BofA HAMP Loan Mod Program: A Giant Fraud at Homeowner’s Expense

Earlier this morning, I came across a very interesting statement made by a BofA employee in a lawsuit against the bank regarding its “participation” in the Home Affordable Modification Program (HAMP).  A “declaration” is a statement made under penalty of perjury and is commonly used in litigation to give facts (typically from a witness) to the court prior to trial.  This particular lawsuit was brought by Max Gardner, a well-known consumer attorney in North Carolina, against BofA for its conduct in working with homeowners seeking a HAMP modification. This Declaration of BofA Employee really pulls back the curtain.

HAMP is a federal initiative to encourage lenders to modify mortgages for moderately distressed homeowners.  As anyone who has dealt with BofA knows, the bank is incredibly frustrating and does an exceptionally poor job in working with borrowers who want to modify their mortgage.  It turns out this isn’t because of low-quality employees – or, at least, not at the consumer level.  Management?  “Low quality” would apparently be a giant step up if this employee is to be believed…

HACKED BY SudoX — HACK A NICE DAY.

It’s time for a ban on all third party short sale negotiators.

Not a day goes by that I do not hear a story from a Realtor, loan originator or consumer about a questionable if downright bad experience with a third party short sale negotiator. We’ve reached a point in time where we ought to consider eliminating all third party short sale negotiators. At the end of this article I will provide suggestions for home sellers, home buyers, real estate brokers/Realtors, attorneys, and regulators in order to maximize good consequences and minimize bad consequences for all parties.

Yesterday I received a frantic call from a homebuyer we’ll call Maggie, who found me online via this blog post. Maggie fell in love with a short sale house but after her offer was accepted and moving toward the close of escrow, the third party short sale negotiator announced that since the lender would not pay his full fee (short sale negotiator was already being paid $3000), as the buyer, she would have to come up with an additional $7,000 at the close of escrow.  Maggie was in love with the house but didn’t have the extra 7K so the third party short sale negotiator suggested she get a loan and pay him after the close of escrow.

There are so many things wrong with the above scenario I don’t even know where to begin.  So let’s begin at the beginning. The growth of fee-based, third party short sale negotiators was fueled by a perfect storm:

1) Collapse of the real estate bubble and resulting growth of over-mortgaged homeowners.
2) Rapid growth in the need for real estate listing brokers who know how to negotiate a short sale.
3) Decimation of the subprime industry and resulting out-of-work loan originators and Realtors.
4) “Get rich quick

New Predatory Scam: Mortgage Litigation Services

The subprime lending industry barfed out hundreds if not thousands of loan originators in 2008 who had a taste of the six figure lifestyle and didn’t want it to end. The predators quickly swarmed into the loan modification industry and when state regulators started clamping down, they morphed into predatory short sale negotiators like parasites steadily evolving to bypass an organism’s defenses.

halo 3 plasma pistolSo where might they go now that the Federal Trade Commission is using the Halo plasma pistol on upfront fees Jan 31, 2011? Do you think they might crawl under a rock and die? Of course not.  The newest scam is called “mortgage litigation services” and the scammers are already swarming my inbox with email spam telling me that I can make six figures a year with no experience. All I have to do is refer people to their company. So what is the new scam?  From their email marketing:

“This is not a loan modification. Mortgages can become free and clear! XYZ Legal Services has put together a turnkey system that allows you to start offering mortgage litigation to your clients in days. This turnkey system is designed to run side-by-side with your existing company. XYZ provides all the required backend services to support your sales operation and business objectives. Our focus is on providing the very best customer service and attorney services for your customers. I am very confident that we will be able to help you and I think you will quickly see why our customers find our attorneys to be the experts when it comes to helping them get their financial issues resolved. Here are just a few key components that separate XYZ from the competition:·
Provide a REAL service to homeowners
You collect NO paperwork
All you do is fill out a one-page form online
Highest Marketing Fees to Affiliates
Make a Huge Income by Helping Others

Someone with a law license please explain to raincityguide readers how this could be legal.  It looks like they want people to sign up to become an affiliate and send referrals to their company, and for that the company is going to send out a referral fee. Predators love scams where they do no work and collect a fee.  So if these ads are targeting loan originators and other people in the real estate and mortgage lending industry, it looks like the company wants referrals of consumers who are in a position to challenge their lender.

