What most borrowers don’t understand is that a loan modification is more than just a simple adjustment to the loan which makes the payments affordable; it is a complicated financial analysis for the lender and the servicer. In fact, there is a two-part test that all loan modifications must pass in order to be approved by the lender (and qualify for government incentives). This is complicated and convoluted, but it’s what every borrower needs to know in order to understand why a loan modification might be doomed for failure before the process even commences.

1.     Front-End DTI: First, to qualify for HAMP (the Treasury’s “Home Affordable Modification Program”), the borrower’s current payments for housing debt (i.e. principal, interest, taxes, insurance and association dues) must be “unaffordable” which means that those payments exceed 31% of the borrower’s gross monthly income. This is known as the “Front-End, Debt-to-Income Ratio.” This is usually not a big hurdle because most borrowers in financial trouble are paying well in excess of that 31% threshold. However, some borrowers believe they need to show the lender that they have NO income. In that situation, the loan modification will be rejected immediately because the borrower needs to be able to show that a loan modification will lower the Front-End DTI to at least 31%. If the borrower has no income (or if the borrower artificially decreases his or her income), the lender simply can’t do anything to get the payment to be “affordable” (there are limits to the interest rate reductions and term extensions which prevent unlimited adjustments to reach affordability). Alternatively, some borrowers already pay less than 31% of their gross income toward their housing debt, but have so many other bills that they still can’t afford the mortgage payment. These borrowers also fail the Front-End DTI test because they are already under the 31% threshold (the lender doesn’t care that you are over extended on non-housing debt). So, as you can see, the borrower has a narrow window between making too much money and not making enough money, within which the lender could provide an adjustment to the mortgage (e.g. lower interest rate, extend term or reduce principal) which would transform the loan from unaffordable (i.e. greater than 31% Front-End DTI) to affordable (i.e. equal or less than 31% Front-End DTI). However, the evaluation doesn’t end here. This where the Net Present Value test comes in to kill off the most effective loan modification tool: the principal reduction.

2.     Net Present Value (NPV): Next, the lender must determine whether it will suffer a greater loss by providing a loan modification as compared to simply foreclosing on the home and selling it. The lender must figure out which option (modification vs. foreclosure) provides the highest Net Present Value to the lender. In both a modification and a foreclosure, the lender eventually recoups some of the money that was lent to the borrower. In a loan modification, the lender will receive monthly payments which include principal and interest (albeit, at a lower interest rate than originally contemplated) over a period of 30 or 40 years. An accountant can look at that stream of 360 (or 480) monthly payments and figure out what is it worth in “today’s” dollars (that’s called the “Net Present Value” of a series of payments). Alternatively, in a foreclosure, the lender will end up selling the property either at a public foreclosure auction or as an REO (bank “Real Estate Owned”), and, after paying the foreclosure and sales costs, the lender will have a lump sum of money which it can (hopefully) re-lend to a new borrower at current interest rates. Again, an accountant can figure out how much money the lender will receive as a Net Present Value from the foreclosure and sale. At that point, it becomes a simple mathematical calculation to determine whether the lender receives more money through a loan modification or by foreclosing and selling the property. That’s the Net Present Value Test. Here’s the problem for a borrower: If the lender has to significantly reduce the interest rate, or extend the maturity date of the loan, or even reduce principal, all in an effort to comply with the Front-End DTI test above (to achieve that 31% target), it becomes MORE LIKELY that a foreclosure will provide a greater recovery than a loan modification. If so, the lender cannot approve the loan modification and must foreclose and sell the property. It is this little known NPV Test that kills many loan modifications, and the borrower is not told why they don’t qualify.

So, as you can see, in situations where the lender must reduce the principal balance of the mortgage to the CURRENT MARKET VALUE to make the loan affordable, it is almost a mathematical certainty that the loan modification will fail the NPV test.

A loan modification is not as clear cut as all those TV and radio commercials make it sound. There are ways to counter the harsh result of the NPV Test. A skilled negotiator can actually make a difference, but more often than not, a modification is SIMPLY NOT GOING TO WORK for the borrower. You must take a very close look at the numbers before you waste time and money attempting a loan modification. Additionally, YOU SHOULD NEVER PAY ANYONE AN UPFRONT FEE FOR A LOAN MODIFICATION (CLICK HERE FOR THE DEPARTMENT OF REAL ESTATE WARNINGS ON LOAN MODIFICATIONS). The failure rate is so high that you are almost certainly throwing money away.

Please contact us so we can explain the TWO PART loan modification test in more detail and how it applies to you and your mortgage. We do not charge for this consultation.

ABOUT THE AUTHOR:

Derik N. Lewis is a California real estate attorney and real estate broker. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners find successful alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced short sale attorney by contacting www.LawyersRealtyGroup.com.

