$729,750) and include buyers up to the $2,000,000 price range. For those in the conforming loan limit range there are still good options in the 90% to 95% LTV range. For those who hit the jumbo loan range down payments in my experience have been in the 10%-20% range. There are still a number of cash buyers in this price range, believe it or not, but most rely upon financing to complete their transactions.

    The third category of buyer is the $2,000,000 and up price range. These buyers tend to have large balance sheets and significant assets. Many of these buyers have established banking relationships which allow them non-traditional methods of financing. These include business lines of credit, cross collateralized loans, personal credit lines, or simply cash from their own reserves. Buyers stretching to buy in these price ranges should expect to bring down payments from 20%-40%.

    How can the homeowner know if this is a good time to refinance?

    On average homeowners sell and move every 5 years. Using that as a guideline, it would most often make sense to refinance into a lower (fixed!) interest rate if you can recoup the cost to refinance within 2.5 – 3 years. Those in a variable rate loan should consider the fact that interest rates are at an all time low and few if any believe there is room for rates to drop – if a homeowner does not plan to move in the short term (within the next 2 years) and is in a variable rate loan, it may be time to switch to a fixed rate now.

    The biggest issue facing most homeowners is over-leverage. Many homeowners owe more money than their home is worth. Regardless of their interest rate, these situations leave few options outside of continuing to pay their current mortgage, loan modification, short sale, or foreclosure.

    What are the most popular home buying sales you see closing? Foreclosures? Short Sales? Straight buys?

    There are few “straight” or traditional sales occurring in the market. The reason is two-fold. First an extraordinary number of homeowners are upside down and REO inventories are historically high. Second, those who are fortunate enough to be on sound financial footing, choose not to sell in a distressed or buyers market.

    Foreclosure sales are the most easily understood group of properties and therefore have the largest demand from both retail home buyers and investors. They tend to be very competitive and banks have very strict rules governing how and when offers may be submitted.

    The most frequent and the most popular form of sales I handle these days are short sales. This includes sales to both retail home buyers and investors. I’m finding most home owners in distress prefer to be proactive in handling their financial problems and would rather attempt a short sale than face foreclosure. Additionally, many home buyers and investors prefer not to buy from banks under their stick and onerous conditions. As a result many are willing to pursue short sales even though they require longer waiting periods and come with a degree of uncertainty until the debt settlement is resolved with the lenders.

    Has your target audience changed with the economic change?

    Definitely yes. Most of the brokerage work I did prior to 2007 involved larger acquisitions by developers in urban locations. These transactions involved lot assemblage where smaller functionally obsolete buildings were replaced with new condominium, apartment and mixed use buildings. That market came to a screeching halt towards the end of 2007 and since then my focus has shifted to distressed properties, broken development deals, note sales, and short sales. I have been involved in over 200 short sale transactions in the past two years alone.

    Thank you Allan for participating in our Q&A series. Allan can be followed on Activerain.

  • California Deficiency Judgment Rules

    Posted Under: Agent2Agent in Los Angeles, Foreclosure in Los Angeles, Property Q&A in Los Angeles  |  March 25, 2011 4:06 PM  |  3,271 views  |  No comments

    DISCLAIMER:  This article is intended for informational purposes only.  None of the information contained in this article should be taken as legal advice. Neither ASG REAL ESTATE INC Nor Allan S. glass are attorneys.  Readers are advised to seek legal counsel regarding any information provided herein as they relate to specific personal situations a reader may face. Further the information herein pertains to California only.  Deficiency laws will differ in each state.

    California has historically taken a strong public policy stance against deficiency judgments.  The policy objective of the states anti-deficiency legislation is to place the risk of valuation upon the lender who is typically in best position to understand true market value and to discourage sellers and lenders from taking advantage of less knowledgeable buyers by overvaluing the underlying collateral in a standard real estate transaction.

