Everyone Does Not Qualify for a Loan Mod

Loan modification fever is here. Families all over the U.S. are struggling to make their mortgage payments and many are expressing frustration that their lender won’t modify their loan.  Any of us could try to make a rational argument that a lender is better off modifying a mortgage loan instead of foreclosing but this is a simple answer to a complex problem.  This blog post will help homeowners understand who is not going to get a loan mod.  Hopefully homeowners will be able to then move forward toward other solutions.

Loan modifications are not for people in temporary financial distress. Temporary financial distress is when a homeowner missed a payment for one or two months because of a temporary hardship.  Lenders can and do help these folks with a forbearance and repayment plan where the missed payments are made up over time or tacked on to the end of the mortgage.  This is not a loan modification, it’s a repayment plan. If your financial distress is only TEMPORARY then asking for a full-on loan mod is wasting your time and everyone elses time.  New research out this week from CR shows us that 30% of all delinquent borrowers self-cure without receiving any kind of loan modification. This means lenders who can effectively triage out borrowers likely to self-cure are behaving rationally by setting aside pleas for loan mods.

Long term financial hardship means homeowners need long term financial solutions. A loan modification is only ONE of MANY long term solutions. In order for a homeowner to receive a loan mod, the homeowner must be able to document stable monthly income.  Lenders have to re-underwrite the file to make sure that the loan modification will not result in further loss to the lender.  This takes time. If a homeowner’s monthly income has dropped so low, to the point where they really can’t qualify to repay the modified loan, this loan modification will not be approved nor should it.  (Note: Lender guidelines on qualifications vary and change often, just like the retail side of lending.) This homeowner should consider other options which will be outlined below.  It should be beyond clear by now that lenders are not going to voluntarily start reducing principal balances unless forced by gunpoint.  The government can try to shame them into it but let’s face it: most corporations are shameless and nothing any of us say and do is going to change this.

Long term financial hardship cases do happen. Case in point. I received an email last night from a homeowner who is on permanent disability. Her husband just got laid off.  They are seeking a loan mod.  In no way can they afford the $4500/month payment on their interest only loan so they’d like the lender to lower the payment (lower the interest-only rate, extend the term).  They are $100,000 negative equity.  Sounds rough, doesn’t it?  However, they happen to have $250,00 in the bank.  This is not a case of financial hardship! A lender would be wasting time and money modifying this loan. These homeowners HAVE MONEY in the bank to continue to make their existing payment for many more months.  Besides, looking at the amount of money coming in the door each month, once their money runs out, chance of a re-default is sky high.  The only thing a loan mod does for these homeowners is it keeps them in their home for a little while longer. If the husband can become re-employed at his same rate of pay, maybe the chance of default drops a bit, but  no lender will modify this loan if there’s literally zero money coming in every month.  This lender is making a good business decision to put this file on ice while they continue to pay as agreed each month using their $250K.

I agree with CR: “If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.” It would be rational for negative equity homeowners to make the decision to trash their credit score in exchange for a shot at wiping out $50K, $100K+ negative equity if they wanted to keep their home.  We shouldn’t hold our breath for lenders to make principal balance reductions en masse.

I have not worked in loan servicing for many years but when I did, there was a triage system of making sure cases that were going to cost the bank the most money were prioritized over cases that could wait longer.  We already know that loan servicing departments are far understaffed for the tsunami that’s hitting them full on.  If we want banks to beef up staffing and spend money hiring and training more loss mitigation underwriters, the expense for these costs is going to be priced into new mortgage loans made tomorrow and in the future.  Even so, this will take time.  Working in loan servicing is a very high stress job. Imagine what it’s like to work 8 to 5 every day with a 1 hour break from lunch and 2, 15-minute breaks…with the rest of your day spent being yelled at by Realtors asking for their short sales to be approved RIGHT NOW. High stress = high turnover. I could never do that job today because I’d yell back and surely get fired. 

Homeowners with bonafide cases of lender law violations or predatory lending can and should be prioritized in getting help modifying their loans.  These homeowners are better served by hiring competent legal counsel to represent their interests in negotiating fair and just mortgage terms.  But that’s not what’s happening today.

