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Under Water

newschief.comSept 24, 2012

By Kevin Bouffard

After three years of bureaucratic hassles with her bank in trying to get some mortgage relief on her Lakeland home, Linda Sanders finally threw in the towel.

"I just can't fight this anymore," said Sanders, 61. "We agreed to a short sale. We were forced into it."

A short sale is an agreement to sell property for less than the amount of the mortgage and other liens. The homeowner loses the property but is released from further financial obligations.

Aspects of Sanders' story mirror the experience of millions of other U.S. homeowners since the Great Recession of 2007-08, which was caused primarily by the collapse of a housing bubble that started in the late 1990s.

Sanders bought her house at 6251 Vintner Lane in November 1998 for $92,000 and took a $60,000 mortgage.

By the end of that year, the Case Shiller National Home Price Index, a widely used gauge in the real estate industry, listed the average U.S. home price at $127,640 in inflation-adjusted 2012 dollars, close to where the index stood 45 years earlier.

The Case Shiller index would peak at an average home price of $218,870 in December 2005 before dropping back to $133,060 this June, the most recent measure. Thus millions of Americans who purchased a home from the late 1990s through 2005 found themselves "under water," or holding a mortgage valued at more than the current market price of the home.

"At least 50 percent of the people we see are under water because we've seen such a dramatic decline in housing values," said Walter Walker Jr., director of education and a housing counselor for the Tampa-based Housing and Education Alliance, which works annually with hundreds of homeowners in Polk County and Central Florida.


Refusals and Red Tape

Like Sanders, millions of people lost their jobs in the Great Recession, putting them behind on their mortgage payments. When they tried to renegotiate those mortgages, they encountered bureaucratic red tape and a refusal by banks to make major financial concessions, particularly writing down mortgage values to reflect more closely current prices.

"What we're finding now is that clients are beyond a budgeting fix for their problem because of health issues, job losses and other things affecting their income. The cases seem to be more severe," said Al Miller Jr., deputy director at the Agriculture and Labor Program Inc. in Lake Alfred, the county's only agency providing certified U.S. Department of Housing and Urban Development counseling for distressed homeowners.

The Lake Alfred agency has seen more than 200 people annually in recent years, a significant increase from the mid-1990s, said Miller, who supervises the housing programs.

Miller and Walker agreed few mortgage holders they deal with for their clients are willing to write down the principal on under-water mortgages.

"They're willing to go down on the interest rate, but many chomp at the bit when it comes to writing down principal," Miller said.

Walker and Miller also agreed that Sanders' experience of repeated requests for documents was very common. The counselors and Sanders said the mortgage company frequently requested the same documents because officials handling the case said they either misplaced paperwork or never received faxes.

For owner-occupied, single-family homes, banks and mortgage companies work under the federal Home Affordable Modification Program (HAMP) enacted in 2009 as part of President Barack Obama's financial reform program. A HAMP application, including income and other financial verification documents, can easily run into dozen of pages, the housing counselors said.

Sanders got her original mortgage from Washington Mutual Bank, which the Federal Deposit Insurance Corp. took into receivership in 2008 because of its risky lending practices. The FDIC later sold some of Washington Mutual's assets, including Sanders' mortgage, to JPMorgan Chase.


'A Lie From the Pit Of Hell'

Sanders sought mortgage relief after she lost her job in 2009, and she complained Chase officials repeatedly asked for documents she had sent or requested new documents after her circumstances changed, including the death of her husband, Charles Sanders, last November and when she took in two grandchildren in July. The bank told Sanders to submit a new request each time, she said.

Problems happened even after she personally delivered documents to the local Chase bank branch, where Sanders said she got assurances they would be faxed to the right person. Later she got a letter saying the papers never arrived.

"That's a lie from the pit of hell. They already had their proof," Sanders said.

Ron Hill, a housing counselor at the Agriculture and Labor Program, also said he also experienced faxing documents for clients several times to a number provided by the mortgage company and getting confirmation from his office's fax machine that the documents were sent. Still company officials said the papers never arrived.