    The last part of this explanation dates back to the wild west days of California when most areas were still rural and the original housing boom was in full swing.  In many ways similar to what happened in areas of Nevada earlier this decade, real estate syndicators would buy large tracts of undeveloped land in the middle of nowhere, subdivide the land into parcels and then sell those parcels to homeowners with the promise of future roadways, commerce, jobs and riches.

    In many unfortunate circumstances  these unknowing buyers found themselves not only with a worthless piece of land in the middle of nowhere, but also facing a financial judgement against them by a lender who allowed the prices to be artificially inflated, or by unscrupulous speculators who both sold and financed the purchases themselves at unfairly high prices.

    definition of deficiency judgment

    So what exactly is a deficiency judgment?  According to Webster’s New-World Law Dictionary, it is defined as the following:

    “N. A judgment for the balance of a debt already partly paid, typically through a forced sale of personal or real property.”

    Relating to real estate, deficiency judgments occur as a result of a short sale or foreclosure sale and the rules governing when a lender may seek such judgments are set by state law.  Each state has its own statutes and limitations and most rules have many exceptions adding furhter confusion to the process.

    California Foreclosure Process

    California is a lien theory state meaning you own your property after the close of escrow and lenders secure their loan with a promissory note (promise to pay) secured by a deed of trust.  It is the deed of trust which allows them to take action should you choose or find yourself unable to pay as agreed.  For a more in depth description of the California Foreclosure Process you may read my previous post.

    To summarize, California lenders may choose to pursue the more lengthy court action referred to as a judicial foreclosure, or the expedited non-judicial foreclosure process to recovery their loss.  An overwhelming majority (think 98% or more) of lenders in California choose to pursue the non-judicial method to foreclose for three primary reasons.  First, it does not require additional court proceedings to complete, which leads to the second reason, the process is much faster than a judicial foreclosure.

    The third primary reason lenders pursue non-judicial foreclosures is the “right of redemption” which is afforded to borrowers only after a judicial foreclosure; this rule effectively prevents the foreclosing lender from reselling the property as an REO anywhere from three (3) to twelve (12) months after the judicial foreclosure sale date.  The right of redemption does not apply in a non-judicial foreclosure, thus lenders typically seek to resolve their problem loan quickly through the non-judicial process.

    One Action Statute, A Security First Rule, and the Single Action State

    California is considered a single action state with regards to a lender’s remedy in the recovery of any debt or the enforcement of any right secured by a mortgage upon real property.  The rules governing this statute are found in California Civil Procedure Code Section 726(a).  The purpose of the one-action rule is to protect a defaulting mortgagor (borrower) from being harassed by a lot of different actions filed against it by the mortgagee (lender).

    The security first provision of 726(a) directs lenders to first proceed against the security for the debt prior to trying to enforce the underlying debt.  In essence, if a lender takes real estate collateral as security for a loan in California, the lender must foreclose on the real estate security first. Further, a lender can only bring one “action” against the borrower, and must use it as the primary source of repayment when collecting the loan.  If a lender chooses to seek a deficiency judgment against a borrower prior to seeking repayment through foreclosure they risk the possibility of losing their claim to the collateral.  (See Security Pacific Nat’l Bank v. Wozab, 51 Cal. 3d 991, 997 (1990).)

    Deficiency Judgment Protection in Foreclosure - Codes 580(b), 580(d)

    Two sections of the California Civil Code Procedures outline the deficiency judgment protections afforded borrowers after a foreclosure sale.  These codes do not protect borrowers in a short sale transaction, however most lenders facing these limitations after a non-judicial sale will negotiate a full release of liability on these loans if the short sale is financially beneficial when compared to a foreclosure.   In most basic terms protecting 1-4 unit residential properties, owner occupied, where the purchase money loan was foreclosed on using a non-judicial foreclosure method, the following codify California’s rules:

    California Civil Procedure Code 580 (b) - Covering the “character” of the loan, this section protects purchase money loans explicitly limited to loans on properties of 4 unit dwellings or less used as a principal residence.  This section utilizes the term “vendor” which has been interpreted by the courts to also cover seller carrybacks and/or existing loans assumed by a new buyer in any type of property purchased (Costanzo v. Ganguly, 12 CA. App. 4 1085 (1993)).  This statute explicitly precludes a deficiency judgment when sellers carry back financing at the time of purchase.  This section, however, does not protect non-owner occupied or commercial properties.

