Richard Zaretsky, Florida Real Estate Attorney

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

A mortgaged homeowner is likely to "walk from the property" or "give it back to the bank" based more on loss of equity than the ability to make the mortgage payments, a recent research paper emanating from the University of Chicago says. The paper researches and analyzes when American homeowners are likely to "walk away from their mortgages". These actions by mortgaged homeowners when the indebtedness substantially exceeds the equity value of the property, is called a "strategic default". The study found that 26% of all homeowner defaults today are strategic defaults.

The paper preliminarily released through the University of Chicago and Northwestern University in June, titled, "Moral and Social Constraints to Strategic Default on Mortgages", examines the likelihood and reasons for an indebted homeowner to either pay or default on its mortgaged property and makes for fascinating reading. It is also an excellent background source to my recent blog SHOULD I PAY MY MORTGAGE?

Key findings in this study include:

- 1 out of every 4 mortgage defaults is "strategic", meaning the borrowers are intentionally not making payments based upon valuation of the property, rather than personal finance.

- When negative equity reaches 10%, strategic decisions to default begin.

- Significant defaults begin when the negative equity reaches 15%.

- 17% of homeowners will default even is the home payments are affordable, when the negative equity reaches 50%.

Neighborhood and demographic environment plays a multiplication or magnification effect on the statistics. In fact the study found that besides relocation costs, the most important variables in the prediction process are moral and social considerations. For example, if a homeowner lives in a community where there are several foreclosures, or has acquaintances that are in foreclosure, the homeowner is more likely (82%) to have a predisposition to strategically decide to allow a foreclosure. If the homeowner finds it immoral to default, they are 77% less likely to default.

The study also takes into consideration the morality of purposely not paying the mortgage, which summarily is only(?) 20% of all mortgageors.

• People under 35 years and over 65 said were less likely to say it was morally wrong to default, compared to middle-aged respondents.
• People with a higher education and African-Americans are less likely to think it's morally wrong to default, while respondents with higher incomes were more likely to think it's morally wrong.
• Republicans and Democrats showed little difference in moral views of strategic default, while independents were less likely to say defaulting is immoral.
• People who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral.

The study also takes into consideration the possibility of recourse versus non-recourse mortgages and deficiency judgments in its statistical analysis. See also FORECLOSURE DEFICIENCY JUDGMENT or SHORT SALE PROMISSORY NOTE or BANKRUPTCY - REVISITED. There is an analysis of this issue (which applies to some mortgages in California or example) that is very interesting - as there is not the impact one would think on the determination of the homeowner.

This study makes an interesting juxtaposition to the federal government's moves to address the problem of foreclosures in our nation through addressing the cash flow and affordability of payments, rather than the equity value losses of homes. It is a must read for those involved in short sales and mortgage modifications.

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

This seems to be THE NUMBER ONE question I get. Unfortunately there are several answers and which is correct for you depends on the Circumstances. I will address the common scenarios in this article.

Policy in my office is to never "tell" - as in "instruct" - our borrower client to pay or not to pay their mortgage. Paying or not paying has a lot of collateral effects and the borrower needs to know what they are before making the decision. We don't make the decision for the borrower (our client) because the effects of paying or not paying are not going to affect me - but they will affect the client, so it is the client that must make the final decision.

Let me make one issue clear - when we are hired to help facilitate a short sale or loan modification it is far easier for us to negotiate with the lender if the payments are late, but it is almost never a requirement. The exceptions to which will be discussed later in this article. Additionally, internal rules change at the banks constantly. A new client came in totally frustrated. They called their bank to help with a modification and the bank said they could not address their situation until they were at least 60 days late. So the near perfect (800+) credit score couple stopped paying for 60 days and then called the bank back. Now the bank says that because they are 60 days late they cannot speak to them about a modification! The point is, if you don't have to be late then why voluntarily create a late payment credit history that will adversely affect your credit-dependent life almost immediately and for years to come?

SO LET'S GET INTO IT - Danger - this is a long article and it covers a lot of ground!

Short Sale:

A borrower that is current and contemplating a short sale wonders if they should stop paying their (first) mortgage. They are upside down and until now they have been current. However they are paying the mortgage at a cost of not paying other bills. (Other or different facts may be that they are paying all their bills but taking the money from savings or a pension fund to make those payments, or they are borrowing money from another equity loan).

