Where is the Cavalry?

How much help can Veterans and potential FHA refinancers expect from the latest program announced by President Obama at his recent (3-6-2012) press conference?

For a good summary of the new program see an article in Bloomberg Business (http://www.washingtonpost.com/business/economy/obama-unveils-housing-initiatives-for-military-fha-families/2012/03/06/gIQAjW1mvR_story.html)

“the administration has struck an agreement with various banks and lenders to conduct a review of foreclosure practices for military members. Any service member or veteran whose home has been wrongly foreclosed on since 2006 will receive compensation equal to a minimum of $116,785 plus any home equity lost since the foreclosure. This compensation will come from the mortgage servicers that conducted the foreclosures. In addition, any service member who was wrongly denied the opportunity to refinance will receive a refund of money lost.”

The new initiative leaves most industry analysts entirely underwhelmed. If you read the comments that follow the article, I think the majority of opinions among the real estate industry agree that this new initiative is warmed up leftovers. At risk of allowing this blog to become unnecessarily political the initiative strikes me as a ploy to keep Obama from losing the military vote again in the upcoming election. But this is what most military voters who are sophisticated enough to own a home and read the fine print in the initiative will find:

The initiative is not a direct government intervention, it is primarily an agreement with banks:

“a new agreement with banks to review foreclosures for members of the military that have taken place since 2006 and provide compensation to anyone who wrongfully lost a home.”

This “self-policing” action of mortgage loan services will be overseen by the Department of Justice’s Civil Rights Division (see http://www.whitehouse.gov/the-press-office/2012/03/06/fact-sheet-president-obama-announces-new-steps-provide-housing-relief-ve), so there is some hope that the Servicers will not merely give lip service to this self-review process as they have to so many DC initiatives in recent months.

So who can come away with some hope from all this?

(1) Vets with first mortgage rates over 6% who were denied a modification to a lower rate.

(2) Vets who have already lost their homes and were the victim of a faulty foreclosure in the past 6 years. ****

(3) Servicemembers who are forced to sell their homes for less than the amount they owe on their mortgage due to a Permanent Change in Station;

The biggest single benefit may be: “deficiency waivers to those servicemembers who were forced to sell their home for less than they owe on their mortgage due to a PCS, but who are not eligible for HAP.” Does this mean that a serviceman must first apply to the HAP or other Foreclosure Alternative program and be ruled ineligible? What new protection is created by this initiative over the age-old VA offer-in-compromise program? When a serviceman suspects he is eligible for review of a short sale deficiency situation, he/she is encouraged to call the Justice Department directly at 1-800-896-7743.

Many Vets depend on their credit rating to avoid losing their security clearance. So a vet may be tempted to contribute cash sacrificially to a deficiency at a short sale closing or to avoid a suit for a deficiency after a foreclosure. There is hope that the initiative could lead banks to refund such out of pocket moneys and to eliminate all deficiency obligations by veteran borrowers. It will probably still require time and an lengthy application process in Virginia to become a beneficiary of this new initiative, but clearly worth the effort. The real issue is time. Anyone who has endured a shortsale knows that time is of the essence. While inquiry is made to another governmental agency it could jeopardize the timing of permission to sell short granted by the seller’s mortgage company and the lock-in expiration date from the buyer’s mortgage company. This benefit is completely moot if the sale falls through!

**** (With regard to unanswered questions in the particulars of this new initiative: There is s a potentially large dollar fine, but would access to that fine require solid proof of absolutely bungled foreclosure practices and proof of actual losses by the veteran? If the house is already upside down when it is lost . . . . what are the damages? The credit was already on the way down when the veteran started missing mortgage payments and it would be speculative, at best, to try to quantify further damages to credit or pocket book beyond the self-inflicted damage caused by the previous delinquency.

In reality, many foreclosures are faulty because of “robo-signing” or other issues. But there are already laws in place that every foreclosure trustee must observe, even in Virginia, the reputed 2nd easiest state in the USA in which to foreclose on a mortgage! Especially federal regulations that have existed since WWII, there are laws that protect veterans and require special notice to veterans (Servicemember Civil Relief Act). It is not easy in Virginia to overturn a foreclosure with technical glitches. But these federal laws do “trump” state laws.

Robosigning, while abhorrent, is not even a certain indicator that there was a flaw in a foreclosure. When we look at glitches in foreclosures, we are talking about such things as inadequate advertisement, inadequate notice to the borrower, or inadequate time periods between notices and foreclosure advertisements, loss of original note, etc.. In Virginia, if you do not battle these “glitches” during the foreclosure process, it is very difficult to overturn a foreclosure afterwards. So to the extent that this “agreement” with the big 5 mortgage lenders leads them to review some of their own past possible glitches with VA borrowers, we should all be grateful.

Whether or not a foreclosure is wrongful will be determined in part by Virginia laws, which as I said earlier, are among the least borrower friendly laws in the Union. So when it comes to Virginia foreclosures, which are pretty hard to bungle sufficiently to have recourse against the lender, the administration has said to the banks: “We want you to go back one more time and re-evaluate your Trustee’s foreclosure on each Veteran and tell us if any were wrongful.”

Anytime you see a program which depends on self-policing, remember that Obama has completely alienated Wall Street. He actually received Wall Street donations in the last election at a 2 to 1 margin over the Republican party. Since then, he has done nothing but wipe his feet on Wall Street. The banks have winked and moved on every time another “initiative” comes from DC! Take for example a recent case we handled involving X Bank, the current largest servicer of mortgage loans in American and the company that brags the highest number of successful modifications among all banks for the past couple of years . . . .. . Who were the real beneficiaries of all those 20,000 modifications per year? (a whopping average of 400 per state) We have a classic example: A couple of my “salt of the earth” long time clients were living well within their means, had equity in their modest home, and made good incomes and had 800 credit scores. They were not terribly upset with their 5.25% mortgage nor had they seriously considered refinancing or lowering their interest rate. X Bank called them out of the blue and offered them a totally unsolicited modification! They came to me to review the paper work and close the modification for them and it was wonderful! It really saved them $130 a month! But this was about as low risk a loan as you will ever find. And it clearly illustrated the old adage: Banks only lend money when you don’t need it.)

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