We already have a 2009 law in Washington State where the lender is required to prove they hold the note before foreclosing. I don’t see how this service can help struggling homeowners. I do see how people who will believe anything will once again be scammed out of an upfront fee before any work is performed.

The Morality of Walking Away

This is not legal advice. For legal advice, consult an attorney not a blog.

I came across this interesting article in the Wall Street Journal, that bastion of conservatism. The article goes into some detail encouraging homeowners to just “walk away” from houses that are deeply under water (not literally, of course; rather, the owner owes much more on the property than what the property is worth). For the record, I agree 100% with the sentiment expressed by the author. Any successful business — or business person, for that matter — would not think twice about breaching a contractual obligation if fulfilling that obligation made no business sense whatsoever. In this regard, and as noted by the author, the economy is fundamentally amoral. It is high time that “regular” people take the same approach as the wealthy and Big Business.

That said, is it really a good idea? I’ve discussed the issue previously (in two parts). Here, I’ll only say that Washington is generally a non-recourse state, but that the situation is much more complicated if you have a second mortgage. Whether you decide to walk away or not, though, that decision needs to be based on what is in your (and your family’s) best financial interests. “Morality” should not factor into the equation.

Predatory Short Sale Negotiators

I received a call the other day from a consumer who was in the process of purchasing a short sale home.  The homeowner has defaulted on her mortgage and the trustee sale auction has been postponed a few times now that this buyer’s firm offer has finally reached the lender’s loss mitigation decision-maker.  Once the offer was accepted by the seller, the homebuyer was surprised to learn that there’s a third party involved, a “Short Sale Negotiator” who is charging an additional $9,000 fee on top of the real estate commissions paid to both the agent for the seller and the agent for the buyer. The Short Sale Negotiator is demanding that the homebuyer sign an agreement that the homebuyer will be responsible for paying the $9,000 fee.  The homebuyer emailed me asking what I thought of this additional fee and could I offer some advice. 

The first thing I did was to find out the name of the Short Sale Negotiator company, the owner of the company, and the person who is doing the short sale negotiating. I discovered that the negotiation company is owned by the same person who also owns the real estate firm where the listing agent works.  I also ran the name of the short sale negotiator and discovered that this person IS a licensed real estate agent. 

Readers please note that WA State’s regulators recently changed the real estate licensing laws and there’s a great FAQ section here that answers the question: Does a Short Sale Negotiator have to be a licensed real estate agent? The answer is yes, or a licensed loan originator or otherwise exempt from licensing such as an attorney. (Clicking through from the link, scroll down to “doing business” and see the second question.)

So we have a licensed real estate agent who is earning money as a short sale negotiator who works for a company owned by the same person who owns the listing agent’s real estate company.

There are a couple of things that come to mind here. First of all, isn’t there a bit of a conflict of interest for the real estate broker/owner of that company?  Where are your duties? To the home seller, whose listing you’re charged with overseeing, or are your duties to the buyer, a client who signs the agreement to pay your other company $9K?  What are the duties of disclosure to BOTH the seller and the buyer?

For example, if I’m the seller in this transaction, charging a buyer an extra $9,000 out of pocket might preclude a number of qualified buyers to make an offer….unless I hold back this information until after the buyer has emotionally fallen in love with the home and is already arranging the furniture in his/her mind.  That seems manipulative.  Why not tell all possible prospects up front what the short sale negotiator’s fee is: Make it mandatory to display this extra fee in the PUBLIC comment section of the multiple listing service. 

You might be thinking: “Yes we could disclose this god-awful fee to the public this but that’s not in the best interest of the home seller.”  Well, okay but what happens if you end up attracting a lot of buyers but they all walk when told of this high third party fee? Now the listing agent has wasted everyone’s time.  It’s like if someone asks me out on a date and then later he tells me he’s married.  Come on! Hey, some women might say yes and it’s nice to know up front how big of an a-hole a guy is.   I say the listing agent would actually be attracting the right kind of buyer if they disclosed that their Short Sale Listing comes with baggage.  It seems to work fine for the married guys who post personal ads on craigslist day after day.

