Foreclosure; Letting Go and Rebuilding

This is Part Five of a series of articles on foreclosures.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.
Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from your state Bar Association or through a LOCAL HUD-Approved Housing Counseling Agency.

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

In part five, we visit Cap and Maria, who went through the foreclosure process and began rebuilding their lives.

The Captain and Maria purchased a house in 2006 using a Pay Option ARM from Wachovia.  Their mortgage broker explained the “pick a pay

58 thoughts on “Foreclosure; Letting Go and Rebuilding

  1. Great post, and great example. The one thing I’ve hated is those who insist we demonize a borrower, simply because they took a risk at a particularly bad time.

  2. Sad story indeed. However, there is no one to blame here but the borrower. I want some hard numbers on causes, demographics, etc. There seems to be a lot of talk about preventing foreclosures, but the cynic in me says you can’t prevent foreclosures. There have always been foreclosures regardless of how great the economy may be. Some people get a bad hand and they have to play with it. That is life and it sucks but nothing we can do about it.

    My concern is that we are drafting public policy based on a faulty information. What is the TRUE foreclosure rate when you strip out all the specuvestors and fraud? We have seen anecdotal evidence that up to 50% of foreclosures are actually investment properties. I guess my question is if the rate of hardship foreclosures is really any higher than it has been in the past?

  3. Hi biliruben,

    Yes, Cap and Maria took a risk. They were fully aware of what they were doing with the Option ARM. This counters many examples in the mainstream media of homeowners who claim they were lied to by their lender.

    Sometimes hope can blind people of a better reality. Once they decided that they were in charge of their own future, it became easier for them to begin the process of grief, which allows the homeowner to begin letting go of that old dream so they can create emotional space for new dreams.

  4. Hi Russ,

    Always good to hear your take on what I write. Well, I’ll see if I can find some good resources for you. I do recall that Fitch, the ratings agency looked deep inside a sample pool of RMBS (residential mortgage backed securities) with high early payment default and found lots of fraud, including occupancy fraud.

    So for example, when the lender believes the loan is low risk because of a decent FICO and owner occupancy, and two of those things have been manipulatd, then the risk level goes way up.

    At the end of this blog post, there’s a link to the Fitch report. You need to provide them with an email address to login, but it’s free after that:

    The FDIC/Neighborworks publishd this interesting fact PDF on foreclosure stats:

  5. Jillayne,

    Regarding “found lots of fraud, including occupancy fraud.” It reminds me of a comment David Losh made yesterday on Tim’s post. Often agents said that was between the buyer and the lender, but often the agent was the one who knew the intent of the buyer better than the lender.

    I remember overhearing a lender say to a buyer “they don’t check…there’s no red flag…until someone buys a fifth property in a short period of time.” That number may have been 7, but clearly was not less than 5.

    You have to ask yourself on the “occupancy fraud” thing, is it really fraud when the lender guideline allows 5 – 7 properties to be purchased as “owner occupied” to the same individual in a short period of time? There’s a difference between fraud, and begging to be lied to.

  6. Hi Ardell,

    In a case where the agent for the lender (who we would identify as the mortgage broker,) knows that the homebuyer has no intention of occupying, then we have two people committing fraud.

    In a case where a lender is buying and selling loans as fast as they can to investors and writes guidelines in this way, we have a lender making false claims of occupancy to the investors.

    Underwriting guidelines were thrown out the window during the bubble run up.

    Nobody forced the real estate agents, loan originators, and homebuyers to lie to the lender in these cases.

    We would assume these folks had a choice over their decision.

    My advance apologies for channeling Greg Swann however, the appeal to common practice is a fallacy with the following structure:

    X is a common action.
    Therefore X is correct/moral/justified/reasonable, etc.

  7. LOL…I know where your standards fall, Jillayne. But there was a whole lot of “everyone’s doing it” going around at all levels. When 90% of the lenders RECOMMEND the activity, it is no longer fraud, but an expectation.

