Sara’s Homes

Loan modification scams may not be the worst of monetary crimes, but they are certainly in the running. Taking advantage of financially distressed homeowners, the most common form of these scams is this: They take a large up-front fee (in the thousands) and then do nothing, or next to nothing, producing no beneficial results for the beleaguered borrowers.

People who do this are receiving a lot of attention in California. Among those who are looking are the State Attorney General, the Department of Real Estate, the FBI, the California State Bar, and even the California Legislature.

In the spring of this year the Department of Real Estate was investigating more than 750 complaints; nationally, the FBI was looking into more than 2,100 companies suspected of defrauding troubled homeowners; and the California State Bar is currently dealing with more than 800 cases relating to foreclosure complaints. Says the Bar's Chief Trial Counsel, Russell Weiner, "In my 21 years in attorney discipline, I have not seen a crisis of this magnitude. It is truly unprecedented."

Recently, the California State Bar took the highly unusual step of identifying sixteen attorneys who had received "a significant number of complaints" and who were under investigation. (Readers in my market area might be interested to know that slightly more than 2/3 of those attorneys were in Orange County, California). The bar's press release noted that it was highly unusual to go public with the names of those who were under investigation (and not yet found guilty), but in this case the organization was "waiving investigation confidentiality in favor of public protection." (Interested readers can go to www.calbar.ca.gov; or, to see the list of names – too cumbersome to reproduce here – just email me for a link.)

The California Legislature has also weighed in on the problem. The legislation in question (AB 764 – Nava) noted that current law allows both real estate brokers (with procedures approved by the Department of Real Estate) and California attorneys to charge up-front fees for negotiating loan terms. But, within those confines, too much bad stuff has occurred. Hence the passage of the bill on Sept. 28, 2009. It would prevent anyone from collecting advanced fees for loan modification negotiations until a successful result had occurred. The bill would also contain the requirement that any contract for loan modification services must contain specified language that states that it is not necessary to pay someone for attempting to negotiate a loan modification. The statement includes the web address www.hud.gov where a list of free loan counselors may be obtained.

AB 764 had a large number of supporters and no organized opposition. It now sits on the Governor's desk, awaiting his signature. He should sign it.

Half a million people are now in trial modifications under the Obama administration's mortgage rescue plan, but getting them permanent help is proving to be difficult.

The foreclosure prevention plan, which reduces eligible borrowers' monthly payments to no more than 31% of their pre-tax income, requires homeowners to make three on-time monthly payments before they can receive a permanent modification.

Loan servicers use the trial period to verify borrowers' income and ascertain whether they can handle the reduced payments.

But servicers say they are having a tough time collecting the necessary documents to determine whether troubled borrowers should receive permanent adjustments. They contend that some homeowners aren't sending in their tax returns, bank statements and pay stubs. Borrowers, on the other hand, complain that their paperwork is being lost.

The Obama administration recently made several changes to the program to give the transactions more time and streamline the plan.

Last month, it extended the trial period by two months to give servicers more time to collect the documents. And last week, it announced that servicers could automatically move qualified borrowers into permanent modifications without their signatures.

The Treasury Department said these moves should make it easier for qualified borrowers to get permanent modifications, according to a spokeswoman. Officials are discussing ways to make it even easier, she said, including allowing servicers to access tax records directly from the Internal Revenue Service.

It is in servicers' interest to convert eligible borrowers since they only get incentive payments when the modification is made permanent, the Treasury spokeswoman said. Plus, if the government finds institutions to have wrongly deny swaths of people, it could impose penalties.

"Treasury is also working intently with servicers to help ensure that they execute in helping more borrowers convert to permanent modifications," she said.

Servicers say they are wrestling with getting the completed documents they need to put borrowers in permanent modifications.

At JPMorgan Chase, for instance, representatives call and send letters to homeowners detailing what they still need to mail in. The bank says it has improved its system for collecting paperwork so that lost documents are not the problem. The issue, it says, is that homeowners are simply not sending in what's required.

"At first blush, you'd think that for people who've made three payments, it would be a no-brainer to get the paperwork in," said Tom Kelly, a Chase (JPM, Fortune 500) spokesman. "But for some people, it just hasn't been the case."

A Citigroup (C, Fortune 500) spokesman also said the documentation process has been challenging.

But many borrowers and housing counselors contend that homeowners send in their documents multiple times, only to be told their files are incomplete. This has been a problem that's plagued the program from the beginning.

