The concepts of foreclosure defense preparation have started a cottage industry, unregulated as with most of the home saving concepts, called "loan audits".

A loan audit is supposed to be a "forensic analysis" of the loan origination and closing.  I get calls every week from a few sales people trying to get me to use their "expert loan auditor" for the foreclosure defense / loan modification / short sale work we do.

About 8 months ago I wrote about the misconceptions that the public has regarding Foreclosure Defenses and what they can and can't do for a distressed homeowner. See that article for an explanation of Foreclosure Defenses. 

Loan Audits can be a good thing - if there is some solution to which it will economically create a positive result for the distressed homeowner.  The problem is almost every loan closing is going to show up something of a problem and many will show up multiple problems.  If that is the case, how can all these mortgages be enforceable?

A recent article in the Daily Business Review here in South Florida titled "Loan Auditors Seek Errors That May Delay Foreclosing" focused on this issue and said, "Ultimate proof that the audits are successful will come in stopping the foreclosures.  That hasn't happened yet but lenders have been required to substantiate fees and the investigations have resulted in other findings.  Several of the cases are being litigated and are currently in discovery".

The article also said some professionals call the loan audits a "new gimmick" that can be construed to be helping people but also capitalizes on the financial crisis.

Another issue is whether auditors are "foreclosure-related rescue services" that come under the new Foreclosure Rescue and Fraud Prevention Act (Florida).  The Act prohibits collecting fees up front - which is why such firms are aggressively seeking to be providing services directly to attorneys, who have some exemptions under the Act.

There may be a place for the loan audit if it shows significant issues that would damage the lender financially.  The key however is how much would the damage be compared to the cost to the lender of a modification or short sale? 

For example, on a $300,000 loan that is collateralized with a now valued $200,000 home, the bank is short at least $100,000.  If you are in foreclosure and you mediate with the bank and show them a loan audit that could make them responsible for $50,000 in refunds and penalties, that is not much incentive to give relief to the homeowner that is still in default.  If you want to use it to unwind the loan and put the parties back into the position they were in before the loan was made, the homeowner is going to have to return the $300,000 less the $50,000.  Where the homeowner is going to get $250,000 is the million dollar question - and why this usually does not produce real solutions to the distressed homeowner.

When the housing market was right side up there was no real issue with foreclosure defenses since the homeowner could almost always return the funds to unwind the loan (less damage credits) through a refinance or sale.  That cannot be done now.  Attorneys then also charged based on "savings" to the homeowner.  Today the fee is almost always up front to get started and monthly thereafter.  I question the philosophy of "monthly" as long as the litigation continues - and what it implies (keeping the house while not making payments to the lender but instead making lesser payments to the attorney).  To me that just is not a "solution" to the homeowner as it eventually ends up in the same place - a judgment of foreclosure, unless a modification or short sale is the ultimate and realistic goal.

If your client asks you about a loan audit, you need to look at the total picture and determine together what the end goal for the homeowner is or needs to be, and then see if the expense is worth the investment, or if it is just going to create unnecessary expense and false hope.

Copyright 2009 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com.  See our easy to find articles at Need Short Sale and Modification Information? - These Articles Probably Answer Your Question