Today, it seems that the masses believe they deserve a loan mod based on whatever is going on in their lives.  Job loss, reduction in hours, on and on….I know I may sound heartless here but lenders need to make sure you are able to repay a modified loan and that you are eligible for a loan modification under their specific guidelines.  Not everyone will qualify.

Options beyond a loan modification:

Move out of the house
If you don’t want to sell the home, perhaps you will be able to rent out your home and cover or almost cover the mortgage payment. Then you can seek out other living arrangements that comport with your ability to pay. When your income adjusts upward again, you can move back in.

Take on a tenant
Maybe you can rent out your basement or spare room to a tenant.  I know several people who are doing this just so that they can make their own mortgage payment.  Check your local city or county rental guidelines.

Sell the home
If you have negative equity, interview at least three real estate agents who are COMPETENT in the practice of listing and selling short sales. Do NOT hire an agent who has no experience in short sales.  If you decide to hire a Realtor who’s your friend or relative and that person has no experience listing and selling short sales, you get what you deserve.

Hire an attorney
Some homeowners seek out a loan modification only to find out that the real problem was far beyond just the mortgage but instead was an abundance of consumer credit card debt.  Maybe an appointment with an attorney who represents debtors is in your future. An attorney can fully explain all the reasons for and reasons against letting the home go to foreclosure, as well as all the legal consequences.  News today suggests a foreclosed homeowner might even be able to rent back their home from the lender!

Whatever you do, do NOT pay ANYONE cash up front for services before the services are actually performed (with the exception of when you hire an attorney.)  If you part with cash to pay a loan mod company, you are setting yourself up to become re-victimized.  They will tell you anything you want to hear in order to get your money because they know you are desperate. If you have money, hire your own attorney who will represent you directly. If you do not have money, contact your state’s bar association for a referral to free legal aid. 

Also worth saying: Avoid any third party who claims to have a solution to all your problems and asks you to sign anything.  Especially if they say, “This is perfectly legal.”  Before signing anything hire your own local legal counsel. Foreclosure rescue scams continue to be on the rise nationwide. 

Not everyone will qualify for a loan mod and not everyone is going to get their loan mod processed in a timeframe that the majority would consider anywhere near “good customer service.”  Loan servicing doesn’t have to provide you with good customer service because you have no where else to go.  There is no automated underwriting slam dunk approval system for loan mods.  There’s no stated income program for loan mods. Real humans underwrite the file and this takes time.  It’s going to take many, many years to work all the bad loans out of the system. We are in for a long ride.  If you don’t qualify for a loan mod it might be time to move on to other solutions.

Notice of Trustee Sales v. Trustee Deeds

Each month, Alan from Seattle Bubble religiously posts the Notice of Trustee Sale (NTS) numbers for King County. I’m very appreciative of his work because it saves me time each month so thanks again, Alan.  Cruising SB last night, I found Alan’s numbers alarming for June:  1615 NTS were filed.  Here are more numbers from Alan:

King County Notice of Trustee Sales

6/2009 – 1615
6/2008 – 576
6/2007 – 304
6/2006 – 299

180% YOY (280% of last year)

The last few months:
6/2009 – 1615
5/2009 – 992
4/2009 – 938
3/2009: 1089
2/2009: 838
1/2009: 909
12/2008: 660
11/2008: 540
10/2008: 643
9/2008: 607
8/2008: 575
7/2008: 728

If we’re seeing 180% increase year over year with notice of trustee sale filings, then where are the REOs? Well as it turns out, if you compare the trustee deed filings for the same month, you’ll see that a low percentage of Notice of Trustee Sales actually go all the way through the auction process. Here’s comparison data courtesy of Jess and Julie Lyda, which gives us a visual comparing NTS v. Trustee Deeds, which means title changed hands from the owner in default to a new owner. That new owner could be the bank/lender or someone who was the high bidder at the trustee sale. Here’s a link to a larger image of the graph.