On top of that, housing counselors report that banks are sending homeowners forms with the wrong income data listed, which could jeopardize their chances of getting a permanent modification.

Many borrowers are growing increasingly nervous as they near the end of their trial modification periods with no decision from their servicers.

Jim Copley, a Minneapolis homeowner, was given a trial modification five months ago. He found he could no longer afford his $1,650 monthly payments after the housing collapse decimated his home-painting business.

After receiving a temporary adjustment that cut his payments to $955 a month, Copley sent his servicer, Bank of America, all the required income documentation in June. He was shocked to learn two months later that there was some paperwork missing. He called again and was told that his file was, in fact, complete and that he should continue making reduced payments until he was told otherwise.

"Every time I talk with them, I get a different story," said Copley, a single dad who now makes a third of his previous income selling meat to restaurants. "No matter what I do, I can't get any kind of an answer."

A Bank of America (BAC, Fortune 500) spokeswoman said that Copley's file is complete and that he should receive a decision about a permanent modification soon.

It remains to be seen how many people will qualify for permanent modifications.

"If the trial modifications don't convert to permanent modifications, then the program won't be considered a success," said Barry Zigas, director of housing policy for the Consumer Federation of America.

With low mortgage rates and a federal incentive for first-time homebuyers, you might be enticed to buy a place or refinance the one you're in.

But new regulations on brokers, appraisers and mortgage lenders have changed the rules for getting or refinancing a mortgage. Some rules went into effect this month, and others will kick in soon.

"Over the past year, getting a mortgage as a buyer or when refinancing has become more arduous and more expensive," said Dale Robyn Siegel, author of "The New Rules for Mortgages."

Here are a few tips, some accounting for fallout from the credit crisis.

Don't use a mortgage broker unless you need hand holding. In the past, brokers typically shopped your loan to multiple lenders, which was a big help. But new regulations have hamstrung their ability to efficiently shop for the best deal. Among them is a rule that lenders can't accept home appraisals commissioned by brokers. So, you'll have to pay for new appraisals with each lender, which costs time and money.

In the end, you're probably better off shopping for a mortgage by yourself, said Siegel, who owns a mortgage brokerage in White Plains, N.Y.

However, if you're very busy or need hand holding, it could be worth using a broker, she said. Just realize you'll pay a slightly higher interest rate because that's how the broker gets paid.

Shape up your credit. You barely needed to fog a mirror to get a mortgage or refi a few years ago. Today, it's different.

"Qualifying for a mortgage is the most difficult it has been in decades," said Dale Vermillion, author of "Navigating the Mortgage Maze."

Starting Nov. 1 or Dec. 12, depending on the type of loan, anybody with a credit score of less than 620 will have a very difficult time getting a mortgage. That's because government-backed mortgage financier Fannie Mae is tightening lending standards to the 620 benchmark, even for loans backed by a federal agency such as the Federal Housing Administration or Veterans Affairs.

To get the best rates -- and save money on monthly payments -- you'll need a score of about 720 and have a verifiable, steady income, Vermillion said.

So, take steps to raise your credit score. The scoring formula is complicated, and specifics are secret. But the best ways to raise your score are: pay bills on time and pay off debt. Less known are to never close an old credit card account and try to use a very small percentage of your available credit, regardless of whether you pay off your card balance every month. And check reports at Annualcreditreport.com.

Get a fixed-rate mortgage. The vast majority of buyers and refinancers are better off with a rate that won't change, Siegel and Vermillion agree.

"Why are you taking out an adjustable-rate mortgage that's going to change in five years when you can take out a 30-year fixed and never think about it again?" Siegel said.

With a primary residence, it's usually best to think long term, and that means a fixed-rate mortgage.

The U.S. Treasury is poised to announce a finalized plan to expand mortgage relief efforts to include short sales.

A short sale occurs when the bank allows the sale of a home for less than the existing mortgage balance.

It's a strategy to avoid foreclosure, but banks have been more likely to let a home go into foreclosure, rather than short sell it, even if it means holding the property during moratoriums set by some jurisdictions.

That's because short sale bids often come in well below the last appraisal, real estate agents don't want the extra work involved and buyers fear a four-to-five month transaction period that could end in a no-deal scenario.

To help move more distressed properties through the clogged pipeline, the Treasury, under the Making Home Affordable's Home Affordable Modification Program (HAMP) is expected to announce a $1,500 closing cost incentive for those who agree to short sales or deed-in-lieu deals (the deed is transferred to the lender, avoiding the more costly foreclosure proceeding).