    California Code Civil Procedure 580 (d) - Covering the “process” of the foreclosure action. This statute is considered to create a “parity of remedies” for lenders allowing them to choose between the judicial vs. non judicial procedure.  Initially enacted to protect borrowers from the practice of under bidding at a non-judicial sale which would then worsen the deficency, the statute now expressly prohibits a deficiency judgment after a non-judicial sale.  Althougth 580d does not bar a sold out junior lien from seeking a deficiency judgment (see Walter E. Heller Inc. v. Bloxham, 176 Cal.App.3d 266 (1985)), it does protect borrowers on junior loans in cases where the senior foreclosing loan is the same lender (see Simon v. Superior court below).

    Code 580d does set limitations on deficiency judgments when the lender chooses the judicial process.  In these cases deficiency judgments are limited to the lesser of:

    a) the amount by which the debt exceeds the fair market value of the property at the time of foreclosure sale
    b) the amount by which the debt exceeds the sale price of the property at foreclosure sale

    It’s important to note that each of these rules apply on their own, regardless of the other rules.  Meaning you only need to meet the requirements of one of these civil codes to be protected against a deficiency judgement on any particular loan.

    Pending Additional Protection

    During the recent housing crisis many professionals and politicians addressing foreclosures felt it unfair that a borrower who refinanced a purchase money loan unwittingly put himself at risk of a deficiency judgment after a foreclosure sale.  In particular, those who simply refinanced to lower a monthly payment without taking additional cash out of their homes. As a result California Senate Bill 1178 was introduced and passed by the California legislature in 2010.

    Intended to extend homeowner protection against deficiency judgements to refinanced purchase money loans in instances where  the homeowner did not “cash out” the bill was ultimately vetoed by then Governor Arnold Schwarzenegger last year.

    Short Sale Protection Code 580(e)

    Seen by some to be a compromise on the failed SB 1178, legislators introduced California Senate Bill 931 in 2010 to extend deficiency judgment protection to homeowners in a short sale transaction.  The bill was passed by the legislature, signed into law, and became California Civil Prodecure Code 580(e).

    Prior January 1, 2001 deficiency judgment protection was only afforded to certain borrowers after a non-judicial foreclosure sale occurred.  However, the passage of SB 931 created this new statute extending further protection in the case of short sale on one to four unit residential properties regardless of residency.  This statute only applies to senior liens and therefore does not protect borrowers from deficiency judgments on junior liens after a short sale.

    Exceptions to the Rules

    In spite of the statutes listed above, there are circumstances where a borrower can lose his/her deficiency protection, and other exceptions to the rules.  They include:

    1) Fraud - Deficiency protection is not extended to a homeowner in cases where a borrower fraudulently induced the lender into making the loan in the first place.  California Civil Procedures Code 726 (f) (g) & (h).  In these instances lenders may also seek punitive damages.

    2) Bad Faith Waste - You may have heard about the case of San Diego Police officer Robert Acosta bulldozing his home last June after losing it to foreclosure.  This is an extreme example of “bad faith waste” which can also describe willful neglect on the part of the homeowner (Cornelison v. Konbluth 15 Cal .ed 590 (1975)).  These acts include reckless, intentional, and/or malicious injury to the property by the homeowner.

    3) Non standard Transactions - These transactions include those where non traditional means of financing were used to consummate the transaction.  Examples would be loans which originated with a seller as non purchase money and were later assumed by a subsequent purchaser, construction loans on property not intended as a principal residence, or subordinated seller carry back loans on vacant land.