Generally, it is not a good idea to get into debt to pay your mortgage, unless you have a solid plan to both (i) keep the mortgage current and (ii) repay the additional indebtedness you are creating. It is not like taking from one pocket to put into another - it is more like taking from someone else's pocket to pay your bills. This would include credit card loans as the source of funds. It all has to be paid back, so if you don't have a plan to pay it back, don't borrow it in the first place! You are only digging a bigger hole for yourself and making it harder to get out of the hole.

If you are taking from your pension or savings money, again you better have a rock solid plan to get that money back into those accounts, or there is no sense in giving up that hard earned and usually irreplaceable retirement money, especially considering these are monies that are usually protected from creditors' judgments including those your mortgage lender could obtain (deficiency judgment)..

Of course the "amount" of money you have "in reserve" comes into consideration. If you have 2 million dollars in reserve and you decide to spend 10% of it to keep the loans current until you can short sale the property, that plan has a basis that the 10% is not going to make a difference in the way you run your life over the remaining time you have left as a mere mortal.

Sometimes, but rarely, we run into a lender that says they won't approve a short sale or modification because the borrower is current with his payments. When we have encountered this it is in most cases associated with a government backed loan, (but later on we will show you why this may be motivated by plain greed on the part of a loan servicer). A properly compiled financial snapshot of the borrower should show why they are current and what will happen if the short sale or modification is not approved.

Your decision on how to proceed should be based on what goal you are trying to accomplish and how you plan to get to that goal (see how to determine your goal).

Mortgage Modification:

Apart for some voluntary government programs regarding (Fannie Mae or Freddie Mac) government involved mortgages, I know of no lender that absolutely will not deal with a borrower who is current with their mortgage payments. Lenders deal with all sorts of situations and "absolutely not" is just not in the vocabulary. A typical borrower calling a lender may hear that they must be late, but that is more of a "vetting" statement than an absolute policy.

The exceptions are some government program guides for modification. The first step to seeing if your loan comes within this exception is to see if it is a Fannie Mae or Freddie Mac loan. You can do this online at the Making Home Affordable site. Many servicers and lenders whose loans are not "government backed" are now choosing to follow this government plan (known as the Home Affordable Modification plan or more affectionately called the "Obama Plan" - see below) for the simple reason that they are being compensated by the government for each successful modification they execute within its guidelines, and either the servicer or lender receive a residual bonus for the loan staying current under the modification. In these cases we have seen non-government backed loans insist on the borrower being late to qualify for modification as well. What is confusing on this point is that when the plan was introduced it included modifications (and compensation for such) for current loans as well. However, we are told time and time again from the lenders directly that they must be late to qualify. There is no such rule in the guidelines.

While this is contrary to what has been published by the government about the plan, keep mind that following the plan and any of its various aspects is entirely voluntary and up to the Lender or servicer. They can pick and chose from this plan as they see fit for their own internal reasons. Here is a more interesting twist - a servicer that modifies a delinquent loan is paid more under this incentive plan than if the borrower were to modify while the loan is current! If the borrower is current, the servicer can receive up to $3,500 in incentive fees from the government. If the borrower is delinquent, the servicer can receive up to $4,000 in incentive fees from the government. Thus it seems that it pays ($500 to)the servicer to encourage a borrower to be delinquent!

We often see a client that fits the profile for modification under this government plan. Some of these plans are said to require that to be qualified the borrower must be late 60 days (see Guidelines page 5 at bottom). But in fact, being late is not a requirement, but only one factor of many (see Guidelines page 16 at the top - "However, a NPV (net present value) positive result is not necessary to qualify a loan for a Home Affordable Modification"). If the goal is to qualify under such a plan as put in place by the lender at that time, then to accomplish that qualification the borrower may need to make themselves late, but that cannot be determined in a 2 minute telephone call with a lender representative. I cringe when we go this route because just like these "plans" came into existence, I can see them change the plan thus leaving the now 60 day late borrower with ruined credit scores that occurred needlessly.

Generally about a quarter of our modification clients never go late and still get a modification offer from the lender. However, keep in mind that nearly all lenders put up as their first line of defense the policy that going late is a necessity to qualify. We can only speculate this is done to deter the enormous inflow of loan modification requests from borrowers that would come in if this was NOT said to be a requirement. It also helps address those in the most dire amount of need first.

The Pro's and the Con's:

The general rule of thumb we use is if you can pay your mortgage and maintain your life's necessities, you may consider keeping the loan current, taking the points in this article into account. However, if you need to choose between buying food or medications and paying the mortgage, the decision that should be made is clear: your life necessities take precedent.

