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Why Loan Modifications are so Hard

October 21 2010

networking200pxToday, real estate sales people are conducting roughly 25% of their transactions in Short Sale/REO conditions. For some, this is 100% of their business. What are the problems? The banks are lost.

Today’s consumer selling their home does not really know who owns the loan. They may have used a broker, who sold the loan to a bank, who put the loan into a holding company who packaged the loan to be offered up to a pool of investors, each of which may own a portion of that loan. Getting them all to agree to the short sale of the property, getting paperwork that confirms their agreement on the short sale, and getting back to the real estate agent in a timely fashion to accept an offer is impossible.

Further complicating the issue is the current investigation by the nations 50 State Attorney’s General. In some states, they are questioning if the current mortgage lien on the property is valid given that the ownership of the loan has been securitized, and paperwork was not properly filed at the county level. Fall out from this could be very dramatic, possibly reversing the entire construct of securitizing loans in some states whose laws did not contemplate this activity. This also may invalidate past foreclosures.

Many banks have been foreclosing on loans. They were having employees “robosign” affidavits and file them with the county to proceed with the foreclosure process. Given that the bank may not have filed the affidavit legally, they may be forced to compensate the consumer for their illegal activity that forced them out of their home. The fact that the consumer defaulted on the loan was not at issue here – it is the illegal action by the bank of not following the county and state due process laws for foreclosure. What is clear is that the purchaser of a foreclosed home will not be impacted.

Some title companies are beginning to get timid about insuring properties that have gone through short sale or foreclosure as a result of the investigation of the Attorney’s General. The risk of clean title may increase – forcing higher rates or they may stop insuring title on these transactions.

In the meantime, REALTORS® can carry on the fight to help consumers sell pre-foreclosures, buy short sale homes, buy foreclosed homes. Should be an interesting time in real estate history.