    Simon v. Superior Court (Bank of America), 4 Cal. App. 4th 63 (1992)

    Although a borrower is not protected from a deficiency judgment after foreclosure on a junior lien which is sold out and rendered economically worthless, that exception does not apply if the lender itself has taken some action to make the security worthless.  The California courts clarified this position in Simon v. Superior Court stating that a creditor who loses it’s security through a culpable act does not come within the exception to the security first rule.

    In plain speak, if the same lender holds both the senior and junior loan, the lender cannot pursue a deficiency judgment on the borrower for the junior loan after foreclosing on the senior loan.  This is also true if the junior loan obligation was originated by a different entity, but was later assumed by the senior lender.

    For example, let’s assume a borrower had a first trust deed held by Chase Bank and a second trust deed originally held by Washington Mutual Bank.  Now that Chase has assumed the liabilities of Washington Mutual (WAMU) they have effectively become the same lender.  If Chase were to foreclose on this first trust deed, they would not be able to pursue a deficiency judgment against the borrower on the second trust deed.  The same holds true for Countrywide / Bank America, etc. etc.

    Although this only applies in the case of a foreclosure sale and does not apply in a short sale, it is very important to understand the implications of this case when negotiating a short sale transaction.  If a short sale is in the financial best interests of a lender, a skilled negotiator can use this case to reason with a lender and help them understand why a claim to deficiency should be waived.  If it is not, the seller can hold out for a more costly and lengthy foreclosure sale that ultimately prohibits the lender from seeking the deficiency.

    Release of Lien v. Full Satisfaction or Release of Liability

    Not every short sale approval letter is created equal.  Further, receiving a settlement letter from the bank does not mean that they have agreed to release the borrower from all future liability in connection with the loan.  In order to complete a short sale a lender must agree to release the lien against the property securing the loan.  Thus every approval letter will stipulate a “release of lien” to accommodate the short sale.

    However, unless your approval letter specifically includes language referring to a “full satisfaction” or “release of liability” the borrower may find themselves subject to a deficiency judgment after closing a short sale.  Therefore a full release or satisfaction should be sought on approval letters from a junior lender (senior liens are protected under code 580e) whenever possible.


    California is very protective of borrowers when is comes to deficiency judgments.  With the introduction of Ca. Civ. Proc. Code 580(e) in January of 2011, some of these protections have also been extended to borrowers in a short sale transaction.  Most protection is afforded to purchase money loans on principal residences, however several cases have extended the reach of deficiency protection to consumers.  Although most sold out junior lenders retain the right to pursue a deficiency judgment, this right does not apply to all junior liens in California (Simon v. Superior Court).

    Finally, a short sale approval letter does not always release a borrower from future liability and should be reviewed carefully for specific language addressing a full release of liability.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • The California Foreclosure Process

    Posted Under: Agent2Agent in Los Angeles, Foreclosure in Los Angeles, Property Q&A in Los Angeles  |  December 15, 2010 8:47 AM  |  2,762 views  |  1 comment

    chart courtesy of: Foreclosureradar.com

    As I established in my last post “Understanding the Foreclosure Process” every state follows a different procedure and set of laws during the foreclosure process.  The two primary routes are judicial and non-judicial foreclosure and which process is followed can often be determined by which “theory” of ownership has been established in the state.

    California is a lien theory state that uses a trust deed and underlying promissory note to secure the loans made against real estate. Essentially the promissory note is an unsecured “promise to pay” agreement between a borrower and lender; to provide security for the obligation borrowers sign a deed, which is held in trust by a third party “Trustee,” until the the debt is paid in full and the lien is released.  The trust deed will also include a power of sale clause, allowing the lender to initiate foreclosure if the borrower fails to pay.

    Because of these factors lenders in California have the option of pursuing both types of foreclosure proceedings if the borrower fails to meet his/her obligation.

    Judicial Foreclosure

    The Judicial Foreclosure process is the lengthiest process and requires a court proceeding to be concluded.  Further complicating this option, a foreclosed borrower reserves the right to reinstate their home after the foreclosure sale up to one (1) year after a judicial foreclosure proceeding is completed.

