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Chapter 13 Should Not (Sometimes) Be Used to Save Your House

Although Chapter 13 is often the go-to prescription for hanging onto a home in financial distress, like most strong medicine it comes with side-effects. The simpler Chapter 7 “straight bankruptcy” may be the better solution for both short-term relief and long-term financial health.

 

Chapter 13, the three-to-five year version of consumer bankruptcy, arms you with a remarkable set of tools for dealing with your mortgage lender and with other creditors related to your home. I’ll talk about them in upcoming blogs.

But you should absolutely not enter into a Chapter 13 case without understanding it thoroughly and considering it very practically. The fact is that a large percentage of them do not make it all the way to completion, often wasting the debtors’ money and delaying for years their final relief from creditors. Chapter 13 is awesome medicine, but only for the right patients in the right circumstances.

So in what circumstances should you very seriously consider Chapter 7 instead of Chapter 13?

1. If you are behind on your mortgage payments, but could realistically catch up on that arrearage within about a year—after writing off the rest of your debts in Chapter 7, and being very disciplined during that one year:  Depending on your lender, your payment history, and similar factors, most mortgage lenders will allow you to enter into a “forbearance agreement” after you file a Chapter 7 case. That agreement allows you to stay in your home and to catch up on your mortgage arrearage by paying a certain amount extra per month. Given the cost savings of a Chapter 7 over a 13, and the benefit of getting to your fresh start in a year instead of three to five years, you should very seriously consider with your attorney whether that one year of extra effort would 1) be doable, and 2) be worth the effort and risk.

2. If your chances of keeping your house through a Chapter 13 case are unrealistic: As powerful as Chapter 13 is, it certainly has its limitations. Think long and hard about whether you will be able to consistently meet the terms of your proposed payment plan. Consider your deeper motivations and fears, and you may find better ways of meeting your and your family’s true needs. With the helpf of your attorney try to ground yourself with brutal honesty about what is realistic in the short term and also two or three years out. Although “desperate times call for desperate measures,” a desperate mind doesn’t tend to make wise choices. Chapter 13 should almost never be a “Hail Mary pass,” a last-ditch long-shot. Be very clear about the consequences of that long-shot not panning out, and you may well realize it’s not worth it.  

So, aim towards a Chapter 7 instead of a Chapter 13 case if you really don’t need the extra length of time and other benefits that Chapter 13 provides. And the same thing if you are trying to hang onto a house that you very likely can’t hang on to even with all the help that Chapter 13 provides.

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Oregon Foreclosures Likely Shifting to Judicial Process

Oregon foreclosures of residential properties will likely be shifting from nonjudicial to judicial process, and the shift has already begun with some servicers, namely Wells Fargo and its subsidiaries. Oregon is one of 24 states that provides a nonjudicial foreclosure process, which is how most delinquent residential mortgages are foreclosed since this has been a faster and cheaper process for lenders.

One reason for the shift to more judicial court actions is because judges have started blocking nonjudicial foreclosures for failure of lenders to record ownership history of the trust deeds, as required for nonjudicial foreclosure. The shift will mean that the process will possibly take longer to clear titles following the sheriff sales. It will also take lenders considerable time to review and shift gears on pending foreclosures. Lenders may decide the cost and time expense are worth more certainty with the judicial process.

The good news for borrowers subject to the judicial foreclosure process is they will now have a judge to hear their complaints, if they challenge the filing. This right is currently unavailable unless a lawsuit is filed by the borrower to stop a nonjudicial process from continuing forward. However, under a judicial foreclosure, if homeowners don’t challenge a filing, the lenders could get a sale date more quickly and possibly expedite the process. It also does not require the recordation of beneficiary history, so it can result in cleaning up any messy title situations the lender may face. This means a defaulting borrower will need a good defense in order to realistically challenge a judicial foreclosure, but the court will have to make a decision before the foreclosure can happen. There could be more opportunities for workouts and settlements too.