Here are the pro's to consider when in the short sale or modification process. Keeping the loan CURRENT has the following benefits:

a) Your credit score is not dinged until the short sale transaction occurs (and not at all in most loan modifications) and your overall credit score reduction will be minimized, and b) You will remain in good standing with your lender without worry of penalties, fines, or a foreclosure.

The "con's" of keeping the loan current are that:

(a) You will be out of pocket for the monthly mortgage payment (monies which you may or may not need to survive), and

(b) Your lender may question the sincerity of your claimed hardship, and you may be spending funds that would otherwise be potentially (but rarely) forgiven by the lender. In addition, occasionally the lenders in a short sale may require a lump sum payment above the sale amount from the borrower to forgive the debt. Coming up with that money is sometimes the difference between a deal or no-deal. If you can put your mortgage payments aside and stockpile them, it will help you cover that potential lump sum.

A similar pro/con approach applies to GOING DELINQUENT with your mortgage. In favor of going late is being able to keep the unspent mortgage payments in your pocket (or applied towards other necessities as the case may be) in which event your hardship may appear more sincere to the lender. On the other hand, there are very real consequences to going late with your mortgage payment:

a) You WILL incur late fees and other penalties on the late interest. Usually this is not a large issue as it is part of the forgiven debt in a short sale and usually forgiven in a modification, but it is something to consider,

b) Your credit score downgrade will be harder as you will compound the short sale hit with a 30 day late, 60 day late, etc, (and if this is a modification you will make a non-negative credit score event turn into a negative credit score event), and

c) You will eventually cross a threshold (typical industry standard of 90 days late) where the lender will initiate a foreclosure action in State court.

Going Late on Your Second Mortgage:

Often a borrower comes to us and says that they are late on the first mortgage but current on the second mortgage. The second mortgage is almost always totally upside down with no equity left in the property to secure that financial obligation. The borrower says they paid the second mortgage because they had the money for the smaller payment (second) mortgage but not the larger amount first mortgage. Our answer - if you don't pay the first mortgage they are going to foreclose it and then paying the second mortgage is not going to save your house.

Lately we have seen second mortgage lenders with 90 day late mortgages skipping the foreclosure process (since if they cause a sale of the house it is sold subject to the first mortgage, and thus any buyer still has to pay the first mortgage, which usually makes no economic sense). Instead the second mortgage lender sues the borrower on the promissory note only and gets a money judgment that they can keep for a long time (20 years in Florida).

So if a client says they are paying the second mortgage but not the first mortgage, we usually suggest they look at the common sense approach and what are they likely to gain or lose by doing so.

Effect of Non-Payment / Late Payment on Credit Score:

This is a big question and nowhere is the answer clear cut. Definitely if you get a report on your credit that you were "late" (in mortgages that means 30 days or more late) then your credit has been "dinged" and your credit score is adversely affected.

Credit scores are used for many purposes, including the amount of credit you can get on a credit card, the interest rate you get on credit cards, car loans and mortgages, your ability and price of life and disability insurance and even car or house liability insurance, your ability to get a certain type of job, or to establish business relationships, and your ability to rent a place to live, to name a few. So credit scores are important. If you want to better understand credit scoring you can see the Federal Reserve Board's Report to Congress from April 2008.

How much your credit score is affected by a 30, 60 or 90 day late report depends on a lot of other factors about your financial well being, your past credit history and myriad other issues. Generally though we have our clients reporting drops of as little as 50 points for a no late payment short sale or up to 150 points for a short sale with multiple late payment reports. We have seen an 800 go to 720 and we have seen a 740 go to 500. It all depends on too many uncontrollable credit issues to be able to give a formula that works for everyone. For a discussion on credit scores this our past article.

Confused?

Rightfully so. The fact of the matter is that we are in uncharted waters and there is no industry standard for Short Sales or Loan Modifications, which makes pinning down exactly what the Lenders may do near impossible. Pile on the fact that there are a large number of lenders out there and each have their own internal policies which change as readily as the tides. The best anyone can hope to do is make an educated decision, set a plan, and be ready for anything.

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 SHORT SALE AND LOAN MODIFICATION TABLE OF CONTENTS

The Distressed Property Owner's "Goal" is an interesting situation for each individual and for each individual experiencing this event, it is different. I like to help my client visualize creating a solution or "goal" by telling a visualization story.