So what assumptions can we make given facts that we already know? We already know that banks and lenders are postponing the majority of trustee sales in King County. We don’t have any data as to how long postponements are lasting.  If a homeowner is trying for a short sale or loan modification, we do know that the average wait time for banks to process these requests could easily be months based on nationwide reports from Realtors, home buyers and homeowners.  We also know that there are many banks who have turned into zombies, waiting for their number to be called and the regulators to show up on a Friday afternoon.  Postponing the losses from a foreclosure means the bankers can collect a paycheck for a few more months.

We also know that 50% of all loan modifications re-default by the 6 month mark. This pushes the foreclosure out longer and increases the overall losses to the bank/lender.  Another assumption we can make comparing data from Alan and Julie is that hundreds of REOs will be coming back on the market each month, which will put further pressure on home values.  Prime delinquencies are starting to surge and so are delinquencies in the upper home price ranges.

With what we know, home values will continue to feel pressure from many angles including higher inventory levels, continued tightening of underwriting guidelines, the lower prices of REO resales and short sales.

More on home price declines:

House Prices: The Long Tail from Calculated Risk
Case Shiller: Anemic Spring Bounce in April from Seattle Bubble
CR explains the difference between a bottom in housing starts and new construction homes and a bottom in residential resale homes in this post; Housing: Two Bottoms.

California Attorney General Demands All Loan Modification Firms Register with his Office and Post a 100K Bond

From the Orange County Attorney General’s Office:

Oakland — Continuing his fight against scam artists who “prey on” vulnerable Californians, Attorney General Edmund G. Brown Jr. today issued a directive forcing foreclosure consultants to register with his office and post a $100,000 bond by July 1, 2009. Those who fail to do so will be in violation of state law, subject to criminal penalties of up to a year in jail and fines ranging from $1,000 to $25,000 per violation.

“California is awash with con artists who prey on vulnerable families facing foreclosure,” Brown said. “By forcing foreclosure consultants to submit detailed information to my office and post a $100,000 bond, this registry will help bring long-overdue transparency to this shadowy world.”  Up and down the state, scam artists pose as legitimate foreclosure consultants, promising homeowners they will prevent foreclosure. In reality, these scam artists charge huge up-front costs, but don’t provide an ounce of help.

Earlier this month, Brown’s office prosecuted a scam artist who provided hundreds of homeowners with forged bank documents and directed them to send their mortgage payments to accounts she had created, instead of the homeowners’ lender. Additionally, Brown’s office has seen a significant increase in the number of complaints from homeowners regarding foreclosure consultants.

The registry unveiled today will provide Californians with information about potential consultants and recourse in the event that a consultant violates the law. All foreclosure consultants operating in California must post a $100,000 bond and register with Brown’s office by July 1, 2009 and submit the following information:

– Name, address, and telephone number;
– All names, addresses, telephone numbers, websites, and e-mail addresses used or proposed to be
used in connection with their business;
– Copies of all advertising;
– Copies of each different contract the consultant will use with consumers; and
– A copy of its $100,000 bond.

Foreclosure consultants who provide proper information will receive a Certificate of Registration. Brown’s office, however, may refuse to issue, or revoke, a Certificate of Registration if the foreclosure consultant has made any misstatement in its registration form, has been convicted of fraud or misrepresentation, has been convicted of a violation of the state’s foreclosure consultant laws, California’s false advertising, unfair or deceptive practices laws or other laws dealing with mortgages. If the company violates the law, a court may order restitution to victims out of proceeds from the $100,000 bond. After July 1, 2009, consumers can call the Attorney General’s office to determine whether the company they are considering dealing with has been issued a Certificate of Registration.

There is more in the press release including the names of several companies busted by his office.  California is asking all “foreclosure rescue” firms to register which includes the pre-foreclosure scam artists and also loan modification firms.  I wonder how long it will be before Washington State Attorney General Rob McKenna makes a similar move towards foreclosure rescue companies? Unlicensed loan mod firms out of California continue to make a run for Washington State homeowners (based on the phone calls and emails I continue to receive about this company which sends paperwork to another loan mod firm under a different name for processing,) even though loan mod firms doing business in WA State must be licensed under DFI.