    Honestly, I know many, many agents who took the lender’s acquiescence and even instruction to “just do it this way” as an indication that it was permitted. Most real estate agents rely on the lender to give advice that isn’t fraud. Can you really blame them for that?

    I remember a HUGE builder saying “this is how it’s done” and it was a lender fraud answer. When a huge building corporation believes fraud is simply part of the process, and doesn’t recognize it as fraud…common practice simply becomes the new structure.

    Remember, it has been at least TWENTY years that agents have been instructed “don’t put repairs on the addendum that goes to the lender. Put toward closing costs.”

    The heyday of zero down and stated income is NOT the first and only time that lenders give instructions that equal fraud. To this day, I’m sure lenders are instructing buyers to ‘bring a lease” for a vacant property to show 75% of lease income, and to sweep repair issues under the carpet as to seller credits.

    Once you tell everyone to commit fraud over here…you open the door to fraud over there. Lenders have not become realistic as to seeing repair credits…have they? They invite fraud and they get what they ask for.

  8. Ardell,

    Cap and Maria did not commit fraud in any way. They fully disclosed their income and occupied the property.

    Fraud committed by lenders and real estate agents is contributing to the rapidly declining home values in Cap and Maria’s neighborhood and many neighborhoods. Declining values was a partial contributor to Cap and Maria’s foreclosure.

    How do Realtors such as yourself, who owe a primary duty of honest to all, answer people who are losing their homes, when they read that “lenders invited fraud and they got what they asked for.”

    “lenders invite us to lie so we lie.”

    I’m not sure how well that defense would hold up in court.

  9. Jillayne,

    My comment #7 is in response to this in your comment #6, not the post about Cap and Maria.

    You said: “In a case where the agent for the lender (who we would identify as the mortgage broker,) knows that the homebuyer has no intention of occupying, then we have two people committing fraud.”

    I know Cap and Maria lived in the home.

  10. Jillayne,

    Ask 100 lenders if repairs credits can show TODAY on an addendum OR if they tell the agent to call the repair credit “toward closing costs”.

    At some point you have to blend realtiy into the equation. My guess is lender fraud is alive and well and you can’t close some transactiosn without it. That is PURELY the lender’s fault.

  11. Yes but Ardell, you didn’t answer the question:

    Fraud committed by lenders and real estate agents is contributing to the rapidly declining home values which is a partial contributor to foreclosures.

    How do Realtors such as yourself, who owe a primary duty of honest to all, answer people who are losing their homes, when they read that “lenders invited fraud and they got what they asked for.

  12. I am answering the question, Jillayne.

    Lenders can’t say “Please lie about this but not that.”.

    When lenders will permit honest contracts across the board…THEN we can talk about moving forward with no lender fraud. But if brokers are still telling agents to lie about repair credits…most agents can’t make the distinction about when to lie and when not to lie. Once you instruct them to lie…well, give them an inch and they’ll take a yard.

    Lenders cannot instruct people to lie, and they are still doing it as to lease agreements on vacant property and repair credits. I really don’t blame the buyer for lying twice when told to lie once.

  13. Ardell,

    Are you blaming all mortgage fraud on the lender and putting zero responsibility on the Realtor and loan originator?

    That culture encourages fraud is not a very good reason to continue onwards with the behavior.

    I suppose you could take all the acts of mortgage fraud and rank them. At the top would be the type of behavior that could be classified as fraud which leads to the worst consequences for the most number of people.

    At the bottom of the list we’d see behavior classified as mortgage fraud but leads to minimal consequences for the most number of people.

    It is entirely possible that the baby fraud you describe does not lead to massive foreclosures.

    The type of fraud Russ mentions would be more at the top of the list.

    This blog post is about foreclosure, not mortgage fraud. Kindly keep to the topic at hand or connect the two together. Thank you.

  14. Ardell, if you’re telling me that real estate agents and Realtors are continuing to lie to lenders today, because they can’t figure out when to lie and when not to lie, then the recovery of the housing market will likely take far longer than we all anticipate.

    It’s simple game theory. When we all make public agreements to tell the truth, and then make decisions to lie in private, the result is that the entire group suffers.