    The benefit to lenders with a judicial procedure is the right to pursue a borrower for a deficiency judgment.   Judicial foreclosures are primarily reserved for large transactions where the borrower has pledged personal liability and has substantial assets the bank could pursue after the sale.  These situations are most often seen in large commercial transactions, rarely if ever in residential situations.  As such an overwhelming majority of foreclosures in California are done with the non-judicial method.

    Non-Judicial Foreclosure

    The Non-Judicial foreclosure method in California has been developed through the process of case law and is governed by the statutes in California Civil Code 2924.  The result established after adopting a lien theory for the state, it concludes that a loan does not transfer ownership of a property to a lender, rather it creates a lien against the property.  Cal. Civ. Code 2924 establishes the rules and regulations governing mortgages in the state and the process by which lenders can forclose on delinquent borrowers.  Also known as a Statutory Foreclosure, this method does not require additional court involvement and is agreed to by borrowers via the power of sale clause found in the trust deed signed when the mortgage was originated.

    Most foreclosures occur using this method which does not allow a right of redemption after the foreclosure or “trustee” sale.  Additionally, as a single action state, defined by Cal. Civ. Code Section 726(a), there can be but one form of action for the recovery of any debt or the enforcement of any right secured by a mortgage upon real property.  In plain speak, a lender choosing to pursue an complete a non-judicial foreclosure in California cannot also pursue a deficiency judgement against the borrower.

    Perata Mortgage Relief Act - SB 1137

    As a result of the recent turmoil in the housing markets, California has passed several new laws which also affect the foreclosure process in the state.  The first was signed into law by Governor Schwarzenegger in 2008 and applies to loans originated between January 1, 2003 through December 31, 2007.  SB 1137 established three primary changes to the foreclosure process.

    First, it established a notification process for tenants living in a foreclosed property.  Prior to SB 1137 many unfortunate tenants were left in limbo unaware the home they were renting was in foreclosure until after the sale had occurred.  The new law sets rules requiring a minimum sixty (60) day notice prior to any eviction and sets specific language required in the notice of foreclosure given to tenants.

    Second, 1137 empowers local authorities to impose a fine on financial institutions that do not maintain a vacant home after foreclosure.  Primarily a means of fighting blight and protecting neighborhood health and welfare the potential $1,000 per diem is a costly deterrent for banks unwilling to address dilapidated homes expeditiously.

    Finally, the most important change pertaining to home owners, SB 1137 now requires lenders to make their best attempts to contact a home owner and discuss the options available to help avoid foreclosure prior to filing a notice of default.   This lender diligence period can and should included discussions regarding loan modification, short sale, deed in lieu of foreclosure and has added anywhere from fifteen (15) to ninety (90) days to the foreclosure process.

    California Foreclosure Prevention Act - ABX2 7 and SBX 27

    Aimed at mortgage servicers and lenders, ABX2 7 and SBX 27, known collectively as the California Foreclosure Prevention Act (CFPA) adds ninety (90) days to the foreclosure process after a lender has filed a Notice of Default (NOD).  The law was passed on February 20, 2009 and will sunset on January 1, 2001, covering loans originated between January 1, 2003 and January 1, 2008.  CFPA applies to first trust deeds on homes which are the primary residence of the borrower in question.

    It is important to note that CFPA only affects servicers and lenders who have not filed or received an exemption to the law.  Exemptions will be granted to all servicers following and adopting a comprehensive loan modification program aimed at helping defaulted homeowners avoid foreclosure.  Although lenders can avoid the 90 day delay with the exemption, often times the required modification process itself will delay the foreclosure process up to the ninety (90) days stipulated in CFPA.  CFPA also exempts lenders and servicers in cases where the borrower has previously filed for bankruptcy.