Do you think this registration system will help California homeowners?  Should we consider a similar system for Washington State?

Let’s discover what “Lending with Expertise” means to Paramount Equity

Paramount Equity has settled their case with the Washington State Department of Financial Institutions. Read the Consent Order here.  The Statement of Charges outlined many, many violations of state and federal law:

  • Using the term “mortgage bank

Foreclosure Rescue Scammer or AG Victim: You be the Judge

In order to go into the foreclosure rescue business, foreclosure rescuers must make themselves believe that they are helping the homeowner. This is done in a cognitive way, by attending many foreclosure seminars, reading lots of books and memorizing scripts that can be played back inside the foreclosure rescuer’s head over and over again until it becomes real and true to them.

Similar to how we fool ourselves over and over again when we say to ourselves “it’s only one drink,” “it’s only a cookie” and “it’s not really sex.”  Self deception is very powerful and it appears to be working well with foreclosure rescuers.  I hear many phrases over and over again such as, “it’s perfectly legal,” “homeowners want to stay in their homes,” and “if it wasn’t for me, then….”  With the case of Joe Kaiser, we are starting to hear a different song. It’s the whine of the victim.  You know the type of person I’m talking about who constantly complains about being victimized to the point where they transform into victim.

Joe Kaiser (doing business as PreFlop, LLC, G. Hobus Investments, LLC, Bobo Buys Real Estate, and Unclaimed Funds, Inc.) makes money selling foreclosure rescue sales courses and books (examples: ‘The Subterranean Marketplace in 2009″ for $997. “Learn How to Day Trade in Real Estate Online Using Craigslist for $667.) though not everyone has been a satisfied customer.  Joe buys and sells homes in foreclosure but not just any kind of foreclosure: tax foreclosure.  Some of you will remember fine movie, “The House of Sand and Fog” very well acted by Sir Ben Kingsley, Jennifer Connelly, and the beautiful Shohreh Aghdashloo. I assign this movie as extra credit for my college students because of all the possible title insurance issues surrounding the tax foreclosure plot.  This movie should be required viewing for anyone thinking about entering the world of tax foreclosures.

In a very methodical way, described in his books, Joe locates homeowners who are delinquent on their real property taxes, and also have equity in their home.  This is a bit like a needle in the haystack kind of work today but during the bubble run-up, as others swarmed the trustee sales, Joe focused on tax foreclosures. Interestingly, several of his victims have Hispanic surnames but I digress. Le’ts read the public records documents:

The Court found that Mr. Kaiser violated the Consumer Protection Act by soliciting homeowners with false promises to help them keep or save their home when partial interest deals do not actually result in the homeowner keeping or saving their home.  The Court also found that, in the course of creating partial interest deals, Mr. Kaiser violated the Consumer Protection Act by falsifying real property excise tax affidavits and by acting as both trustee and co-beneficiary seeking a profit from the trust.

Kaiser solicits homeowners facing tax foreclosure and induces them to place their home in a trust, with Kaiser, through his business entities, as trustee and co-beneficiary.  Mr. Kaiser does not pay the homeowner for their homes. Once title to the home is in Kaiser’s control, he pays the delinquent property taxes and stops the sale of the home.

The land trust…that Kaiser created give him complete title and control over the homes and leave the former owners with only two tenuous rights: 1) the right to some percentage of the sales proceeds if Mr. Kaiser chooses to sell the property, and 2) the right to occupy the property for one to three years, provided the former owner pays rent. These two rights are tenuous because the documents contain hair-trigger default provisions which void these rights if the former homeowner is even five days late on a rental payment or violates any of the other terms contained in the numerous documents Mr. Kaiser has them sign.

Mr. Kaiser testified that every partial interest deal he has created is actually in default…therefore, none of the former homeowners maintains their right to possession of the property or a percentage of the proceeds if Kaiser chooses to sell it.  By virtue of the lease provisions and other contractual provisions for reimbursement of all of Mr. Kaisers expenses, his terms entitle him to receive either the entire home vacant or his share of the home’s equity without having ultimately paid any money….Homeowners who enter the transactions believing they are saving their homes are actually stripped of any ownership interest and are not even given a right of first refusal to buy back their home.  No fully informed person, not acting under compulsion would enter a transaction with such onerous terms.

