Possible foreclosure settlement with the banks! $20 billion to be set aside by banks to fund mortgage modifications!

According to Fox Business there is a potential agreement to reach a settlement between the banks and the Department of Justice over the banks’ use of improper mortgage practices and robosigning.  There are numerous types of improper mortgage practices and robosigning was the practice whereby the banks signed batches of mortgages without reading them.  Bank of America and Chase are the banks that are announcing the settlement which is good because they are two of the largest banks.  I did not see Wells Fargo listed in the potential settlement agreement.

The settlement would contain $20 billion in a “monetary relief fund” that presumably would be set aside to use for mortgage modifications..  This would hopefully allow people who had previously been turned down for a modification in the past to now get a modification.  Also part of the deal is an overhaul of the entire mortgage system by putting in sweeping new guidelines that would fundamentally change the industry like the Tobacco settlement changed that industry in 1998.

None of the banks nor the justice department is commenting on the deal and there are several sticking points.  The banks want immunity from lawsuits if they do this overhaul and set aside $20 billion.  Several states have problems with giving the banks immunity.  California has already apparently said that it won’t and it has backed out of the settlement.  Arizona and Nevada are separately suing Bank of America and New York state has its reservations too.

There are numerous class action lawsuits filed against the banks which the banks want to get dismissed as part of the settlement.  Also its unclear what the requirements will be to receive one of these settlement mortgages/modifications.  The administration has a bad history of running these programs.  The article points out that the Emergency Homeowners’ Loan Program (EHLP) was just shut down as it was badly administered, had too high income requirements, and failed to help nearly the number of people who it was designed for.

It’s hard to say what will come out of this.  If $20 billion is set aside then there will be a pool of money to lend to people or to fund modifications that were previously denied.  That would be a good thing.  But if this program is as poorly run as EHLP then people may have trouble accessing it.

It would be a good thing though if there were new standards for determining what was required for a modification.  My clients would universally all tell the same horror story of what happened when they applied to get a bank to modify their loan.   They would send the same documents to the bank over and over again and each time they called they would speak to a new person at the bank.  No one at the banks knew what was going on or what was needed to process the application.  They would eventually give up or they would be denied because they suddenly made too little money.  Sometimes they would be paying the new modified rate for a year when they were denied.

This is a system that is broken beyond repair and which needs some standards and some predictability.  Why can’t there be set rules governing mortgages and mortgage modifications?  Why can’t those rules be written so that people can understand the rules and know what is required of them?  Why can’t they have some assurance that if they follow these rules or comply with these requirements they will get their mortgage or their loan modification?  It’s not rocket science and it the mortgage industry should not be an enigma wrapped in a riddle surrounded by a mystery as Winston Churchill said.

So I look forward to more straight forward standards and lets hope that something good comes out of this settlement so more people can modify their mortgages and keep their homes.  In the mean time I always advise my clients that if they have a lot of other credit card type debt then they should file for personal bankruptcy.  This will eliminate these payments and free up income so they can qualify for a modification.  It will certainly help their debt to income ratio.

I will give more updates in the future if and when this settlement is reached.

I am a bankruptcy attorney practicing bankruptcy law in San Diego, CA.  For more information please visit my website at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  If you or someone you know is considering bankruptcy then get my FREE E-BOOK “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” bt e-mailing me at; farquharesq@yahoo.com.

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Shadow market tsunami!- It will take 4 years to sell all of these foreclosed homes! Good time to file bankruptcy.

(For an update on the curent state of foreclosures see this blog:  http://bit.ly/JGU1dZ ).

According to an article in the Daily Real Estate News it will take 4 years to clear the backlog of real estate “shadow inventory”.  The banks don’t admit that they have this inventory but they do.  Now we find out that there is indeed a four-year supply of these homes and the supply appears to be growing.

This is why home prices should remain depressed for some time.  Even if the overall economy turns around the housing market still operates on a supply and demand basis.  If there is this huge inventory of foreclosed homes that the banks are holding off the market then it will take some time before it is moved through the system.  We now get the word that there is this four-year supply of these shadow homes out there waiting to be sold.  I look for housing prices to be depressed for at least that long.

Scarier still is the statistic that this shadow market is up 11% in the fourth quarter of 2010 and up 40% from a year ago and the number of homes that are actually part of this shadow inventory appear to be growing.  According to the article Standard & Poors defines shadow inventory as properties with borrowers who are 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REOs). 

They point out that shadow inventory peaked in 2008 but that is probably because banks are currently waiting longer to foreclose on properties.  I have clients who have homes that they have stopped paying for and that they have moved out of a year or two ago and no foreclosure has been started.  It seems that banks are slowing down their rate of foreclosure processing.  This inaction creates more shadow inventory because there are now more homes that don’t show up on anyone’s radar.  These homes that don’t get moved through the system are in limbo and whether occupied or unoccupied realtors cannot list them for sale.   The number of homes like this are growing.

The article prints a chart where they show the number of months that it will take to clear these shadow homes.  It ranges from a high of 130 months in New York to a low of 25 months in Phoenix.  The other cities are Atlanta 49, Boston 71, Charlotte 65, Chicago 59, Cleveland 57, Dallas 56, Denver 38, Detroit 31, Las Vegas 33, Los Angeles 50, Miami 60, Minneapolis, 38, Portland 51, San Diego 39, San Francisco 42, Seattle 59 Tampa 57, Wash. D.C. 50.  It is clear from this chart that this is a nationwide problem of a shadow inventory of unsold and unlisted homes.

New York alone has $116.7 billion in shadow inventory according to Standard & Poors and because of the slower liquidation rate there New York will take 2.7 times longer to clear this inventory.  Los Angeles has a larger volume of shadow mortgages, $173.1 billion, which amounts to 31.5% of all outstanding mortgages.  L.A. has a faster rate of liquidating distressed properties.  My own city of San Diego has a 39 month backlog of shadow homes.

Default of home mortgage modifications remains high also.  80% of people have defaulted on their modified loans in the past and though the default rate is declining they say it still remains high.  My clients report extreme difficulty in getting their banks to agree to modifications of their mortgages.  It’s discouraging that such a high percentage of modifications go into default if people do in fact manage to get through the very difficult modification process.

The funny part is that the banks repeatedly deny that there is a shadow market or shadow inventory of unsold homes.  Realtors know that there is such a market as they can’t get listings for many of these homes that banks are holding off the market.  If banks now slow down or stall the foreclosure process then it will only increase this shadow inventory and increase the amount of time necessary to clear it before housing prices can rebound.

Don’t be surprised if the real estate market lags well behind any other economic recovery that happens in the country.  It is also possible that this huge inventory will act as a drag on the overall economy and prevent a recovery.  It could become what some have labeled as a “shadow tsunami”.

It is obviously a good time to buy a house though if you are going to keep the home for a while and its a good time to stay in your home longer if you are currently in a foreclosure.  It is also a good time to file for bankruptcy as prices will still be low in two years.  It takes two years to elapse after a bankruptcy before you can get a FHA loan approved.  Don’t allow your home to be sold at a foreclosure sale though as then you will have to wait five to seven years to buy a home.  Better to do a short sale and save your credit.

I am a bankruptcy attorney practicing in San Diego.  Please visit my website at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis! 

For a free e-book: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.