    While the act does not dictate modification plans a lender or servicer must follow it does provide a suggested framework to be used.  This includes rate reductions as needed for a fixed term up to five (5) years, extension of the amortization period of a loan up to forty (40) years from the date of origination, deferral of a portion of the principal unpaid balance until maturity of the loan, and/or some form of principal reduction.

    Non-Judicial Foreclosure Timeline in California

    Prior to the passing of recent legislation aimed at helping homeowners avoid foreclosure the non-judicial foreclosure process averaged approximately 125-130 days from the initial moment of default to the completion of a trustee’s sale.  According to the October 2010 foreclosure report from Foreclosure Radar, lenders averaged 279 days to foreclose monitored from the time a notice of default (NOD) has been filed to the date of the foreclosure sale.   It is not uncommon per the new laws mentioned above, for lenders to take up to ninety (90) additional days to file a NOD from the date a mortgage first becomes delinquent.   This means the average foreclosure timeline in California can now reach 369 days, more than one year, start to finish.

    To further complicate matters, California law also stipulates according to Cal. Civ. Code 2924 g(c)(1), “In the event that the sale proceedings are postponed for a period or periods totaling more than 365 days, the scheduling of any further sale proceedings shall be preceded by giving a new notice of sale in the manner prescribed in Section 2924f.”  In other words, if the lender does not foreclose on a property within 365 days from filing a NOD, a new NOD must be filed and the process starts all over again.

    The Aftermath

    Barring cancellation or postponement, the outcomes of a trustee sale are two-fold.  1) the property is sold to a third party bidder who becomes the new owner of record once funds are settled and the deed is recorded or 2) Property ownership reverts to the foreclosing lender and becomes an REO or bank owned property.  At this point ownership has ended for the defaulted borrower and they or any existing tenants will be contacted within hours by the new owner or their representatives to begin the process of transferring possession.

    This ends the foreclosure process for the defaulted borrower and begins a new chapter for the property in question.

    © 2010 Allan S. Glass - ASG Real Estate Inc. ®

  • What to Know About Loan Modifications

    Posted Under: Foreclosure in Los Angeles, How To... in Los Angeles, Property Q&A in Los Angeles  |  December 14, 2010 10:17 AM  |  1,041 views  |  No comments

    There have been countless changes in the loan modification industry since in began en force circa 2007.  Most importantly was the systematic weeding out of fraudulent service providers who set up shop to take advantage of distressed homeowners by charging an fee up front and never doing any work.  I’ll say this now and repeat it again as it’s the single most important bit of information you should know when seeking a loan modification: NEVER PAY UP FRONT FOR A LOAN MODIFICATION!

    Who can negotiate a loan modification?

    • You - that’s right.  Although it can be to your benefit to have a professional help you through the process, there is nothing preventing you from attempting a loan modification on your own.
    • Foreclosure Consultant - These individuals are typically non licensed professionals and can either be for profit or non-profit companies.  After July 1, 2009 in the state of California, all foreclosure consultants must be registered with the Attorney General’s office and post a bond in the amount of $100,000 (California Civil Code section 2945.45).
    • Attorney - Any attorney licensed in the state where your pending foreclosure is located.  You can find all registered attorney’s by searching martindale.com
    • Real Estate Broker or Agent - The most common source for advice and help negotiating a loan modification or short sale.  Although not all real estate agents have the experience to qualify as experts in the field, they are allowed to help if they hold a current real estate license.  You may find out if your agent or broker is licensed at the California Department of Real Estate.

    Protect yourself from loan modification scams.  How to spot foreclosure fraud.