There is much more in the Findings of Fact and Conclusions of Law and if you want to learn how to “Negotiate Foreclosures Like a SWAT Team Leader” then by all means, meet Joe here.

There are some investors who feel sorry for Joe.  Joe feels like he has been attacked by the AG’s office and is blogging about his new role as a victim. Let’s see if this logically works.

In the F&G M. transaction, Mr. Kaiser claimed he saved F&G’s home…What Kaiser actually did was purchase the home at the foreclosure sale and then had Mr. M. sign over his rights to the overage money from the foreclosure sale. As a result, Kaiser obtained both the house and the $45,428.47 in overage money he had paid at the auction. Kaiser never sold the house back to Mr. M. even when Mr. M. obtained a Realtor and made an offer. Kaiser then sent Mr. M. an eviction notice demanding Mr. M. immediately pay $2700 in rent or vacate the property.

I’m trying to work up some tears but they’re just not coming.  Now it’s your turn: is Joe Kaiser a posterboy foreclosure rescue scammer, a victim, a sociopath, a combination thereof, or am I too  justice oriented to become a real estate investor guru?  I just can’t look at someone, flat-out lie to them, and steal their house and money.  If that’s what it takes to be a real estate investor guru, count me out.

Why are Banks Setting the Opening Auction Bid Below The Principal Balance?

I attended a foreclosure auction in Bellevue, WA last week to discover if the rumor was true that banks are opening their bids below the amount owed.  I received confirmation from three professional investors that yes, the banks have been doing that, it’s no secret, and there seems to be no discernable pattern.  It’s not one particular bank or lender, it’s not particular types of property or in any specific area. It appears to be random.

In addition to the 92 active trustee sales scheduled for that day in Bellevue (auctions were also going on in other King County locations,) there were 81 postponements.  Only a few of the trustee sales attracted bidders, and the rest were deeded back to the bank.  Out of the 92 active sales, 25 had opening bids below the amount owed to the bank.

Why would a bank or lender set their opening bid below the amount owed?

Banks and lenders have duties to their shareholders and investors to maximize profits and miminize losses (well, at least they use to.) If opening bids are set LOWER than what’s owed, perhaps the banks have already tallied their losses, realized that if they had to take back the house, get it cleaned out and cleaned up for resale, pay a real estate agent their commission to sell it, pay for title, escrow, excise tax, utilities, and any other carrying costs,  they might as well sell it at a discount at auction.  But maybe there are other reasons.  I wondered if the banks were trying to keep more REO inventory off the market in an attempt to prop up home values for their existing REO inventory.  Maybe appraisers can ignore trustee sale prices in their reports.  Not knowing the answer, I emailed three appraisers for help and here’s what I learned:  Appraisers need to mention trustee sales in the neighborhood if these trustee sales make up a significant percentage of available comps because they are legitimate sales even though title is transferred using a trustee deed instead of a warranty deed.  If an appraiser choses to ignore these, he/she will run the risk of having the appraisal run through an “enhanced review” process in order to catch trustee sale market activity.  If a trustee sale is a significant comparable sale, it can be used. The requirement to use closely comparable trustee sales as comps can also vary based on the requirement of the lender and investor.  It may not be absolutely required but it may be in the appraisers best interest to mention trustee sales. Thanks to Jonathan Miller, Shane Leady and Richard Hagar for teaching me something new today.

That still doesn’t explain the phenomenon of banks undercutting their own principal balances at the auction.  My theory is that banks are relying on third party information such as a mini appraisal or Broker Price Opinion (BPO) prior to auction.  If the BPO suggests that the outstanding principal balance is so high and out of range as to likely attract no bidders at auction, then the banks have nothing to lose by setting the opening bid closer to or significantly lower than the principal balance owed.  If no one bids at auction, they’re still only out the money they would have been out anyways and on the upside, if the low opening bid attracts investors, then perhaps the bidding will rise closer to the payoff.  If not, they have an immediate loss that could be significantly LESS than losses that would add up over time, having to carry the REO on its books for months of marketing time in addition to the other costs mentioned above.