Imagine you are in a dark tunnel and you can only go in one direction - forward. It costs you for every inch you move forward in the tunnel. The cost is the amount of "short fall" or loss you incur every day on the property that is giving you financial problems. No one knows where the end of the tunnel is, and no one knows how long it will take to get to the end of the tunnel. Your job, as the one paying the mortgage, is to "forecast" or predict where the end of the tunnel may be.

Once you forecast where the light at the end of the tunnel could be, you can measure how much it is going to cost to get to there. (The "end of the tunnel" is where you can either sell the property and recoup your loss or at least the mortgage you owe, plus the amount you spent to get to the "end of the tunnel". It may be where the property cash flow turns profitable).

Now you have at least a predictive cost to "see the light" at the end of the tunnel.

Of course there are plenty of variables - like you may have under-predicted the time factor, or over-predicted the cost because you eventually get a rent income that helps you carry the property at less cost. These differences are your tolerance for risk.

Next you find out what it costs to get out now, at a loss. This is your "escape pod cost". The escape pod could be a modification, short sale or bankruptcy.

You try to anticipate the cost to have the short sale, including possible deficiency payments. If you want to see how you compare in your philosophy compared to others in distress, see a recent Wall Street Journal blog on walking away from property.

Measuring the "today" escape cost versus the "tomorrow" light at the end of the tunnel cost, should give you a measure of how to proceed with the property, be it short sale, modification, or bankruptcy.

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 Information? - These Articles Probably Answer Your Question

The short sale flip apparently is alive and well for some investors - and it is causing havoc with title insurance underwriters. Now the title insurance underwriters are making their case simply by declaring that they won't insure such transactions.

This decision is not surprising. As pointed out in SHORT SALE FLIP - QUESTIONABLE METHODS, some investors have seen the reluctance amongst knowledgeable (and ethical?) title insurance agencies to question and usually refrain from being involved in such transactions. The result was the new "twist" of using one title closing agent (and underwriter) for the initial sale and another title closing agent (and underwriter) for the higher sale.

These transactions are also being examined by the shorted lenders - but the current safeguard of having the parties sign affidavits and "disclosures" is seriously not going to stop any investor that sees dollars at the end of the transaction.

Attorney Title Insurance Fund (in Florida) just today released an Alert and directive to its agents and it is reproduced below. They are not the first nor will they be the last to take this position.

FUND ALERT: SHORT SALE PROGRAMS The Fund has become aware of several "short sale programs" advertised on the internet and elsewhere that promise to make the investor lots of money with little or no work by purchasing and selling property through short sales. The programs involve the investor entering into options or similar contracts with the homeowners for the exclusive right to purchase their property for a period of time. The investor negotiates a short sale with the lender, convincing the lender that the price they are offering is the market value of the property. The investor then finds a buyer for the property at a much higher price. Once the buyer is lined up, the investor buys the property from the seller, pays off the seller's mortgage at the short sale rate, and simultaneously sells the property to the buyer at the higher price, pocketing the difference. In most cases the original lender is not told that the buyer is flipping the property on the same day for thousands more than the lender has been told is the market value of the property. In the cases we have seen, the investor has not put any of his own money into the transaction, and uses the new lender's money to fund the entire deal. A variation of this program involves the investor having the seller convey the property into a "trust" with the investor as "trustee". The Fund has made a business decision not to insure these types of transactions. Before you insure any kind of transaction involving a short payoff to the existing lender, or a simultaneous closing, make sure that the following requirements have been met: •1. There are no violations of any restrictions listed in the short sale payoff letter or closing instructions. •2. There have been no misrepresentations as to the value or ownership of the property to the existing lender, the new lender, or the purchaser. •3. All disbursements must be made exactly as stated on the HUD-1 settlement statement, and only to parties involved in this specific transaction. •4. Each half of the simultaneous closing must be kept separate and stand on its own. The sale from A to B must be fully funded and disbursed with money coming from and going to all appropriate parties. The sale from B to C must also stand on its own. The money from C's lender must not be used to fund any portion of the A to B transaction. If the circumstances of your transaction do not meet the above requirements, you must contact a Fund underwriting attorney for approval prior to insuring the transaction.

Attorneys' Title Insurance Fund, Inc. 6545 Corporate Centre Blvd., Orlando, FL 32822 1-800-336-3863 www.thefund.com

THIS IS AN AUTOMATED EMAIL LIST -- This email address is not monitored. Please do not reply to this message. ©2009 Attorneys' Title Insurance Fund, Inc. The Fund is a registered trademark of Attorneys' Title Insurance Fund, Inc.

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