When bank denies a loan modification, a short sale might be the best option

June 10, 2011

I am writing this for my son. He is recently divorced and his ex-wife signed their home over to him, as they were underwater and had no equity in the home. However, his mortgage payment is based on two incomes.

He applied for a loan modification under a “hardship” rule and sent in all applicable paperwork. After four months, he was told that he qualified for a loan modification.

His lender then said it had misplaced his paperwork and he needed to resubmit all of it. Finally, last December he received word that he did qualify for a loan modification and needed to make three of the lowered payments (in January, February and March) on time and he would receive the “final-final” paperwork.

He did all of this, and then in April, the bank sent him a letter denying his loan-modification application.

There is no way he can make his house payment. He is beside himself. It is against his principles to “walk away” from this mortgage, but feels he has no choice. Do you have any advice? Last year, my daughter was fortunate to have gotten a loan modification.

Thank you for your help. None of this makes any sense, and it is a sad situation out there for so many people.

Unfortunately, your son isn’t necessarily entitled to a permanent loan modification, even if he was approved on a temporary basis. If the bank thinks it will make more money by foreclosing, then that’s what it will do. The bank doesn’t have to think about what’s in your son’s best interest, or whether his loan is affordable.

It sounds as though your son was actually approved for a temporary loan modification. Back in 2008, 2009 and most of 2010, those were granted with (and sometimes without) a brief look at the documents. But then the banks would go through the documents with a fine-toothed comb.

President Obama said that if troubled homeowners made the three temporary payments on time and in full, they would be approved for a permanent loan modification. Unfortunately, this wasn’t true. The loan-modification program has been a voluntary program, and the banks get to decide who gets a loan modification. Some banks have been slightly better than others about helping consumers, but overall the loan-modification program has helped only a small fraction of borrowers who applied.

It sounds as though your daughter was lucky. As for your son, while his wife signed over her share of the property, unless your son refinanced the mortgage (which is unlikely), she is still on the loan note. That means her credit will be trashed along with your son’s credit if he stops paying the mortgage and does a strategic default, allowing the home to fall into foreclosure. So it’s in her best interest to help your son find a solution to this problem.

While your son feels that he is betraying his principles, he may not have any choice. The economy is extremely tough and there are a lot of folks who would much rather be paying their mortgages even if the property is underwater. That doesn’t seem to be an option for him.

If your son truly can’t afford the payments on the home, he might consider selling the home as a short sale. That is, he could market the home for sale and the bank would accept whatever comes from the sale to pay off the debt owed on the loan. While your son would be short on the amount owed to the bank, he could move on from his current predicament to a home that might be more affordable. He could even consider renting a home for a while.

If he feels as though he has been rejected unfairly for a loan modification, and if he seems to qualify under the Home Affordable Modification Program rules at the gov­ernment’s MakingHomeAffordable.gov site, he should complain to his lender’s regulator. If he is working with one of the big banks (Bank of America, Wells Fargo, Citibank or Chase), then he’d want to file a complaint with the Office of the Comptroller of the Currency,which regulates those big banks. The Web site is HelpWithMyBank.gov.

Finally, I have to agree with your last point: None of this makes a whole lot of sense. But the banks (not to mention the government) never expected the country to still be mired in a housing depression two years after the recession technically ended in June 2009. But it is, and there are millions of homeowners who are walking the same mile as your son. It is a sad situation, and I wish that there were a better answer for both of you.

Will my mortgage company set the price for the amount they will accept for a short sale? And will that number include the fee for a real estate agent to help sell it?

You have asked an interesting question, and the answer depends on various factors.

For starters, if you are going through a short sale right now, you know that the value of your home is less than what you need to pay off your lender in full.

But there are at least two types of short sales in the eyes of the lender: those in which the homeowner has the cash to make up the difference between the sales price and what is owed to the lender, and those in which the homeowner can’t make up the difference.

Let’s start with cases in which the homeowner can actually pay off the loan. For example, let’s say a borrower bought a home five years ago for $300,000 and sells it today for $250,000. And let’s say he has a loan balance of $250,000. When it comes time to close, he’ll have to show up at the closing table with around $20,000 or more to settle all of his obligations from the sale of the home.

Why pay off the lender? If the homeowner wants to keep his credit history and score intact and has the money to pay the difference between what he owes and what he received from the sale, then it makes sense to pay off the lender in full.

However, not all homeowners have that money in hand, and many don’t have enough cash to make their monthly mortgage payments. For these homeowners, the money that comes in from the sale of the home may be all the money available to pay the lender and all other parties to a real estate sale. This second type of short sale has become the most common type.

For the short sale to go through, the lender must agree to receive an amount less than what is owed. The lender must agree to release the mortgage and the lien the lender has on the home in exchange for the money.

Usually, lenders will agree to pay the listing agent a commission on the sale of the home. However, many lenders will review the commission amount. It may be that lenders want to make sure that the agent does not get paid more than the standard in the area. Sometimes, a lender will require a listing agent to agree to take less than the agreed commission to get the deal done. But lenders generally recognize that they need to allow commissions to be paid to real estate agents.

If the buyer has already stopped paying on the mortgage and the property does not go through a short sale now, the lender knows it will end up having to foreclose on the property, take title to it, list it with a real estate company and pay a commission for the sale down the line — and wind up with less money on the other end.

So, to answer your question, a lender will typically allow a real estate listing agent to receive a real estate brokerage commission on a short sale.

—Tribune Media

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through ThinkGlink.com.

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