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You are here: Home » 2011 » July

BOFA SETTLEMENT UPDATE

Recently it was reported that Bank of America had settled with a group of institutional investors who had suffered large losses after investing in securities backed by loans made by Countrywide (BofA acquired Countrywide when they imploded). The amount of the settlement was to be $8.5 billion to compensate investors for their losses. My guess was that this settlement would clear the air so BofA could go ahead and resume a rapid pace of foreclosing on homes again. BofA seems to be dragging their feet on many of their foreclosures, so we’ve been waiting for the “surge” to come at some point.

I had planned to write about this in last week’s article, and warn those of you with BofA loans that are in default that they may be speeding up their foreclosure processes now. But then the news hit about the new California law which appears to remove lenders ability to pursue you after a short sale on senior AND junior loans. So I pushed the BofA topic to this week, and I’m glad I waited! The settlement is now being contested by some of the investors, putting the outcome in doubt. Some of the investors aren’t happy that BofA is only buying back 40% of the bad loans. They want the figure raised to 100%, which puts the dollar figure between $23 and $28 billion. So this could take a while to resolve.

One very funny part of the otherwise dry legal wranglings came when I read BofA’s defense. They say that the investors had a fiduciary duty to their investors to investigate what they were investing in, and that is was hard to believe they didn’t know what they were buying. If you read between the lines, it seems like BofA’s attorneys are readily admitting that the AAA-rated investments were in fact, junk, and the investors should have known better than to buy them in the first place.

NEW SHORT SALE LAW

There is a new law in California that addresses a junior lender’s right to pursue after a short sale effective immediately. This will have a BIG impact on short sales, but whether it will lead to more short sales as was it’s intent or more foreclosures (see below) is yet to be seen.

Back in January, a new law went into effect that said that lenders who agree to a short sale on a FIRST mortgage had to accept the proceeds as full satisfaction, meaning they couldn’t pursue the Seller after for the deficiency. This was welcome news and has helped many short sales go through that otherwise would have been foreclosures. The new law that went into effect last week extends this protection to any junior liens, as well. This means 2nd loans, 3rd loans, HELOCs, etc.

The big question mark is how junior lenders will react. They may shrug their shoulders and say, “OK, it’s the law, we’ll comply. Here is your approval on the 2nd mortgage and we won’t be able to pursue the Seller after.” OR they may say, “Well, the only reason we were approving the short sale is BECAUSE we would have the right to pursue the Seller after the short sale to collect even more money later. So now that we have to give up that right, we’d rather TURN DOWN the short sale and take our chances pursuing them after the foreclosure.” The third (and much more likely) result of this law is that junior lenders are going to ask for A LOT MORE money in order to approve the short sale. So it’s possible in some cases that this new law will INCREASE foreclosures because the junior lender either turns the short sale down, or holds out for more money than the 1st lender will allow.

By the way, there are provisions in this law where if you commit fraud (lie about your financial situation) or waste (strip the house), then the protections don’t apply to you.

MORE SHORT SALE INCENTIVES

Last week I mentioned that Citibank has greatly sped up their short sale process, and on top of that, they are offering an average of $12,000 as an incentive to the homeowner to do a short sale. I’m only aware of two other banks that have short sale incentives and that would be Wachovia and Chase. (Please note that I’m not talking about the HAFA $3,000 incentive that is available from most lenders. This would be separate from that, although you can rarely double-dip on these.)

Wachovia will often do a $3,000 payment as “relocation assistance” and sometimes $5,000. Because they are calling it “relocation assistance” they usually reserve it for owner-occupied homes. So it’s usually not for investment property or homes that have been vacant for a long time, although their rules tend to change from time to time and case by case.

Chase has also become quite aggressive in the short sale incentive area. I had a recent transaction where they offered $20,000 to the homeowner, and I’ve had clients bring me letters from Chase where they are offering up to $30,000 to do a short sale.

You may be asking yourself why in the world would lenders be offering this much money as an incentive to do a short sale. My assumption is that they have figured out that they lose much less money after a short sale than with a foreclosure. On top of that, they are very concerned about the legal challenges they are facing with some foreclosures being questioned, and possibly reversed, through the courts. In a short sale, they can mitigate that risk because short sales are initiated by the homeowner voluntarily selling their home to a 3rd party, and the lender is only involved in accepted a reduced payoff. With a foreclosure the lender is taking a much more aggressive role, and therefore they have more legal risks if it wasn’t handled properly, or some sweeping legislation gets enacted in the future which voids large numbers of prior foreclosures on legal grounds.

GOOD NEWS ON CITI SHORT SALES

If you have a Citibank loan, I have some encouraging news for you if you are considering a short sale. Citibank has come a LONG way over the past several years in regards to how they view short sales. They used to be quite difficult to work with, but that is changing rapidly. Like many lenders, they have a new attitude in regards to short sales, and they are staffing up, reaching out to borrowers, and even offering financial incentives. [Warning: Most of the good news I’m about to share with you mostly only applies to loans owned by Citibank. If they are simply servicing the loan for someone else, you may still have a battle on your hands.]

They have staffed up and streamlined their data collection process so they are losing less documents. In 2009, it was taking 120 days on average to close a short sale. But that figure has dropped to 83 days. Part of the change is that in the past the homeowner was the one pushing for the short sale, and Citibank was the one playing coy. Now, they are the ones reaching out to the homeowner to suggest and assist with a short sale if their loan mod attempts are not successful.

Citibank has also started offering incentives to certain homeowners in distress. In 2009 they were averaging about $1,500. In 2010 that rose to about $4,000. And so far in 2011 the average is an eye-popping $12,000! The incentive is on a case-by-case basis and is predicated on the homeowner’s financial situation and other factors.

So if you have a Citibank first or second loan, and a short sale is your next best option, the processing of your short sale should be much improved. And if your loan is a true Citibank loan, meaning they aren’t just servicing the loan, you may have a nice payday at the end of the transaction! Call me if you have a Citibank loan and want to discuss your options.

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