    Please write a separate post on this issue of lying regarding repairs and credits so we can explore it further under it’s own heading. Thank you 🙂

  15. I sometimes wonder if RE agents realize what they’re doing when they “coach” a client to say or not say something to the lender.

    I think this goes on a lot as does agents not providing all pages to a RE contract…usually because of work to be done to the property (or credit for) that they don’t want the lender to know about.

  16. Jillayne,

    I’m sure it happens. And there is another option. Instead of treating the credit from the buyer as a financing concession, which would go towards allowable closing costs and be subject to u/w guidelines as to how much would funds would be allowed (based on LTV); it could be treated as a sales concession. With a sales concession, the amount of the credit is deducted from the sales price for calculating loan to value ratios for underwriting.

    Another option is to have the work complete before closing. Worse case scenario, the bank does not want to repo the property to find that the work that was suppose to be completed with by using the credit intended for repairs, was not done.

    Most lenders will not allow escrow holdbacks–there are exceptions (like weather).

    If the home needs more of work, the borrower could check out doing a 203k FHA loan for their purchase money.

  17. It is a combination of factors that contribute to fraud. Most of the responsibility lies on the lender and the LOs. IMHO opinion the problem lies with the lenders and their mindless underwriting games though. As an LO, you quickly learn that sometimes too much information can kill a deal and open a can of worms that just isn’t worth the headache.

    There is fraud and then there is figuring out how to get the deal done within the guidelines put forth. Unfortunately, this is where the gray area starts.

    Regarding seller credits, I have always instructed Realtors to keep it simple. Generally, if it qualifies as a seller credit it usually is minor to begin with since there are limitations on the amount of seller credit allowed. Larger issues require escrow hold backs and usually will be noted on an appraisal. I haven’t had a problem getting these when warranted due to weather or other issues.

    I don’t think any LO is going to allow a deal to get killed because the frig broke down and the agent negotiated a credit for $1000. Call it a seller credit and be done with it. A lot of this could be avoided if the lenders stopped mindlessly assuming that repair credits for minor items devalue the property. Again, it gets back to underwriting becoming a mindless drone game of a checklists and processes as opposed to truly evaluatnig a loan based on creditworthiness and common sense.

  18. I’ve been reading Seattle related real estate blog posts regarding foreclosure and short-sales and I wanted to thank Jillayne for this five part series. It has been very informative for me. I was hoping I could get some feedback on my situation.

    I bought a 1-bdrm condo in the Seattle area 3 years ago with 10% down and a combination of 2 mortgages. I am upside down by around $5-10k at the moment but that is steadily increasing every month. In addition, I pay $350/month in HOA dues. But unlike some owners, I do not want to keep the property. Over the past two years my family has increased by 2 and we would like/need to move.

    Last year I attempted to sell but, due to the current financial mess we are in, the few interested buyers were unable to get the funding they needed. Our condo was on the market for some time and I am quite burnt out from showing the place. Also, the stats for absorption and net pending sales for the King County condo market ( make the prospect of a sale look pretty gloomy.

    I had planned in the fall to put it back on the market in March, but now I’m in a situation of having to bring money ($15-20k+) to the table or do a short-sale if I would like to sell. And both of those scenarios will only work if I am lucky enough to find a buyer. All this talk of foreclosure has made me wonder if that is the right route to go.

    I was wondering if there were any suggestions on what I should do.

  19. Hi Josh,

    Thanks for the compliment. Questions:

    1) have you consulted with an attorney yet? Homeowners in financial distress should always hire their own legal counsel, even if it’s just for an hour or two.

    2) Do you have the money to pay back the short fall if you lowered the price to a point where it WOULD sell? If you have the money stashed away, then the transaction isn’t a short sale, it’s a “seller brings cash to closing” transaction. For a short sale, you will need to disclose all assets to the lender.

    3) Could you keep it and rent it out and cover the payment, or come close to covering the monthly payment and HOA dues?

  20. Thanks for the response.

    1) Yes, I’ve contacted an attorney. I have just had a brief conversation so far but I learned some interesting details about issues with having two mortgages when it comes to foreclosure.