If banks are undercutting their own payoffs, then why isn’t this phenomenon more widely publicized?  Okay, so we know that bidding on a home at a trustee sale is too frightening for most first time homebuyers but still, if more people know about this, then maybe there would be more folks showing up at the trustee sales and bidding those homes UP, thereby reducing the banks losses.  There certainly is NO shortage of tall, well-groomed, good looking, muscular investor gurus in shorts showing off tanned legs, even though it was only 63 degrees outside hanging out at foreclosure auctions with all kinds of downpayment solutions to offer newby real estate investors:  “We have zero down financing available for the right investor!” and “We have private hard money financing available for your purchase and you can refinance out of that loan in 30 days….My mortgage broker is right here, let me introduce you to her.”

Maybe the banks aren’t publicizing their low bids because they don’t want to bring buyer attention away from purchasing their REOs or short sales, knowing that investors are the ones who typically show up at the auction anyways.  The banks also have a vested interest in keeping traditional buyers focused on MLS listings. 

If I owned stock in a bank or lender that was undercutting their own payoff at auction, I’d want to be darn sure that this practice was saving the bank money and not hiding something else such as higher losses to be pushed on into the next earnings report…or the next stress test.

Foreclosure Auction Video Part 1
April 24, 2009
Bellevue, WA
Here is the rest of the auction.
Special thanks to Phil Leng for introducing me to all the investor bidders.

I’ll Be at the Factoria Courthouse Friday Morning at 10AM for the Foreclosure Auctions

Every Friday morning at 10:00 AM, Trustee Sales are held in various locations throughout the county.  Phil Leng, one of my students, invited me to attend the foreclosure auction with him this Friday at 3535 Factoria Blvd SE, Bellevue outside of the south entrance to the Northwest Trustee Services building.  I’ve been hearing rumors that banks are discounting their own opening bids right at auction and I want to check this out.

If you’ve been following along with Craig Blackmon’s foreclosure series, this means the amount of money owed to the bank, plus expenses, is the opening bid.  Bidders show up with cashier checks, receive a bid number, and typically bid UP from the bank’s opening bid.  During the height of the bubble run up, there were multiple bidders bidding the final price way up.  The rumor is that some banks or lenders may now be opening the auction at a bid price lower than their cost. I have heard of this happening in other states such as California, but not in Washington state. 

I’ll be there tomorrow. If you want to come and join me, I’ll be the one with a video camera recording as much as I can for a new class I’m writing.

JBA Financial Group: Get Licensed or Get Out of Washington State

I heard a radio ad on KIRO 973.FM on Monday, April 13, 2009 at 11:45 AM during the Dave Ross show and again on Tuesday, April 14, 2009 at 6:02PM on the Ron and Don show.  The company was JBA Financial Group and they are advertising their loan modification services.  JBA Financial Group is not licensed to do business in Washington State, and they are not licensed as either a mortgage broker or consumer loan company according to the DFI database which is updated as of today.  I called JBA Financial. Here is how the conversation went:

Jillayne: “Hi, I’m a Washington State homeowner and I just heard your ad on KIRO 97.3FM here in Seattle.  I was wondering if you are licensed to do business in Washington State.”
JBA: “Well you sure sound happy. My name is X, what’s your name?”
Jillayne: “Jill.”
JBA: “Hi Jill, yes, we are licensed by the department of real estate and licensed by the department of corporations to do business in all 50 states.”
Jillayne: “Well on your website, it just says DRE-California. With all the news reports about predatory loan modifications, I want to be sure I’m dealing with a legitimate company.”
JBA: “That’s very smart of you.  As you can see on our website, we’re licensed to do business through the Department of Real Estate and that’s good for all 50 states.”
Jillayne: “No, I don’t think so. It just says “California” on your website, not “all 50 states.”
JBA: “Well you can call the department of real estate yourself and check us out.”
Jillayne: “No thank you, good bye.”

