Loan Modification Programs (and Short Sale Programs as Well) are a Joke

Westcoe Realtors, Riverside California…OK, so we realize that the heading for today’s subject is a bit direct, but after what we witness in the real estate trenches every day, there is simply no other way to describe the processes referenced above.  Loan modification programs and short sales are designed to assist sellers so that both they and the banks who hold their loans can ease the hassle and pain of going through the foreclosure process.  That’s the theory.  In reality, both of these programs are so screwed-up by bureaucratic nonsense that it is a wonder that any seller even tries. 

In the movie Cool Hand Luke, there is a great line by Strother Martin (the warden) as he addresses Paul Newman’s character Luke….”What we have here is a failure to communicate.”  My God, how simple and enduring some truths are over time….because the communication from lenders to sellers regarding loan modification programs,and their cousin short sales, is absolutely abominable.  Are there exceptions to this?  Sure…but they are very few and very far between.  To fully grasp the frustration here, let us deal with each program separately.

Loan Modification Programs

Let’s face it…many politicians are masters of the sound bite…and no real estate related program is more attractive to a sound bite than one in which the intended goal is to “help the little guy” dig out from underneath the crushing weight of a sumo-style mortgage.  The President, Federal Congress, State Governor and State Congress have all jumped in to “help”…and the net result is a tangled mess of rules and regulations that make the tax code look like lite bedtime reading.  Any level of government can mandate whatever they want, but unless there is a very simply, easy way to implement the mandated program, then the banks will simply give lip service to the idea, and do 1% of what they should just to look good for those same, sound-bite politicians.  Let us give you just one example.

Currently, the State of California has imposed a 90 day moratorium (June 1-August 31) on banks foreclosing on almost any loan created in California between 2003-2008.  There are exceptions, but this moratorium covers, by estimate, 90% of the loans originated in that 5 year span.  In conjunction with this 90 day stay on foreclosures is a companion Loan Modification Program that will give the banks a way to work with troubled sellers to modify (and thereby save a foreclosure) the existing loan.  The paraphrased quote from both the Governor and State Congress is “this will allow the banks time to help those homeowners in need with their mortgages.”  Sounds good, eh? 

Want the reality here?  At least two bank CEO’s that we communicate with on a regular basis have both indicated that the loan modification program outlined by the State Government is so cumbersome and so clogged with junk, that both of these large, local banks will not touch the modification programs as they stand.  Both of these banks would rather sit for 90 days unpaid on their loans than even attempt to comply with a boggled, bureaucratic mess such as this.  How’s that for a sound bite?  For a great article on the hassles some individual homeowners and real estate agents have faced recently while trying to negotiate the modification maze, read Leslie Berkman in this past weekend’s Press Enterprise newspaper.  She hits the nail right on the head.

Short Sales

Again, in theory, a short sale helps both the bank and the homeowner by working out a price to sell the property so that the lender will accept less than what is owed on the home in exchange for not having to go through the foreclosure hassle.  Saves everybody time and money…a real win-win for everyone involved.  What could go wrong here? (if this were a movie script, there would be a remark about rolling one’s eyes at that last line).

Perfect example we have right here in our office.  We have an agent who has been negotiating with a bank for 11 months on a short sale…and may finally be getting somewhere because we are now on our 3rd bank counselor, who insists that this can all be wrapped up within 90 days.  That will be over 1 year the bank has gone without any payments…and the bank has still not filed the paperwork to even begin the foreclosure process!  On top of that, we have sent them all the paperwork required of the seller, and at least 4 offers on the property from prospective buyers.  1 full year everyone has waited around for a decision that should not take over 30 days.  Amazing…but wait, it gets even better.  The real kicker here is that even though all four separate buyers submitted lower original offers that were eventually raised substantially by all parties, the bank is ignoring the newer, far higher offers and only wants to deal with the lower, original offers.  We are not kidding here, and we have no words…but we can give you the banks words: “We don’t need all the added “stuff”…we’ll just work with the original offers we have here and pick one of them.”  And we all wonder why the financial world is insane.

So what’s a seller to do?

Well, we suggest you keep on plugging away, and perhaps you will be the 1% (our estimate) of successful loan modifications (the percentage is slightly higher for short sales, but not much) that are successful.  However, to help with the frustration that surly lies ahead, may we offer you the one thought that we have learned over and over again that may help…and that is the following:

 THE BANKS DON’T CARE…about you, your situation, your intent to do the right thing, your job loss, your medical issues, or your dog.  They simply don’t care.  They are geared-up only for what their regulations tell them, and if you present any type of uniqueness to their system, then you only represent a problem.  They take the path of least resistance, embrace what is systematically easy, and will not work with any situation that displays any sort of individuality that may require a decision contrary to the formula worked-out by some nameless corporate bean-counter.  Yes, there are a few (very few) who actually try to help…but the majority are simply faceless organizations who only know the “rulebook” as dictated by the people in the back room.  We know this is not what you want to hear, but it is the reality we deal with every day…and if you can embrace this last paragraph, then perhaps you can endure your struggle without caving into the massive frustration that lies here…in the real estate Twilight Zone.