One huge risk is that, currently, Oregon law protects homeowners from being pursued by lenders for their losses for homes that sold for less than the balance on the loan. However, if a lender pursues judicial foreclosure, if someone moves out of the home before the foreclosure complaint is filed, they could lose this protection and may be personally liable for the deficiency. (This problem is going to be fixed by a new law that goes into effect soon). Homeowners will also lose the right to cure, which gives them up to 5 days prior to a nonjudicial auction sale date to pay the missed payments and lender fees to end the foreclosure; but they will gain the right of redemption under the judicial process which gives them up to six months to repurchase the home for what it sold for at the foreclosure sale. This could mean homes will be vacant for longer periods and be difficult to immediately resell.

 

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Irony by Perjury Adds Insult to Injury: from Lender Robo-signing to Foreclosed Homeowners Begging for Scraps from the National Mortgage Fraud Settlement

Homeowners who lost their homes to foreclosure may need to commit perjury to get restitution payments though the settlement.  That would be the deepest kind of insult on injury.

In the last blog, I explained what a homeowner who lost a home to foreclosure (from 2008 through 2011) will have to assert to get his or her small share of that $1.5 billion pot of money:

1. “Borrower lost the home to foreclosure while attempting to save the home through a loan modification or other loss mitigation effort.”

2. “Servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home.”

While these may seem superficially sensible, in practice they are very troublesome, especially because the statements must be made under penalty of perjury.

As to the first statement, what “other loss mitigation effort” “to save the home” will be considered sufficient to be able to make that statement? Must that effort have continued right up to the foreclosure date to be considered to have “lost the home to foreclosure while attempting to save the home”?  How is the former homeowner to know whether he or she can make this statement truthfully?

The second statement is even more of a problem. How can the former homeowner know whether “servicer errors or misconduct in the loss mitigation or foreclosure processes affected the borrower’s ability to save the home”? The robo-signing of foreclosure documents—mortgage servicers’ false assertions made under oath by the thousands—were only discovered through borrowers’ attorneys’  aggressive discovery efforts during litigation. In this nationwide settlement, the five banks are not admitting ANY wrongdoing or liability. (For example, see the non-admission clause in the Federal Release, Exhibit F in the Wells Fargo settlement documents, paragraph F on page F-11, which is page 232 of the 315 pages of those documents.) Presumably the banks are not now going to start admitting wrongdoing on a case-by-case basis so that borrowers can answer this statement accurately.

So to receive the restitution payment a former homeowner will have to sign a statement under penalty of perjury affirming the truthfulness of one statement that is so vague as to be in many situations meaningless, and the truthfulness of a second statement the accuracy of which is unknowable.

There may yet be a partial solution, to at least the first required statement about the extent of borrowers’ efforts to save the home. The claim form to be sent out to the borrowers’ by the yet-undesignated Settlement Administrator may give enough guidance about this. A tentative 3-page claim form has been prepared by the Monitoring Committee for possible use by the Settlement Administrator. It may create a bright line between qualifying and non-qualifying borrower efforts. We don’t know yet because although this tentative claim form is being made available for companies applying to become the Settlement Administrator (the application deadline is April 30, 2012), it is not being released to anyone else.

But even so, I see no conceivable way that the second statement about “servicer error or misconduct” can be made known to the borrowers in order for them to be able to assert that under penalty of perjury. The banks are not going to admit to wrongdoing as to two million or so homeowners in direct contradiction of their non-liability assertion in the settlement documents.

So here’s the moral irony:

1. The banks were accused by the federal government and 49 states of a long list of allegations of serious wrongdoing which take 10 pages to detail (see pages F-2 through F-11 of the Federal Release in the settlement documents referred to above). These allegations include fraud and misrepresentations of numerous kinds, including in the form of many thousands of perjured documents submitted to courts over an extended period of time. The banks do not admit to any of these allegations or to any resulting liability.