    In case you didn’t catch this in the first paragraph, NEVER PAY UP FRONT FOR  A LOAN MODIFICATION!  In California this practice is illegal. It’s also important to remember that if it sounds too good to be true, it probably is.  Just like a stated income loan with a “starting” interest rate that is unexpectedly low, a loan mod with terms that don’t pass the sniff test are also unlikely to prove true.  I’ve listed below some of the more common loan modification scams for you to review and catalog:

    • I’ll again start with the loan modification counselor who asks you to pay a fee BEFORE you’ve successfully obtained a PERMANENT loan modification.  I’ll say it again, NEVER PAY UP FRONT FOR A LOAN MODIFICATION!
    • The foreclosure consultant who tells you to make your monthly payments to him/her rather than your bank during the loan modification process.  This should never happen.
    • The consultant who poses as a government affiliated entity.  Often using names that sound like they are government related and asking you to pay them up front to qualify for one of the special government related programs like HAMP or HAFA.  These groups will suggest that their company is directly linked to the program and they charge you to confirm you are eligible.  Your lender will tell you if you are eligible for HAMP free of charge.  You may also see the HAMP waterfall below.
    • Bait and switch “rescue loans.”  It is imperative that everyone read and fully understand what they are signing.  Bait and switch rescue loans will ask the homeowner to sign over title to their house to a third party in exchange for a new modified loan with a lower loan balance.  Again, if it sounds too good to be true…
    • Rent to Own and leaseback schemes.  Be aware of who you are dealing with and take care not sign over title to persons or companies who ask you to sign over title promising to sell the property back to you once the process is complete.  These schemes may also include asking the homeowner to move out during the process, allowing the “consultant” to collect rent until the house ultimately goes to foreclosure sale.  In this case the consultant never completes the modification, rather, they just postpone the foreclosure allowing them to collect rent for a longer period.
    • A late add to this list, from the CA Attorney General press release, beware of forensic loan audits.  In this scenario the consulting company uses the forensic loan audit as a means of getting the homeowner to pay up front for the tools needed to complete their modification; in this case a forensic loan audit.  Once the fee is paid, no work is done and the loan modification never happens.

    What to be aware of going in.  What are your chances of success?

    The foreclosure process is stressful and often times overwhelming.  In many cases home-owner’s are willing to suspend reality, try anything and trust anyone who promises to allow them to stay in their home.  Fueling additional confusion in the loan modification process is the fact that many defaulting homeowners used stated income loans to refinance or make their purchase. Every homeowner should know before going into the loan modification process that you must have income to qualify for a loan modification.

    This is worth repeating:  If you cannot document income sufficient to pay your mortgage (that is a new lower mortgage payment), you will not get a loan modification! Further, although the bank may have taken your word for it when you qualified to take out the loan, they will require you to document and will definitely confirm your income before agreeing to modify your loan.  Generally speaking the goal of a loan modification is to lower your monthly payments to an amount equal to 31% of your current gross income.

    Banks also require you have a hardship before seeking a modification.  Examples of generally accepted hardships are divorce, death of an income provider, loss of job or income, forced relocation for a job, or pending interest rate increase.  They are not going to modify your loan because you’d like to refinance, if your current income supports the current monthly payment.

    Next, the banks expect you to spend your savings before they consider modifying your loan.  Two things to note here; first some of your retirement accounts are off limits thanks to the ERISA laws, meaning the banks cannot go after or require you to liquidate them in order to make mortgage payments.  Second, it is generally accepted that the banks will expect a home owner to have less than two and one half times their current monthly payment before they modify a loan.  For example, if your monthly mortgage payment was $100 and you had $250 in your savings account (2 1/2 times your payment), the bank would expect you to use that money before they modify your loan.

    One final note on this subject, think twice about applying for a loan modification simply to postpone a foreclosure or short sale.  Almost anyone can get a temporary modification through their bank. The suggested reasoning here is that the bank is attempting to collect a bad debt, in order to evaluate their ability to collect banks will attempt to gather any and all financial information you provide to later collect on that bad debt.  If you are falsely or hopelessly building a case for a modification by showing income and assets, that information may ultimately prove detrimental to your short sale negotiations.

