Banks Slow to Extend Californians the Agreed-Upon Principal Reductions

     Reports as recent as  August 2012 indicate banks are still slow to extend principal reductions to California homeowners after the $25 Billion Mortgage Settlement was approved by the federal judge on April 5, 2012.  Even though the settlement provisions were effective immediately, the California Reinvestment Coalition (CRC) reported the banks have returned to “business as usual” by forgoing principal reductions to instead push their short sale efforts forward.  Kamala Harris, California Attorney General, had secured $12 billion in principal reductions to homeowners to be used by 2015, yet recent reports from the CRC show a mere 2.7%, or $335 million, as being used for such purposes.  Studies by Keeping Current Matters [aka The KCM Crew] echo these findings, with KCM portraying their research in the below pie chart which shows how the National Mortgage Settlement funds have been spent.

  

     As the chart above indicates, banks are certainly prioritizing their short sale efforts in California in the wake of the Mortgage Settlement, with an estimated 85% of the exercised settlement funds being used for such purposes.  As a realtor Los Angeles specializing in short sales, I’m a little torn by these statistics.  It’s encouraging to see the settlement funds stimulate the short sale arena; after all, these transactions still hold up as a less costly remedy than foreclosure.  At the same time I would also contend principal reductions would go a long way in revitalizing the housing market statewide by opening up more opportunities for refinancing, as well as eliminating more negative equity from the market equation.  Kevin Stein, associate director for CRC, contests “The California piece of the settlement emphasized principal reduction because that is what is needed to stabilize families and neighborhoods in California, and yet the banks’ initial performance shows that meeting Californians’ needs is not their priority.”

    Perhaps the participating lenders / servicers in the Mortgage Settlement can take a page out of life’s playbook and realize that balance is the key component to anything healthy.  Placing too much emphasis on short sales may prove to have less corrective impact than if the funds were more evenly dispersed over all types of assistance programs.  For those underwater homeowners in California interested in principal reduction, it is certainly possible that lenders will begin extending this type of workout more so than in the prior months, since the settlement months are still available for this specific use.  But until lenders begin exercising this workout program at a higher frequency, principal reductions should not be the expectation.  

Surviving the Short Sale Escrow Process

A residential short sale is not the simplest of transactions.  Unlike in a standard sale [i.e. equity sale], realtors in a short sale must first work with a homeowner’s lenders to acquire short saleapprovals before escrow closing can take place.  The realtor will not only have to successfully navigate the homeowner’s loss mitigation department to do so, but often times must operate in the face of a foreclosure looming in the background.  For many files, closing dates are established just days before a foreclosure auction.

In these situations, I commonly get this question thrown my way: “What happens if we need more time to close? The lender won’t foreclose, will they?”

As a short sale negotiator, I always have an eye and an ear on investor tendencies when it comes to foreclosure processing.  In days prior, it was not uncommon to see postponement after postponement being issued once the short sale was fully approved.  Investors were seemingly more reluctant to proceed with foreclosure and incur the associated costs for facilitating such an action.  As a result, realtors began relying on short sale approvals as a security blanket to help stave off foreclosure auction.   In more recent times, I’ve seen a growing trend for investors to choose foreclosure over short sale if the sale is looking like it ‘s floundering and won’t get done.  Requesting more time, and then more time, or requesting buyer change after buyer change, are red flags which eventually induce the investor to simply pull the plug instead of putting in more time, resources and money into processing the file.  After all, the short sale process is a form of Loss Mitigation.

As a general rule, I always encourage my files to close on or before the original closing date established in the lender’s short sale approval paperwork.  Predominantly this date is at least 30 days out from the date of approval issuance, which should give ample time to complete inspections and prepare escrow for closing.  With cash buyers, closing time can routinely be cut down to 30 days or less, so from a short sale perspective, Cash is most certainly King. 

Cases wherein buyer’s are requesting financing, today’s market does make it a bit difficult to manage a 30-day or less escrow close.  With everyone keen on taking advantage of the historically low interest rates, short sale buyers seeking loan financing are competing for limited lender attention.  To make sure my short sale buyer loan applications are processed in 30 days or less, I’m never more than a phone call or email away from the loan officer.  I constantly defer to the loan officer for status, and identify and implement corrective measures the moment I see underwriting fall off course.  Taking a proactive approach to all aspects of short sales is the key to my successes.

If I find the established closing date fast approaching and more time is absolutely necessary, I push the lender to at least show evidence of the following, placed in order from most ideal to least:

1. confirmation of funding

2. confirmation of all buyer’s closing funds wired into escrow

3. confirmation of signed loan docs

4. confirmation of loan docs

Without showcasing any of the above, a short sale lender will be more compelled to deny the short sale and proceed with foreclosure.  But if you can demonstrate to the short sale lender that your listing is on the cusp of closing, as these four statuses do, you are doing all that can be asked – maximizing the chances your short sale listing will get done successfully.  

Perfecting the Art of Short Sale ESCALATIONS

It is always frustrating to have file reviews fall behind schedule; the short sale process time line is long enough without such delays.  For short sale specialists, escalations are the primary tool at our disposal to correct review hold-ups.  All short-pay lenders implement procedures to correct any short sale negotiation process that has derailed from its expected review course.  Although each lender might use a different name for such a procedure, the end result is the same.  The most widespread identifier for this lender, corrective process is the ESCALATION, so for the sake of this article, we’ll use the same.  If used properly, the escalation will minimize your negotiation time and bolster your closing rate!

The escalation is a coined loss mitigation review term used by realtors and 3^rd party negotiators to red flag a short sale review.  For each and every bank task, an expected due date (or time frame) is provided.  As soon as the due date (or time frame) has elapsed, the file should become eligible for a red flag escalation.  The escalation message will usually be sent not only to the delinquent review party, usually the assigned file negotiator, but to the review party’s immediate manager / oversight team.  The escalation will then have an expected turnaround time for the delinquent party to bring the file back in good standing.  Should the escalation time period elapse with no file advancement or account note updates, the file will again be eligible for an additional, phase 2 Escalation.  This additional escalation will have a new response date, and will usually include even higher management than the initial escalation request.  As such, the escalation really has two benefits:

1.       Places a red flag tag on the file until the review process has been brought up to speed

2.       Includes upper management to make these parties aware of the file delays, establishing a way for agents and 3^rd party negotiators to walk up the bank’s chain of command

Keep in mind, that should an initial escalation go unanswered, not all is lost.  In fact, each and every escalation documented in the account notes will add strength to our short sale negotiation leverage.  A history of under-performance by a bank employee, as evidenced by an account record full of escalations, will eventually place the file under review of upper management with more immediate access to the overall decision team.