Loan Modifications and the Short Sale
Well, banks are at it again. Let me clarify, banks with a well documented history of predatory lending are at it again. They have come up with new ways to hold the unsuspecting consumer down. Let me rephrase that, these banks have come up with new ways to manipulate the system and get defaulting borrowers in even more trouble.
The most brilliant part of all of this is that the government has made it possible. Every so often the Feds come up with new requirements for banks so they can continue to receive TARP funds. One such requirement is for banks that have heavy numbers of foreclosures and short sales on their books to modify defaulting loans. In essence, these banks are taking loans, usually these loans can be classified as predatory, and adjusting the terms to save the homeowner from foreclosure. Each bank addresses loan modifications differently. With some banks, the consumer needs to contact the bank and ask if they qualify for a loan modification. This seems like the logical way to approach loan modifications. But let’s remember, banking institutions are not known for being logical. My favorite bank approach to loan modifications is for the bank to send a blanket letter to all defaulting borrower’s stating that they have investigated the loan and the likelihood that the loan can be modified and the loan can not be modified. (Hmmmm… interesting approach. I would love to see the information banks used to come to this conclusion since they have not asked the borrower for any personal information or for changes in information since the loan was obtained). I guess banks figured that as long as they “tried” to modify each and every loan that was in default, then they can still get access to stimulus money.
But, not so fast, in walks the government, again. Rules have changed and they have told the banks to loosen the requirements for loan modifications. Loosing the requirements could be good for some banks and some (few) borrowers. Once the loan is modified the bank stands a better chance of being able to sell it to another bank. Now, this loan is someone else’s problem. Brilliant! However, there could be a snag to the loan modification tango. Many defaulting consumers who have been told that they do not qualify for loan modification have put their homes on the market as a short sale. Once the seller finds a buyer and they ratify a contract, the seller can not modify any liens on the property. (If you’ve ever been to a closing/ settlement table you should remember the settlement agent ask the seller if they have made any decisions about any an existing lien or caused a new lien to be placed on the property since the contract was ratified). Many banks are ignoring this and contacting defaulting borrowers after the short sale process is started and offering to modify loans. This infuriates most real estate agents. Why? Well, the banks are in possession of a ratified contract from a seller and a buyer. The bank is aware that the property is being sold as a short sale and their approval is needed to make the sale go through. The bank should know that the seller is not allowed to modify any existing loans on the property if it is under contract. Now, there is a seller who has been given hope that they can save their house, a buyer who has their heart set on purchasing the house, a bank that has interfered with the sale for its own advantage, and two real estate brokerages that have worked very hard on a transaction that may not get paid now.
A seller in this situation should contact an attorney immediately. I’m serious. Stop reading and contact a real estate attorney immediately! You are treading on dangerous waters. If a seller accepts the loan modification, they could find themselves in default. Default could cost them more than a short sale or foreclosure. As a buyer, you should contact a real estate attorney immediately. Buyers in this situation need to learn what remedies are available to them as a result of a seller taking a loan modification and refusing to sell the home. As a bank trying to modify the seller’s loan, be careful. Now that two parties to the transaction have contacted an attorney, every one knows the bank has torturously interfered with a ratified contract. That’s not good. The bank’s loan modification representatives should expect a few phone calls from unhappy attorneys. As a real estate agent who finds their transaction going down the drain, there is recourse. The real estate brokerages should contact their attorneys and find out what recourses are available to them. The seller could find that they still owe real estate commissions even though they are now refusing to sell the property.
I don’t know how many times I’ve said it before, but apparently it must be said again; if it sounds too good to be true, it usually is. I have never known a bank institution to do something altruistically. They don’t care about keeping a borrower in their home. Lending institutions care about protecting their investments. They care about staying in business. They care about Federal investigations into their lending practices. Any decision a bank makes is a decision in the bank’s best interest, not the consumer’s.