"Their response was, 'It might have gone to another department.' They're the ones who gave us the fax number," Hill said. "I can't see them throwing it away. They're like a lot of agencies -- they're just overwhelmed."

Bernie Noel, 56, of Lakeland, gave a similar account of being told faxed documents had not arrived in dealing with a mortgage company over refinancing his home. Noel declined to name the company because he's still in negotiations.

"I know what it is: It's lack of communication on their part," he said. "I thought they put trainees on the job."

Even when the mortgage company says it received all the necessary HAMP paper work, getting a response can take three to six months or longer, Walker and Miller said. Miller cited one case that took 18 months.

Both attributed that delay and the resistance to lower mortgage principal on the trend to "securitizing" mortgages.


'The Maze'

In the old days, 20 years ago or more, a homeowner got a mortgage at a bank or other lending institution, which held onto the paper and serviced the account until it was paid off. That changed in 1983, when the first "collateralized mortgage obligation," was created.

The mortgage obligation is a security backed by a pool of mortgages and sold on financial markets like a stock or bond. The investors -- which could be individuals, companies, other banks and pension and mutual funds -- own the mortgages and receive income as they are paid off.

Many financial analysts credit the mortgage obligations, and a related investment called a "collateralized debt obligation," with fueling last decade's real estate bubble and, because they were so widely and anonymously held, intensifying the effects of the financial crash.

Whether one agrees with that analysis or not, it's clear mortgage securitization makes renegotiating any single mortgage more difficult and time-consuming, Miller and Walker agreed.

Under that system, banks and other companies have become "mortgage servicers" that process payments for investors and deal with service issues but have no authority to modify mortgage terms, they said. Each investor with a financial interest in that mortgage must sign off on any modification.

"The more layers you add as to who has to bless these things, the more difficult it is to walk through the maze," Miller said.

That's why getting a principal write down is so rare, Walker said.

"They (mortgage servicers) have got to be able to secure the investment value of the mortgage. They can't leave anything hanging in the breeze," he said. "It (a write down) must come from the investors."

A successful modification, if it comes, usually involves a reduction of the interest rate and/or extending the loan term, Miller and Walker said. Sometimes late fees and legal costs will be waived.


Most Common Homeowner Mistake

That's not to say homeowners don't also create problems when it comes to mortgage modification, the counselors said. Probably the biggest problem is that homeowners often wait until the last minute to seek help.

"By the time someone comes to use for housing counseling, they're in foreclosure or on the verge of foreclosure," Miller said.

That eliminates many potential solutions, Walker added.

"The door hasn't slammed shut, but the options are limited," he said. "People are becoming more and more frustrated with the system because they can't walk in and solve the problem. It's not that simple."

The agencies can usually get the foreclosure process delayed while they work with the client, Miller and Walker said. The first step is writing down a monthly household budget.

"Many times they're surprised because that's the first time they've looked at their budget," Miller said.

That often leads to initial resistance when a counselor suggests areas to cut or eliminate, even non-essential items, they said.

"Most people, that's the first words out of their mouths: 'I can't cut,'" Walker said.

He recalled working with one family that had "all the toys," including premium cable, cell phones for parents and each child and payments on jet skis.

"They flatly told us: No, I've got to keep these toys. They refused to make adjustments to their lifestyle," Walker said.

Most clients, however, given the reality of making cuts or losing their home, will opt for the latter, he and Miller agreed. "Part of (the initial resistance) is the client doesn't realize just how serious the situation is," Miller said.

Still, less than half of the mortgage modification efforts fail because neither the counselor nor the mortgage servicer can make the budget numbers work because the client is unemployed, working only part-time or has other income problems, he added.

"Even if they were to write down the principal, it still wouldn't solve the problem," Miller said. "The mortgage servicers have some limitations as to what they can do."

Back to September 2012 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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