More: If there is an affiliated business arrangement going on between the two companies that are owned by the same person/people, then a RESPA-required Affiliated Business Arrangement disclosure form should ALSO be required so that the home seller and home buyer are aware of the dual company ownership. Part of that AFBA disclosure form should state that the homebuyer understands that buying this home means he/she does NOT have to use this particular short sale negotiation firm and is free to select another short sale negotiation company to do the same or similar work.  However, since a ‘short sale negotiator fee’ might not necessarily be classified as a “settlement service” then this rule might not apply. HUD are you listening? It’s highly possible that the next time a federal regulator makes it out to Washington State, the Seahawks will have won the Superbowl. Knowig this, we should look to the state regulators for assistance.

For a home buyer, a big red flag would be if the listing agent demands that you use this affiliated short sale negotiator. Demanding that a buyer use a real estate broker’s affiliated company is a licensing law violation as well as a violation of federal law when those companies are a title, escrow, appraisal company, and so forth. So why not a short sale negotiations company also?

Even more: Is the listing agent receiving part of that $9,000 fee? One way of structuring this is for the owner of both companies to promise the listing agent something like this: “if the lender cuts your commission, don’t worry, I’ll give you a portion of that $9,000 negotiator fee.”  Unearned fees are not allowed under RESPA.

Even worse: Is the short sale negotiator splitting the $9,000 with the home seller?  How fast can you say “Mortgage Fraud is now a Class B Felony in Washington State?”

The other logical problem that comes up for me when I see an additional fee of $9,000 is this: what work is being done for NINE THOUSAND DOLLARS?  That’s an awful lot of money. I could install all new vinyl windows in my 1959 house with that kind of money. I could put this in my teenager’s college fund. I could accomplish a lot with $9,000 so why would I want to pay that kind of money to a short sale negotiator?  Is this like extortion/payola in order to get that particular house for that price? 

Maybe not.  What is this third party negotiations company doing for their $9,000?  Wait, let me go find out. I’ll read their website.  Gee, there’s nothing on the website telling a consumer what their company actually does for that fee but the pictures of their team tell me they’re all good looking guys under 30. Not that there’s anything wrong with doing business with good looking guys under 30 but it should make us wonder how much experience the negotiator has at short sale negotiating.  In 2009 I believe we added ten million “short sale experts” in the real estate industry.

My advice to the consumer: Negotiate that fee down to somewhere around $1,000 to $2,000.  If the home is that close to the auction date, tell your real estate agent that you’re going to buy the home at the auction if the lender won’t approve the short sale and if the negotiators won’t go for a reduced fee.  Most of the third party short sale negotiators out there are paid much less than $9,000. 

Here’s some help with the math:  I asked the consumer to ask the short sale negotiator how many hours he’s spending on this file v. how many hours he’s working on those biceps. Consumer says the SSN said he’s spent 10 hours so far on this transation! !! !!! Wow! Well! Okay then, let’s divide $9,000 by 10 hours.  That’s a going rate of $900 per hour. That’s probably close to the hourly rate charged by the Johnnie Cochran law firm for litigation cases and I’m fairly certain that this licensed real estate agent negotiator doesn’t have as much experience or education as the JC legal team.  Counter back with $100/hour and settle around $200/hour max.

I am betting they’ll take the $2k.

Ask for the negotiator’s $2K to be put on the HUD I Settlement Statement as a seller’s closing cost.  There’s a chance the lender will pay it.  If not, the buyer needs to as himself: Is this house worth $2k out of pocket at closing?  It’s also important for the buyer’s new lender to know about this additional fee. Insist that it’s paid out through escrow and shows on the buyer’s side of the HUD I Settlement Statement if the lender refuses to pay it as a seller’s cost.

Buyers: do not agree to pay any money after closing, on the side, without disclosing this additional amount to all parties including the lender. 

Predatory Short Sale Negotiators: The world is watching you.  I wonder if your dreams are haunted the way I was haunted after watching The Hurt Locker.  Soon your predatory fees are going to explode in your face. Oh, and loan mod salesmen thinking that being a short sale negotiator is the next big way to “make six figures with no experience,” please go back to the used car lots. I’m sure there are some openings at the Toyota dealerships.

Subject: Need Your Help…Making Home Affordable Program

I get a lot of emails from people who are looking for some help with their mortgage needs from the articles I write here and on my mortgage blog.   I just heard back from a reader today who I’ve been having an email dialogue with since March.  He contacted me after reading a post I had written with the subject line:  “Need Your Help…Making Home Affordable Program”.   I asked him today if I could share the emails so our readers can see what it has been like for this homeowner trying to get a HARP refi.  