2. Now the banks have negotiated with the governmental entities to pay restitution for their extensive alleged wrongdoing, and in particular to homeowners who’ve already lost their homes to foreclosure. But as a precondition to receiving that restitution, these former homeowners will in many cases be faced with a moral dilemma: can they sign a statement under penalty of perjury asserting that their “ability to save the home” was affected by “servicer errors or misconduct” when they do not know whether such errors or misconduct happened as to their mortgage, and if so whether it had any effect on their “ability to save the home.”

3. Because the “Monitoring Committee” has made clear that the “Settlement Administrator” will not be required to get documentation from borrowers about their statements on the claim forms, borrowers are seemingly being encouraged to make statements that will in many cases be vague and factually unverifiable, while asserting the truthfulness and accuracy of those statements under penalty of perjury.

4. The banks, having admitted to no fault, having paid their modest penalty, and having foisted this moral conundrum onto the foreclosed borrowers, can now wash their hands entirely of the matter. They no longer care how each borrower handles the matter since the pot of money does not change. The money just shifts out of the hands of the perhaps more carefully honest borrowers who disqualify themselves by admitting that they cannot swear to the fact that they lost the property because of lender wrongdoing.

5. Thus this settlement process has lowered borrowers—through circumstances almost entirely outside their control—to the moral level of the original robo-signers: “just sign here and don’t worry what the statements say or what they mean.”

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Is the Home Affordable Refinance Program (HARP) 2.0 New and Improved Enough to Help YOU?

Under new rules coming on line, HARP is now available for refinances no matter how far your home is underwater. The 125% loan-to-value cap is no more.

The purpose of the Home Affordable Refinance Program has been to enable homeowners who could not otherwise qualify for a refinance do so, thereby getting a lower interest rate and lower monthly payment, making more likely that they could afford to stay in their homes. 

Until this revamped version of HARP, homeowners could not qualify if their existing mortgage was more than 125% of the value of their home. In the new improved version announced way back in October, this condition was eliminated. But it has taken until a few weeks ago for Fannie Mae and Freddie Mac to release their formal guidelines, update their approval software, and start getting lenders on board.

In this blog I will give you a short list of the main conditions for HARP 2.0 eligibility, and then provide a few good sources for more detailed information.  

Eligibility

1. Your mortgage loan must be owned or guaranteed by Fannie Mae or Freddie Mac. Why? Because these entities were effectively taken over by the government near the beginning of the real estate market crash, and so the federal government can require them to follow new refinancing rules. HARP operates through Fannie and Freddie, and so loans owned by private lenders aren’t in the program. However, a large majority of home mortgages are held by Fannie or Freddie, so there’s a good chance yours is as well. You can find out by checking these two websites: www.fanniemae.com/loanlookup  or www.freddiemac.com/mymortgage. (If you instead you have a VA, FHA, or USDA home loan, they each have their own refinancing programs.)

2. Your loan must have been sold to Fannie or Freddie on or before May 31, 2009.

3. Your loan was not refinanced through HARP previously. No second bites at this apple. One small exception—if you happened to refinance your Fannie Mae mortgage from March through May of 2009. Also, prior non-HARP refinances are not a problem.

4. Your current loan-to-value must be greater than 80%. Although HARP is not limited to underwater loans, you can’t have more than 20% equity. Presumably, homes with an equity cushion are either more likely to be refinanced on the private market, and any event their owners will be motivated to preserve their equity. The point of HARP is to enable refinances which could not otherwise happen, and to give help and motivation to homeowners who have little or no equity.

5. Must be current on the mortgage—no late payments in the last 6 months, maximum of 1 in the last 12 months. Given that this program will leave the homeowner with a loan with little or no equity, and often with serious negative equity, the borrower must show a very clean recent payment history. However, many other requirements have been loosened, for example automated appraisals will be permitted instead of needing on-site ones (since the home value is not important here), and income verification will be less often required, making self-employed people more likely eligible.

CAUTION: Lenders have a fair amount of discretion to alter these rules, so refer to your lender for the details, and it may well be worth shopping for eligibility and better refinance terms.