Newsflash for  JBA: The California Department of Real Estate does not give you approval to do loan modifications in all 50 states.

Isn’t there something in the contract KIRO radio signs with advertisers that they have to be sure the company is following state law?  I asked KIRO this question and here is what a KIRO representative, who refused to be identified, said on Monday: Listener concerns should be directed to the attorney general’s office. KIRO has left a message for JB Financial to inquire about the status of their ability to do business in Washington State.  On Tuesday, the same KIRO representative emailed me confirmation that JBA has the authority to do loan modifications in all 50 states, which they received from the owner of JBA.  Here is the document.  There is nothing in this document that allows JBA to claim that it can do loan modifications in all 50 states.  If I can easily figure this out, why can’t KIRO or it’s parent company, Bonneville?

I also put in a call to JB Financial Group’s owner, letting him know that I was preparing this blog post. I received a phone call from their vice president, who informed me that JBA’s primary business is real estate investments and they only recently began doing loan modifications.  He did not know if JBA is licensed to do loan mods in Washington State. He referred me to the company’s CFO, “the strictest compliance person you will ever meet.”  The CFO was not able to talk long because he was, no kidding, in the middle of recording another radio commercial, so the president called me back. He said that he believes the California Department of Real Estate gives them approval to perform loan modifications in all 50 states unless a state contacted them and told them otherwise. Wow, so much for strict compliance.   He believed that because his company is “attorney assisted” they didn’t need to be licensed. I informed him that WA State gives his company no such exemption.  

I’ll be happy to update this post once I find out that JBA Financial  Group is actually licensed in Washington State to perform the services that they are advertising on the radio. 

During the last decade we had hundreds and maybe thousands of predatory lenders roaming around Washington State.  In some of our state’s investigations, there were NO consumer complaints filed against lawbreakers such as the case of Liza Bautista. It will take a village to shut down the predatory loan mod companies.  I’m hoping that the legitimate loan mod companies as well as radio advertising decision-makers will help.  The closest we can come to “legit” is to make sure they are, at minimum, licensed with the Department of Financial Institutions working under either a mortgage broker OR licensed as a consumer loan company, or otherwise exempt from the act such as attorneys and free HUD-approved housing counseling agencies.

DFI Releases Guidelines on Loan Mods and Sets Limits on Fees

Washington State Department of Financial Institutions has released an updated interpretive statement on loan modifications late this afternoon. People who perform loan modification services for Washington State homeowners must be licesed as a loan originator and under the supervision of a broker, or be working under a licensed consumer loan company.  Attorney have a limited exemption and non-profit housing counseling agencies are also exempt.  Real estate agents are not exempt.

 Licensees that charge a fee for loan modification services in advance of the services being provided must obtain a signed fee agreement for loan modification services from the borrower. Any fees paid in advance of services provided must go into the company’s trust account prior to disbursement, or be submitted to an independent escrow or title company to be held until disbursed at the instruction of the parties consistent with the fee agreement. Licensees are prohibited from collecting fees via direct access to a borrower’s bank account or via use of the borrower’s credit card.

A loan modification normally begins with a hardship analysis which is an examination of the borrower’s current mortgage, income, expenses, and ability to repay. The hardship analysis includes meetings or conversations with the borrower(s) and a determination of the borrower’s eligibility for a modification based on the particular lender’s eligibility requirements or the eligibility requirements of a federal modification program. The hardship analysis, sometimes referred to as “Phase I services,

Bottom Calling to Solicit Clients: Is it Ethical?

A question was asked by seattlerenter in this post at SeattleBubble about an advertising letter mailed out by a real estate agent. See comment 19:

Dear Renter,

Youve been patient. Youve waited for the perfect time to buy a home. Well this is it. Home prices have bottomed out. Many experts see prices rebounding from current lows. The $8000 Federal Tax Credit is available for a limited time. The….. Buyers Rebate is yours when you use me as your Buyers Agent. And now Mortgages are at their lowest since 1971…Your patience has paid off!”

Seattlerenter asks if this is legal and ethical, specifically, using the phrase “home prices have bottomed out.” Since I do not practice law, I cannot answer the legal side. In this blog post, I will analyze the ethical question.