The Treasury will also pay the lender $1,000 for accepting a short sale or deed-in-lieu deal.

Earlier this year when the plan was first announced, there was also a provision to pay second lien holders up to $1,000 to relinquish their claim in such transactions.

Thus far, Refinancing Fannie Mae or Freddie Mac mortgages under the Home Affordable Refinance Program (HARP) and HAMP mortgage modifications have been the "go-to" foreclosure options among federal mortgage relief programs.

Some 260,000 homeowners have refinanced under the HARP program since January, according to the Federal Housing Finance Agency.

FHFA also said during the second quarter this year there were 11,700 short sales and 202,200 trial loan modifications under government programs.

American home owners sell and move, on average, every five to seven years. Why do home owners move? People who have lived in the same home for the past 30 years have a hard time understanding this phenomena. They are shocked that people move so often, but I know one thing for certain: Their day to sell and move will come as well.

Here are the top 15 reasons why people sell and move:

• 1) Home is too small. First-time home buyers often outgrow their "starter" homes. Increased family size is the main reason home owners say they need a larger home.

   

• 2) Upgrade. The grass is greener on the other side. People often want what they don't have and long for a bigger, more expensive and grander, upscale home. It's the American way.

   

• 3) Fix purchase error. Owners might believe they made a mistake when purchasing their present home and want to rectify that mistake. Maybe they thought they could get by without a back yard but yearn to garden, or the dining room in the center of the house annoys them, or they no longer enjoy the underbelly of planes flying overhead within inches of their face.

   

• 4) Job transfer. Relocation makes it necessary for many to pull up roots and move. If the commuting distance exceeds an hour, most people would prefer not to spend two hours in traffic every day.

   

• 5) Personal Relationships. Moving in with a partner or getting married can mean one of the parties will need to sell, especially if both owned homes prior to the commitment. On the other hand, break-ups cause owners to sell as well for three basic reasons:
  1. One party may need to buy out the other and not have the cash available.
  2. The home may not be affordable to sustain on one person's income.
  3. The home holds bad memories, making a fresh start desirable.

   

• 6) Neighborhood changes. The neighborhood might have changed for the worse, economically, socially or physically. For example, maybe a freeway was constructed nearby. Maybe the next-door neighbors receive visitors who arrive wearing striped pajamas at 2 AM. Or they have hung sheets over their windows while a skunk-like odor permeates the air.

   

• 7) Empty nest. The kids have grown up and moved out. The owners want a smaller home. The older you get, the harder it is to keep a big house clean.

   

• 8) See family more often. Some people want to be closer to their family as they age and will move to be near relatives. Parents want to be near children. Grandparents, near their children and grandchildren.

   

• 9) See family less often. To put more distance between the home owners and relatives. Some might move out of state to keep harmony within the family. Dysfunctional and fractured families have been known to blossom being separated.

   

• 10) Retirement. Active-adult communities are attracting many buyers over the age of 55. These planned communities have golf courses, club houses, workout facilities, week-end social gatherings, back-yard barbecue parties and more, all designed for people over 55.

   

• 11) Health problems. Physical ailments such as knee or back problems make it difficult for an aging population to climb stairs in a two-story, so a one-story home may be more practical. A trade-off solution for many elderly people who don't require round-the-clock care is to buy a condo or move into assisted living housing.

   

• 12) Deferred maintenance. Some people don't want to put on a new roof, replace the siding or buy a new furnace, so it's easier to buy a newer home. When you figure the life of most home systems is about 15 years, it could make sense to get out before everything goes haywire.

   

• 13) Home improvement perfection. A small segment enjoys fixing up and selling, spending time, money and effort on remodeling, and once the work is completed, these people become restless because there is nothing left to do. Some of you may call these people obsessed, but for some, it's a way to maintain balance while mastering a hobby.

   

• 14) Cash in equity. Some home owners can't stand the fact their home is worth all that money because that money is not in their pocket. These people would prefer to stare at their passbook savings than stare at four walls with empty pockets. They. Just. Want. The. Money.

   

• 15) Lifestyle change. Others are simply tired of owning a home and would prefer to travel, pursue a hobby or be less responsible. We used to call these people misfits or boomers, but many past a certain age want to find a calling that is meaningful to them. So, for these people, home ownership loses its priority status and turns into the ticket for realizing dreams.