Resources for More Information

1.  A good general new story about the HARP changes, from the website edition of the Philadelphia Inquirer.

2. The best detailed description I could find of the new program, in a website called bills.com.

3. Some experts’ opinions about the impact of HARP 2.0 in a Wall Street Journal blog.

4. A HARP 2.0 eligibility calculator on Zillow.com.

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Ten Terrific Tools for Saving Your Home through Chapter 13–Part 2

Here are the other 5 powerful home-saving tools. Chapter 13 isn’t for everyone. But these tools, especially in combination, can often give you what you need to tackle and defeat your mortgage and other home-debt problems.

In my last blog I gave you the first five of ten distinct and significant ways that Chapter 13 can save your home. I’ll summarize those here briefly, and then give you the other five in more detail.

Chapter 13 enables you:

1…. to stretch out the amount of time you are given to catch up on missed mortgage payments, giving you as long as 5 years to do so.

2. … to slash your other debt obligations so that you can afford your mortgage payments.

3…. to permanently prevent income tax liens, child and spousal support liens, and judgment liens from attaching to your home.

4…. to have the time you need to pay debts that cannot be discharged (legally written off) in bankruptcy, all the while being protected from those creditors messing with your home.

5…. to discharge debts owed to creditors which could have otherwise put liens on your home.

6…. to get out of paying all or some of your 2nd or 3rd mortgage ever again—IF the value of your home is no more than the balance of your 1st mortgage. This “stripping of junior mortgages” under Chapter 13 continues being used more and more as home property values continue to head downward in so many parts of the country.

7…. to take extra time to pay back property taxes, while protecting the home from tax and mortgage foreclosure. This is particularly important if you have a mortgage on your home. That’s because virtually all mortgages require you to keep current on the property taxes. So not only does Chapter 13 protect you from the property tax authority itself, more importantly it prevents your mortgage lender from using your property tax arrearage as a justification for foreclosing on your home.

8…. to favor many home-related debts—such as property taxes, support liens, utility and construction liens– that you probably want to pay. You generally can’t get rid of these special kinds of liens on your home, but Chapter 13 allows—indeed requires—you to pay them in full before you pay anything to your other creditors. So in many situations your regular creditors’ loss is your home creditors’ gain, and thus your gain, too.

9…. to get rid of judgment liens in many situations, so that they no longer attach to your home. Although this can also be done in Chapter 7, it’s often all the more helpful in a Chapter 13 when used in combination with these other tools.

10…. to sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later. You may need to or be willing to sell and downsize, but not until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, allowing you to preserve your family home in the meantime.

 

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Getting Just Enough Help for Your Home through Chapter 7

When does filing a Chapter 7 “straight bankruptcy” case help you enough so that you don’t need a 3-to-5-year Chapter 13 case?

If you are behind on your mortgage payments but want to keep your home, you have likely heard that a Chapter 13 “payment plan” is what you need. And that IS a powerful package, with an impressive set of tools to deal with a wide variety of home-related problems—everything from the mortgages themselves to property taxes, income tax liens, and judgment liens.

But what if you need to discharge other debts to get a fresh financial start, and have managed to fall only a couple of months behind on your mortgage? Or what if you are not keeping the house, but just need a little more time to find another place to live?

Then you may well not need a Chapter 13 case, and can maybe avoid the disadvantages it comes with—mostly, that it takes so much longer and generally costs lots more than Chapter 7. This extra time and cost can be well worthwhile when you need the great advantages of Chapter 13, but let’s look at ways that Chapter 7 can do enough for your home:

In a Chapter 7 case:

1. The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13. So the filing of a Chapter 7 case STOPS a foreclosure in its tracks, just as quickly as a Chapter 13 filing. But if you are just trying to buy time to save money for a rental, the tough question is HOW LONG that break in the mortgage company’s foreclosure efforts will last, and how much extra time it’ll buy you. An aggressive creditor could quickly ask the court for “relief from the stay”—permission to resume the foreclosure process—thus potentially getting you only a few extra weeks. Or on the other extreme, a mortgage creditor could just do nothing for the 3 months or so until your Chapter 7 case runs its course and the “automatic stay” expires with the completion of your case. So, Chapter 7 often does not come with much predictability about how much time you’d gain. On the other hand, your bankruptcy attorney may well have experience in how fast certain mortgage lenders tend to ask for “relief from stay” under facts similar to yours.

