Loan Modifications are supposed to allow a borrower to redeem themselves and regain their financial footing long enough to survive their hardship. Short sales are supposed to help lenders reduce their losses and help homeowners stop foreclosure. These transactions make up a significant percentage of the current real estate market and should be helping us to recover from the economic woes we all face.
Short sales and loan modifications are very similar in their execution in that the lender requires a financial disclosure, copies of bank statements and proof of income. In each case the borrower and lender come together for a mutual benefit which is to mitigate the lenders financial losses and limit the damage to the borrower's credit and finances. It seems to be symbiotic relationship in theory. Anyone who has been involved in them knows it is anything but pleasant or short lived.
It is common knowledge that lenders will often refuse to consider a loan modification unless the borrower is delinquent. What happens to the borrowers who are advised to miss a payment, or two, or three in order to be considered for a loan modification and are then turned down? It happens with short sales as well. The borrower keeps up on the payment and the lender refuses to consider the deal unless they are delinquent. The borrower may have no choice but to sell the house due to a forced relocation, rather than a lost job or medical disaster, yet they cannot rent the property and must sell it short or it will certainly go to foreclosure eventually.
The bank directs to borrower to stop paying on the mortgage which immediately damages their credit without the bank taking any obligation or liability for their advice. Regardless of the eventual outcome the borrower's credit score ends up with greater damage as a result of this advice. A short sale should have a lower impact on a borrower's credit if they were never late versus 12 to 15 months of missed payments.
The worst scenario involves borrowers who contact the bank before being late, are told to stop paying their mortgage, and then are turned down for the modification. Ultimately their credit is ruined; all for contacting their lender for assistance in avoid loss on both sides. I know of a case where the borrower contacted their lender for a loan modification. The lender insisted they stop paying and become delinquent. They even told the borrower they didn't know where to credit payments he did make since his loan was in the modification process. They turned him down for the modification. Unfortunately the borrower will not be able to save the existing house and will have to sell. Even more unfortunately they have 3 mortgage lates on their credit record. Had the lenders advice not been taken they could have sold the house and bought another less expensive home since their credit was excellent credit prior to this experience.
This all came to light for me when I read the new FHA guidelines that allow a home buyer to immediately buy another home after a short sale IF they had not missed or been late on their mortgage payment. I almost laughed when I initially read it.
How is it banks can tell their customer to take a course of action that is so damaging and remain insulated from liability for their advice. I believe attorneys are liable for their advice and so are real estate agents. It seems to me that lenders are creating yet another class of victims to their narcissistic pursuits while remaining completely immune to the damage they are creating. Conspiracy theorists might think they are doing it on purpose to set up increased future profits by creating future customers that can be charged higher rates for the next 10 years.
What are your thoughts?
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