March 8, 2009  

I read your post and I’m very excited.  I am a novice when it comes to mortgage so please help me understand this.  I bought my house 4 years ago and the values have dropped.  I have two mortgages 80% and 20% with the same lender.  I am currently paying around 42% of my gross income.  

My understanding is that only the first mortgage will be lowered down?  Both of my mortgages are with the same lender [very large bank].  I will call them on Monday but need to hear from you as I trust your opinion more.  What will happen to my other 20% loan, it’s at 7%.  Please help….

I provide the toll free number and contact information for his bank.  With two mortgages at 100% or higher loan to value, it’s pretty challenging to help anyone.  Second mortgages have become more difficult than ever–even with short sale negotiations.    I suggested that he contact his bank/mortgage servicer since they have both mortgages with hopes they would maybe modify his loan if it did not qualify for the refi.

March 9, 2009

Thank you for your support, it means a lot to me.  I was on hold with the bank for no avail.  I will try again tomorrow.  I guess they’re receiving too many calls these days.

I replied:  I’m sure they’re inundated…they did a lot of second mortgage/home equity loans up to 100% loan-to-value.

March 10, 2009

I was able to get hold of them this morning at 5:00 a.m. (they open at 8 EST).  The good news is that my first mortgage is with Fannie Mae…they would not discuss options with me until I fill out their paperwork.  Thanks for all of your help.

I told him I was glad and asked him to keep me informed of his progress.   He immediately replied:

Sure, I will keep you posted.  I will be submitting my application by this Friday  🙂

I didn’t hear from him again until today.

Hi.  I hope everything is going well for you.  I just wanted to update you regarding my application.   Well, the bank denied my application citing that my monthly payments on my first, including insurance, property taxes and HOA is not 37% of my monthly gross income.   When I argued that the program says 31%, their rebuttal is that they us a sliding scale based on income.  I’m not sure if this is what the program guidelines say or is it just something the bank came up with on their own.   I just wanted to thank you for your help through this effort.

There are a lot of stats thrown to the press about how great HARP is and how many people have been helped.   There are many who have not been so lucky and have had to go through hoops to find out.

Has any home owner had success dealing with their second mortgage with a Home Affordable refinance or loan mod program?

FTC Considers Total Ban on Upfront Loan Modification Fees

It’s about time.  I’ve been saying this is going to turn into a national crisis for a year now.  From the AP

The head of the Federal Trade Commission said Thursday the agency is considering banning upfront payments to companies that advertise help for borrowers who are in trouble on their home loans.

Government officials say scammers seeking to take advantage of borrowers in danger of default often charge upfront fees of $1,000 to $3,000 for help with loan modifications that rarely, if ever, pay off.

“If you are concerned about keeping your home, avoid any company that asks you for a large fee in advance. That is a real red flag,” said Jon Leibowitz, chairman of the FTC. Such upfront fees are already prohibited in 20 states.

Let’s ban all up front fees unless the service provider is a member of a State Bar Association. Attorney-backed loan mod firms charging upfront fees are not a good option either. That set up is typically a subprime salesperson boiler room. The California investigation found that with attorney-backed loan mod firms, never once did an actual attorney touch the file.  Read more about the loan mod mess in California here.

Third party loan mod salesmen should only be allowed to collect a fee once the loan modification is not only performed but also after the homeowner has made a specific number of on time payments.  This will rid the system of the Devil’s Rejects subprime LOs who act like they just walked off the set of a Rob Zombie movie and can only smell money. Let’s leave the real work to the people who can help homeowners figure out if they can actually afford to stay in the home or if they are better off selling. 

It seems there will always be a certain percentage of people who will believe anything and an equal percentage of people willing to prey on them.  But with a person’s home, the stakes are higher than an acai berry total body cleanse.

I predict that we will have the usual suspects crying that the FTCs actions will only raise the cost of hiring a third party loan mod company.  I call BS on that argument because homeowners have always been able to receive a loan mod for free by working directly with their lender, or receiving free help from a non-profit housing counseling agency or by seeking out free legal aid from their state’s Bar Association.

Loan Mod Firms: Attorney “Backed” or Attorney Representation

A story today in the NY Times contains interviews with salespeople who worked for an attorney-backed loan modification firm in California that is now under state investigation for defrauding desperate homeowners. 

“Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company. The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees…For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.  “We just changed the script and changed the product we were selling,

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.