2. Chapter 7 stops—at least briefly—not only mortgage foreclosures, but also prevents other potential liens from being placed against your house, including the IRS’s tax liens and judgment liens. But why would the few weeks or months that Chapter 7 gains make any difference with these kinds of creditors? In the right set of facts, it can make many thousands of dollars of difference.

• A timely filing of a Chapter 7 case can prevent you from having to pay a debt that would otherwise have become a lien against your house. For example, let’s say you have an older IRS debt that meets the necessary conditions for discharge, and you also have a little equity in your home but not more than your homestead exemption allows. If you waited until after the IRS recorded a tax lien for that debt against your house, that lien would continue being attached to your house even if you filed a bankruptcy and would eventually have to be paid. However, if your Chapter 7 filing happened before the IRS recorded a tax lien, the “automatic stay” would prevent that tax lien from being filed, the tax debt would be discharged forever, and your home’s equity would be preserved.

• Or if instead let’s say you have a debt that is NOT going to be discharged in bankruptcy—say a more recent tax debt—but you also had some assets that you were going to have to surrender to the Chapter 7 trustee, what we call an “asset case.” If again you filed the bankruptcy case before the recording of the tax lien, your Chapter 7 trustee could well pay those taxes as a “priority” debt in front of any of your other debts, potentially leaving you with no tax debt at the completion of your case.

3. Chapter 7 allows you to concentrate on your house payments by getting rid of your other debts. If you’ve managed to keep current on those mortgage payments, but don’t know how long you will be able to do so, the relief you get from discharging your other debts greatly improves your odds of staying current on your home long term. Or if you have missed only a few mortgage payments, AND can reliably make future ones, PLUS enough to catch up on your arrearage within year or less, then Chapter 7 would like very likely do enough for you. Most mortgage creditors will let you enter into an agreement –often called a “forbearance agreement”—to catch up the missed payments by paying a sufficient specific amount extra each month until you’re caught up, again, as long as that period of catch-up time is relatively short. Otherwise, you may well need a Chapter 13.

 

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How to Win a Specific Performance Lawsuit

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Real property is unique in the eyes of the court, therefore, specific performance typically arises in these types of transactions. Specific performance is asking the court to force the opposing party into a contract that obligates them to honor the contract at issue, rather than awarding money damages. For example, a buyer can force a reluctant seller to perform the purchase sale agreement.

 

 

These are the requirements for the lawsuit:

  • Terms must be certain: Essential factors include identifying: (1) the seller, (2) the buyer, (3) the price to be paid, (4) the time and manner of payment, and (5) the property to be transferred.
  • The buyer paid adequate consideration and the contract was just.
  • The plaintiff must have performed the agreement.
  • The defendant must have breached the agreement.
  • A money award must be inadequate.

When a party wins a Specific Performance lawsuit, the court will order the sale of the property at the price and terms agreed upon. Moreover, the victorious party will also be entitled to a judgment for the rents and profits from the time he was entitled to the conveyance under the contract.

When a purchase and sale deal starts to go wrong, seek legal advice. While the other party may have breached the agreement, the wrong response (i.e., refusing to perform your obligations) can destroy your chances for success in the lawsuit.

For the full story, please visit: http://www.thenichereport.com/articles/the-5-steps-to-prosecute-a-successful-lawsuit-for-specific-performance/

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Short Sales: Seldom Easy and Often Not What You Expected

A short sale of your home is sometimes your best alternative. But short sales often do not successfully close, and even when they do you must be vigilant to avoid problems later.