First we need to differentiate between real estate agents and Realtors. Everyone is an agent but only some are members of the National Assoc of Realtors.  In order to solve any ethical dilemma, it’s important to first consult the minimum moral standard; the law.  First we would consult the state agency law. Next we would look to other state laws that may answer the question such as consumer protection laws. After that, there may be a federal law that addresses the question. If we still have no answer, we would consult MLS rules. After that, we would check with our own company for policies and procedures and company ethical codes that address honesty and advertising. Perhaps we belong to a professional association. Then we would consult the ethics code of that association for guidance.

Real estate agents who belong to the Realtor association consult their Code. Here is the link to the NAR Code of Ethics.

As we see in Article 1, a duty of honesty is paramount when working with a client. But at this point, we are soliciting to obtain a client. We don’t have a client yet.  Standard of Practice 1-3 says, “REALTORS®, in attempting to secure a listing, shall not deliberately mislead the owner as to market value.”  In order for the marketing piece to be deceptive, the real estate agent must have known about the falling market in advance and intentionally choose to mislead potential home buyers and sellers. Since we can’t know the future, this article may not fit our situation.  Article 2 says “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property.”  If Realtors have facts that lead them to believe that now is NOT the bottom, then they might be in trouble here. For home sellers, that’s not going to be a problem (since selling NOW in a down market is better than waiting.) This would only be problematic for a buyer who was lead to believe through exaggeration, that we are at the bottom.
Here is what I’ve been waiting for. Article 12:

“REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.”

How would a Realtor put up a defense against an Article 12 ethics violation for sending out the above letter?  Well, I suppose what he/she might do is to provide some sort of analytical proof with numbers, statistics, and graphs as to how he/she arrived at an affirmative realization that “now” is the bottom of the market. This Realtor may be able to defend against an ethics complaint by saying that he/she WAS being honest, based on the facts known at the time, and based on his/her analysis.

This leaves homebuyers to make their own decision as to if this particular Realtor’s personal opnion and analysis of the market can be verified by other third parties.

A prudent decision for a Realtor (who is going to embark on a bottom calling ad campaign) to do is to take his/her personal bottom calling statistics and analysis and have it reviewed by a neutral third party for accuracy. Similar to how we had our thesis papers reviewed by professors and then winced when they tore up our paper with obvious errors and made us do more research. We were better students because of those professors, even though we didn’t like doing the extra work, but I digress. Without neutral third party review, a bottom-call is just one person’s opinion.

If ever hauled in for a professional standards committee hearing, there would be ample documentation from a wide variety of local, state, regional, national, and international economists , Nobel Prize Winners, and other real estate industry experts who could provide solid opinions based on known facts as to if we were at the bottom on the day that marketing piece was mailed.

The third to the last step in any professional ethical dilemma is to consult one’s own set of values. What kind of a real estate agent/Realtor do I want to be? What behavior do I value in this world? For example, if I value honesty then I need to also be honest with other people, too.  Careful reflection is important when considering all the possible consequences.  Realtors value honesty, justice, beneficence and non-maleficence, responsibility, respect for persons, loyalty, and compassion.  These values are hidden all throughout the Realtor Code.  How does our marketing campaign support the values that we believe in?

The second to the last step is to make the decision.

The last step is to look back and reflect on what we did, how it turned out, and if we’d do anything different next time.

The person making the “bottom call” in the letter claims to have experts who agree with him/her. Who are these experts and where can the letter reader go to get more information? Perhaps the real estate agent who wrote the letter could provide that information in the letter.

At best, the letter brings to mind the viagra, porn, and loan mod spam in my spam bin, and I haven’t even touched the typos and the deception regarding the $8,000 tax credit. 

If Realtors care about their ethics as much as they claim to, then Realtors should talk with each other about the possible consequences of calling bottom in marketing material and provide guidelines as to what research to use.  It goes without saying that we would have benefitted from guidelines like this when we rode the real estate bubble on the way up. 

Using the NAR’s economist as the only source  would be a very, very bad decision.