The Man Behind the Curtain: Who Really Owns your Loan?

Who really loses when a home is foreclosed on? One would think that everyone involved loses......right?

Wrong.

First, chances are good that the bank that you stopped making payments to is probably not the owner of your loan.  For example, 80% of all Bank of America's loans are not owned by them.

Pay no attention to the man behind the curtain? Well, you'd better....because it's not your lender that calls the shots on your short sale, it's that elusive, mysterious "man behind the curtain", better known as the "investor" or "GSE".

The biggest actual "owners" of loans/"investors"/"man behind the curtain" are the Government Sponsored Enterprises, also called GSEs. The GSEs are Fannie Mae, Freddie Mac, and Ginnie Mae.  That's right....Big Brother, Baby!

These entities are built around loss.  They are accustomed to losses. In fact, they have loan loss reserves on the books. The other entity that is accustomed to losses is FHA and VA. Between 65-70% of all US mortgages are owned or insure by the GSEs or FHA and VA.

Even small local banks that dominate the markets in their areas don't own a large percentage of the loans they hold on the books. You would think these small banks are lending their own money. Not so. The majority of their loans are sold off within 12-18 months after they are written.

If this isn't complicated enough for you, it is common that the investor is not the only one throwing a ring in this circus. Often times, there is a THIRD layer of approval added to the loan, the Mortgage Insurance company, a/k/a PMI or MIP.  Run, run as fast as you can if there is an MI company involved.....they are so bad that they really deserve their own post! Or two! As a matter of fact, I did publish a post last year on a particular short sale I had where the MI company killed the deal.....check it out here. I'll fill you in briefly on what PMI is, however, to pique your interest for that upcoming amazing post by me regarding Mortgage Insurance in general.

PMI is a type of insurance required by lenders when the homeowner purchased the property without sufficient funds to create enough equity to satisfy the lender. Generally lenders require PMI unless the home's value exceeds 80 percent of the mortgage. To avoid PMI, a number of homeowners leveraged their equity and obtained a second loan, often called a piggyback loan or home equity loan, to avoid PMI. PMI is added to the mortgage payment each month.  When the market started tanking back in 2006, however, lenders started taking out their OWN Mortgage Insurance policies and attached them to the loans while they paid the premiums....so you may have Mortgage Insurance on your loan without even knowing it!

For the sake of this post, let's bury our heads in the sand and pretend they don't exist or I could be here all night.  (I wish I could do that in real life).  After all, this post is really about the INVESTOR behind the loan (Fannie, Freddie, Ginnie, FHA, VA, Tom, Dick & Harry)

Here is the real reason that loan modifications and short sale are so tough. (Remember, loan modifications and short sales will usually net the owner of the loan MORE money than a foreclosure.) The servicers or people who process the loan modifications and short sales won't lose any money if the home is foreclosed, so why should they do any more than the bare minimum to get a short sale approved?  

Here is a classic example.  Midland Mortgage, a/k/a Midfirst, is a bank that primarily services FHA or HUD backed loan programs.  I have worked with them on a few short sales, and I can tell you that they take their marching orders from HUD, but will NOT bend over backwards to complete a short sale unless you twist their arm.  Why should they? They simply DON'T LOSE if the home forecloses.  The loan is backed/guaranteed by HUD.....so their response is usually that there is nothing they can do, and on to the next file.

Recently, I contacted Midland about postponing a Trustee Sale so that I could present my client's short sale package, and the negotiator I spoke with was telling us there was no way that was going to happen.  This is the second month in a row we received this response from Midland Mortgage and that came directly from a Supervisor in the Short Sale department!! If I listened to Midland Mortgage the first or second time, I would have lost a sale and my client would now have a foreclosure on her credit.

What's my secret, you ask? Believe it or not, it's a government sponsored entity (WOW, I Know!) called the Department of Housing and Urban Development.  A/K/A "HUD".  They have been extremely helpful with my last few FHA short sales, and this one is no exception. HUD can be a great resource if you need to perform a short sale on an FHA-backed mortgage. This short sale was denied by Midland Mortgage, but HUD got it reopened and got it approved!!! This is information that any agent who deals with FHA-backed mortgages needs in their toolbox. If I had not been working with HUD, this deal would have been D.O.A., and I would not have gotten an extension and be on our way to a Short Sale approval.

You see, the servicer/lienholder/lender (in this case, Midland Mortgage) could ultimately care less if an FHA loan forecloses. They are reimbursed by HUD.  Thus, HUD is more helpful and compassionate when it comes to borrowers in default. HUD is also a lot easier to work with, and they try to make a short sale work to benefit all involved. In a lot of cases, banks are so overwhelmed that the negotiator may see closing the file as an easy out, or they simply may not see the file from HUD's point of view. After all, they are following HUD's guidelines, so why not work with the source, as well as the bank?

By following HUD's Pre Foreclosure Sale procedures and time frames, a mortgagee (a/k/a bank, lienholder, etc.) may submit an FHA insurance claim and be compensated for the difference between the sale proceeds and the amount owed on the mortgage (including accrued interest and reimbursable costs).  The overwhelming majority of the time, however, banks deny short sales that are FHA-backed because they are fearful that HUD won't pay their insurance claim because they didn't follow the procedure properly or adhere to the time frames. But, if it forecloses, they automatically get paid.

Despite this fact there are special exceptions (please reference the guide again) where the bank may be afraid to grant an approval, HUD will grant the approval. In one very crucial way, HUD is just like the banks; the less real estate they own the, easy their lives are. I have now had several denied claims that HUD opened back up and got approved. Working with HUD from the beginning can save you a lot of headache and strife. This is just one tip of many to make your life easier when it comes to FHA short sales.

It is no mystery that the system isn't working, but no one in Washington or at the big banks really seems to care.

Thinking about a short sale? I can help you short sale your property and never pay the bank another penny. Send me an e-mail at jsulliman@hotmail.com. I will contact you for a free consultation.

When we talk, I will explain how the process works in detail. If you prefer, then you can call me at (602) 677-7977.  Discover how other sellers successfully completed a short sale and request a free consultation by contacting me today.