In a short sale, a house is sold by “shorting”—underpaying—one or more of the lenders (or “lienholders”), because the value of the house, and thus the purchase price offered by the reasonable buyer, is not enough to pay everyone in full. The liens can include not just voluntary ones such as the first and second mortgage, but also judgments, income taxes, support obligations, unpaid utilities, and property taxes. All lienholders must consent and release their liens, or the sale cannot occur, because the title needs to be clear for the new buyer to be in full ownership.

The important thing to know is that unless you get a full settlement or satisfaction in writing you may face continuing liability to any creditor who was not paid in full, even after the sale!  This is why it is important to work with competent and knowledgeable professionals in dealing with any short sale situation.

The primary benefit of a short sale is that it avoids a foreclosure on the homeowner’s credit record—that is, it does so IF the short sale is successful. Generally, the most common current underwriting criteria will prevent a borrower from qualifying for a new home loan for up to 7 years after a foreclosure, but only 2-4 years after a short sale.  (However, given the present economic climate, in the future there may be less credit record difference between a short sale and a foreclosure.)  This credit record difference is often the primary reason borrowers will try to do a short sale, instead of just letting a property go to foreclosure.

Short sales can have problems, however.

First, they can be much harder to pull off than expected, and can take much longer than expected. It is also possible they fail to close, typically due to servicer/lender rejection of reasonable purchase offers, which can be very frustrating to all parties involved.  Short sales may also fail due to:

  • Lack of incentive of the Servicer:  Many mortgage companies are not well organized or staffed to handle short sale negotiations.  Borrowers and agents generally must work through a servicing company, whose financial incentives may well not encourage short sales. So they may drag their heels, and can even sabotage your efforts, even after months of submitting documents and reasonable offers.  This causes many would-be buyers to get frustrated and walk away from the deal rather than keep trying in the face of such adversity and frustration.  LAck of responsiveness of servicers is a major cause of short sale failures.
  • Since all lienholders must agree, any one of them can kill the deal: To accomplish a short sale, usually the first mortgage holder has to give up some money to a junior lienholder or two. The benefit to the first mortgage holder is that getting a little less out of the sale is better than incurring the substantial costs and delay of foreclosure.  However, they may not be willing to allow enough money to a junior to entice all parties to allow the short sale to be completed.  Everybody wants their “fair share” of a pie that is too small to make everybody happy.  So just when you think you have a deal among the main players , someone else crawls out of the woodwork demanding a payment and jeopardizing the closing. They all have a legal claim against the property, and can delay or undo the whole deal.
  • Closing and other costs can be too high: Sometimes after adding up all the closing costs and realtor fees, there may not be a high enough “net proceed” number to entice the lender to do the deal.  Of course, the realtors and their negotiating agents are doing a lion’s share of the work in any short sale process, and must be adequately compensated by the lender at closing.  This is how a short sale can be done with little or no out-of-pocket cost to the borrower.  Sometimes the banks have a hard time with this concept and will lead to a sale failure by their rejection of reasonable market offers.  This just means they will actually lose more money in the long run, and it is frustrating for everyone involved, particularly the realtors and others who put substantial time and efforts into the process only to have it fail due to a recalcitrant or incompetent servicing agent.

Short sales can be dangerous if you are not well-informed:

  • Potential liability from unpaid balances on the junior mortgages and liens: Although you may be told that you will not be liable, you need to be sure that the acceptance and/or settlement documents and the applicable law in fact cut off any financial liability to you following the sale. Also be aware that sometimes in the midst of the negotiations, especially if a junior lienholder is playing tough, and the closing has been delayed for a long time, you may be feel forced to accept some liability in order for the closing to occur.  This may or may not be in your best interest, and you may wish to consult with an attorney to discuss all the factors and options – be sure to consult with someone who is unbiased and who will advise as to your interests alone (unlike realtor or others who may only get paid upon sale).
  • Potential tax consequences: This issue deserves a whole blog by itself. The key principle is that debt forgiveness can be treated as income subject to taxation unless you fit within one of the exceptions. Make sure you talk with an appropriate tax specialist or attorney about this before investing any time or expectations in the short sale option.  Most residential borrowers will have an exception, but not always!
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Fannie Mae and Freddie Mac Now Say that Mortgage Principal Reductions are Good for BOTH Homeowners AND Taxpayers

Will Fannie and Freddie finally be making mortgage principal reductions now that their own analysis shows that doing so would benefit their own financial health—and make them better able to repay billions owed to U.S. taxpayers?