    2) Yes, I have money to bring to the table; the dilemma is a) whether it is worth dumping that amount of cash into an already losing investment and b) if it is worth the effort with so little buyers actually making purchases in the area.

    3) No, I would not be able to rent it out and cover the payment and HOA dues. There would have to be a drastic loan modification to allow me to keep the condo and cover everything.

    Right now I feel the most viable options I found for my situation involve either contacting my lenders and trying to negotiate some big loan modifications that would allow me to rent out the place or go the foreclosure route.

    I feel the market will not be done ‘adjusting’ itself for some time so the thought of holding on to the property seems the riskier of the two options.

    Any thoughts?

  21. Hi Josh;

    1) Terrific. Glad to hear that you’ve taken the responsibility for chosing to educate yourself on the possible consequences of your decision.

    2) Well, we can look at the problem from another angle. Is it worth it to you to pay the money to avoid having a foreclosure on your credit record for many years?

    3) Loan modifications are reserved for people in financial distress. Since you have money, the bank would wonder why it would help you modify a loan that is otherwise being paid as agreed right now. Maybe do a little math on the side and see what your payment would be like with a, say, 2% interest rate. That would be a pretty sweet deal but we can dream at this phase. Would the rent cover the new payment?

  22. 2) At this point I am still unsure if paying the money now is worth saving my credit for the next few years. And the option of selling requires more than just the money. It also involves the time and effort of showing your place for an extended period of time. And even then there is still luck involved with even getting someone to look at it let alone put an offer in.

    Do you feel that there are a lot of buyers in the Seattle market looking to pull the trigger this spring?

    3) I guess the reason the bank would consider a loan modification would be to avoid a foreclosure since they do not want the property and the process costs them money as well. I ran some numbers on an online refinance calculator and yes, in a dream world, with a 2% interest rate I would be able to rent the condo and be able to cover HOA dues and payments. Sadly, anything higher would not really cover it.

    From what I read both a short-sale and a foreclosure have a negative effect on your credit rating. I would like to know what the difference is but I have yet to any details on the actual effect either would have. Do you happen to know of any resources with more detailed information on that subject?

    Also, I’ve read that although a foreclosure will be shown on your credit report for 7-10 years it is possible to minimize the negative effects it has on your credit rating. That it is even possible to regain a higher credit rating before 7 years. I guess I would like to know the details of the negative impact it would have on my credit rating (currently 790) specifically. Do you know of any resource that can estimate the impact?

  23. Hi Josh,

    Yes, there are buyers looking for homes now, however, buyers have lots of inventory to choose from. The lowest price condos in the best condition available in your area compared to other similar condos will have the best chance of selling.

    Loan modifications are available for people in true financial distress situations who are not able to make their current payment but who would be able to make a modified payment.

    Loan modifications are generally not available for people who just don’t want their home anymore, have money to keep making their payment, and need a reduced payment in order to not foreclose.

    But these times are not like normal times.

    Talk with your attorney for help with a possible loan mod if you don’t want to trash your very good credit score with a foreclosure.

    With short sales OR loan mods, if you have extra cash, the bank will ask you to apply that to the loan balance.

    Again, short sales and loan mods are reserved for people with NO money.

  24. Josh, with regards to your credit on which is better, short sale or foreclosure…it depends. If you are able to do a short sale without becoming delinquent on your mortgage, that *might* be less damaging than a foreclosure.

  25. The part of your article that struck me was where you linked to the stages of grief- very insightful, and something that most people miss. I’ve seen so much of this: people going through a grief process, without even being aware of it! All they feel is shame and blame and have no idea the cycle they are stuck in.

    Thanks for bringing this into your series, and for further reading about getting through economic grief, people are welcome to take a complimentary ebook at

    All the best,

    Danny Fitzpatrick

  26. Cap and Maria recently contacted me again. They said that letting go of their home was a sad process BUT they are in a MUCH better place now financially and emotionally and are slowly rebuilding their credit scores.

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