    The unsolicited loan modification from JP Morgan Chase

    A few things in history have reached mythical status; the Fountain of Youth, the contents of Al Capone’s vault.  Our current depressed housing market has the unsolicited loan modification from WAMU / Chase.  Ladies and gentlemen, I’m here to tell you it does exist.  Accompanied by a letter from Steve Stein, head of the Chase Homeowner Assistance Department (I couldn’t find a link to the department on the Chase website, however the phone number listed is: (888) 368-5524) the offer was received and accepted by one of my clients in Southern California.

    According to the Chase documents, her “loan is eligible for (the) special program developed as part of Chase’s announced effort to preserve home-ownership in America.”  According to my client, she never contacted Chase requesting a loan mod, nor had she ever missed or been late on any of her mortgage payments.

    In reviewing the offer with her, I noted she was more than 100% underwater on her loan (previous balance approximately $600,000, estimated fair market value less than $300,000) and her interest rate was going to reset the following month.  This is also an owner occupied property on a stated income, option arm, variable rate loan.  The Chase modification set her interest rate to a fixed 5% for the life of the loan, reset the amortization period at 30 years from the modification date, and wait for it…. reduced her principal balance by approximately $250,000.

    My point in bringing this to everyone’s attention is three fold:  First, pay attention to the letters and phone call offers sent to you by your current lender, although most are just collection calls, some lenders are proactively attempting to help homeowners modify their loans.  Second, I’ve received several phone calls from clients regarding similar offers yet found very little information on such offers over the Internet or from any other sources.  I wanted to share a story of success to inform you all that these possibilities do exist.

    Finally, I wanted to stress the importance of principal reductions as a solution to the current housing crisis (just in case any influential bankers or politicians are reading).  In the example above, my client is in her early sixties, educated, has perfect credit, and was fully aware of the current market value of her home.  Like many homeowners in similar situations she is responsible and proud of her attention to financial obligations.  As such, she was reluctant to ask for help while she could still pay, and felt morally opposed to a strategic default.

    After the process was complete she shared the fear and and anxiety that accompanied two years of waiting for her payment to increase, realizing she had no hope of refinancing into a fixed rate loan, and knowing she couldn’t sell or find another property to purchase.  Her loan modification took one hour to review with an attorney, fifteen minutes to complete the paperwork that was enclosed in the packet sent by Chase, and was processed and completed before her next payment was due 15 days after she received it.

    Finding the greater good

    It seems to me there are two ways to address an obstacle.  One is to brace yourself and move to minimize the negative impact you may individually encounter; the other is to proactively seek solutions for removing the obstacle and move to the collective good.  In fact anyone who’s seen the movie A Beautiful Mind, realizes that John Nash won a Nobel Prize for his game theory suggesting that such strategies lead to the best possible outcome.

    Like millions of Americans currently underwater on their home, my client was reluctant to address the problem until it was immediate and one she had little chance of resolving.  Banks must minimize losses and increase revenue.  While Chase and other institutions grow their loss mitigation and REO departments by the thousands to manage short sales, foreclosures and a deluge loan modifications that may not work, it took one form letter by certified mail to complete a loan modification that required no documentation of income, no explanation of hardship and required no back and forth negotiations.  President Obama and our current political administration are determined to help homeowners stay put, while preventing fraud, putting predatory foreclosure scams out of business, and finding an expeditious end to the housing slump.  This was accomplished overnight for one customer by Chase’s proactive response to the obstacle before them and a mutually beneficial strategy benefiting the greater good.

    This modification would not have been possible without reducing principal.  By doing so the bank minimized their loss and positioned a loan for greater chances of repayment, further they avoided one more foreclosure mitigating the negative impact on the neighborhood and their loan portfolio - a positive move for the overall housing crisis.

    Like any financial matter, a loan modification should not be taken lightly and the prospects of success should be considered before you start.  Banks are debt collectors and they will use the information you provide in order to collect that debt.  If you provide false information to present an ability to pay which you don’t really possess it will work against you if you later decide to pursue a short sale.  And finally, one last time, NEVER PAY UP FRONT FOR A LOAN MODIFICATION!

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