My last blog described Fannie and Freddie’s conflicting purposes: to make home ownership more accessible, but to do so profitably for themselves. And I showed how this inherent conflict has led to a political dispute between the Obama Administration on one side pushing for greater flexibility in helping distressed homeowners keep their homes—and specifically to allow principal reductions, while on the other side Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) and Fannie and Freddie’s overseer, disallowing principal reductions in order “to preserve and conserve [Fannie and Freddie’s] assets.”

Helping Homeowners Also Helps Taxpayers

But what if there is no conflict between these purposes? What if reducing mortgage balances would help hundreds of thousands of homeowners stay in their homes and at the same time would save money for Fannie and Freddie?  

That is the conclusion of a very recent not-yet public analysis by Fannie and Freddie presented to the FHFA, according to the ProPublica article: “Fannie and Freddie: Slashing Mortgages Is Good Business.”

The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January.  … . The companies now find that reducing principal on troubled mortgages has a “positive net present value” — in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.

The two companies’ analyses showed that upwards of a quarter million borrowers who owe more on their mortgages than their homes are worth could benefit from principal reductions. The companies would take a loss upfront, but over the long run these mortgage modifications would save the companies money because they would lead to lower default rates.

FHFA’s Response

DeMarco is thinking about it. In a statement he said:

“As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”

But he also stated:

“FHFA’s previously released analysis concluded that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool. FHFA’s assessment of the investor incentives now being offered will follow the previous evaluation, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects.”

DeMarco seems to be saying that this new analysis may well not change their policy. Why not? After looking at all their options (“the eligible universe”), and considering how borrowers would react to principal reductions (“incentive effects”), it seems to come down to “operational costs”—changes to their accounting and computer systems—which could outweigh the other benefits. It just might be too hard to change Fannie and Freddie’s operations so that principal reductions would work for them.

The Bigger Picture      

So is the FHFA so institutionally ingrained with the short-term profit motive that it would reject Fannie and Freddie’s own conclusions about principal reductions being good for their long term financial health? Does it have SO little ability to adapt? Does the FHFA have such tunnel vision that it can’t give any consideration to the potential benefits to the national housing market, where home values STILL continue to slide? And where in DeMarco’s comments is there any hint whatsoever of compassion for the millions of Americans—about half of them under his control—at continued risk of losing their homes?

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A New Alternative to Foreclosure: Mortgage to Lease

Bank of America is starting a pilot program that will allow homeowners at risk of foreclosure to stay in their homes. Essentially, it entails handing over the deed to the house to the bank and signing a lease that will allow them to rent the house back from the bank at a market rate. Borrowers will agree to a “deed in lieu” of foreclosure, which is less costly to the bank and damages the borrower’s credit less than a foreclosure. Former owners will be offered a one year lease with options to renew every two years at or below the current market price.

The initial breadth of the program has been released to 1,000 homeowners in Arizona, Nevada, and New York-and only homeowners who receive letters from the bank can participate. It is unclear yet how widespread the program will become.  Some have suggested a deterrent may be the need for the bank to comply fully with the Oregon and Washington landlord-tenant act in becoming a  landlord, which includes an obligation to maintain the habitability of the housing unit.  Are banks really ready to become landlords?  My guess is, not really.

For the full story, please visit: http://online.wsj.com/article/SB10001424052702304724404577297904070547784.html?mod=WSJ_myyahoo_module

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