THE JAWS OF FORECLOSURE ARE HARD TO STOP
October 24, 2010: Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause. Thousands of homeowners have turned to short sales to avoid foreclosures, and many end up running a daunting procedural gantlet. Several of the largest lenders have set up complicated and balky application systems.
Banks balk at short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage, for a number of possible reasons including fraud concerns and an accounting rule that favors foreclosures. Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.
People who apply for modifications via HAMP sometimes “end up unnecessarily depleting their dwindling savings in an ultimately futile effort to obtain the sustainable relief promised by the program guidelines,” the report notes, putting the imprimatur of the federal government on a claim long made by housing experts and homeowner advocates. “Others, who may have somehow found ways to continue to make their mortgage payments, have been drawn into failed trial modifications that have left them with more principal outstanding on their loans, less home equity (or a position further ‘underwater’), and worse credit scores.
“Perhaps worst of all,” it continues, “even in circumstances where they never missed a payment, they may face back payments, penalties, and even late fees that suddenly become due on their ‘modified’ mortgages and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent.”
“The lenders foreclosed on borrowers because it’s in their financial interest to do it. Modification is an expensive and ineffective medicine,” he added.
By taking a hard line against principal writedowns, the banks avoid giving borrowers the impression that they can get a “benefit” of sorts by deliberately becoming delinquent.