Financially distressed borrowers may think that a foreclosure or a short sale means their mortgage troubles are over. That’s simply not the case.

The Washington Post reported last week that “over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales [e.g. short sales], creating more grief for people who thought their real estate headaches were far behind.” Also, the Los Angeles Times recently reported that “Fannie Mae gets tough on homeowners” explaining that the government-controlled mortgage company said that it would instruct the companies servicing its loans to recommend when it should sue a defaulting borrower for the unpaid portion of their loan.

In many circumstances, lenders have the right to pursue collection of the deficiency (the amount left unpaid post foreclosure OR POST SHORT SALE). In California, a lender may have as long as 4 years to commence legal action against the borrower after the original default. This means the borrower is in jeopardy for years after foreclosure or short sale.

In a typical situation, after the foreclosure or short sale has concluded, the original lender will sell the right to pursue the legal action to a company that buys and collects upon bad debt. It is that collection company that will call the borrower 2 or 3 years after the short sale demanding payment of the outstanding balance on the loan along with default interest, costs of collection and attorney fees. They have the right to sue the borrower for the amount unpaid, and they have an excellent chance of winning the case. At that point, they have a deficiency judgment against the borrower and can start legal collections procedures such as garnishing wages or clearing out bank account balances.

So what can you do if you are a borrower facing default or foreclosure? Your best option is to explore an alternative to foreclosure which will give you the ability to negotiate the deficiency issue with your lender. Currently, the most successful foreclosure alternative is a short sale. A short sale allows you or your attorney the ability to negotiate with your lenders to have them waive any and all deficiencies.

If you are pursuing a short sale, make sure you have representation that understands recourse & nonrecourse loans, judicial & non-judicial foreclosures, the California anti-deficiency laws (CCP 580b, CCP 580d, CCP 726) and their application to your loan(s), along with the difference between a simple “release of lien” and a “full satisfaction of debt.” It is not good enough that your lender agrees to release its lien in the short sale, you must get a waiver of the deficiency or have language of full satisfaction in your approval letter. Silence in the approval letter on the issue IS NOT AN OPTION.

Additionally, contradictory language is not good: An approval letter which “reserves the right to pursue the deficiency” and also contains language that the lender will “issue a 1099-C in the current tax year,” creates a serious legal ambiguity. There are cases on record where lenders successfully argued that the issuance of a 1099-C was a mistake, and the lender was allowed to pursue the deficiency. Thankfully, the Home Affordable Foreclosure Alternatives (HAFA) program directly addresses this issue and provides incentives to the lenders to compete the short sale with a full wavier of deficiencies. In fact, the HAFA program allows a relocation incentive of up to $3,000 to be PAID TO THE BORROWER for participating and cooperating in the short sale. Hopefully, more lenders will follow the lead of the HAFA program even for those loans which do not fall within the HAFA guidelines.

PLEASE BE AWARE: You only have one chance to negotiate the deficiency issue with your lenders. A short sale provides the best opportunity to address the issue and receive a full waiver of deficiencies. It is also the one time where “new money” is coming into the transaction via the new buyer, which allows for some leverage against the lenders (especially with a second lien holder who would otherwise be very aggressive against a seller post-foreclosure). Homeowners who do not proactively pursue a short sale and who simply wait for a foreclosure to occur are foregoing a significant opportunity to limit their financial burden. As stated in other articles, you must also be aware that a waiver of deficiencies is a cancellation of debt by your lender which can raise serious taxation issues. Please seek tax advice prior to making any decisions on pursuing a short sale.

For more information, please watch our webinar “Foreclosures & Short Sales: Navigating the Minefield” at www.LawyersRealtyGroup.com.

ABOUT THE AUTHOR:

Derik N. Lewis is a California real estate broker and a practicing real estate attorney. Derik graduated magna cum laude from Boston University School of Law. He has 20 years of real estate experience and has served as legal counsel for some of the world’s largest lenders. During the current real estate downturn, Derik is applying his knowledge and experience to help homeowners, investors, and developers find alternatives to foreclosure. Borrowers facing default or foreclosure can get a skilled broker and experienced real estate attorney by contacting www.LawyersRealtyGroup.com.

Hi, this is Derik Lewis with Lawyers Realty Group here in Southern California. At Lawyers Realty Group, we have attorney and broker experience to help you with all of your short sale transaction needs. If you’ve watched the video on the foreclosure timeline and processing, you know that the lender is required to reach out to you, attempt to make contact and determine if there is an alternative to foreclosure, such as a short sale.

After you’ve stopped paying, but before the notice of default, pay attention to what the lender is saying and doing. If they are reaching out to you but they’re just talking about the default and not giving you the appropriate information and trying to make contact, essentially they have violated the law with respect to filing the notice of default before completing those tasks.

If you can prove that they didn’t follow the law, you have a private right of action against that lender. We’ve handled a couple of these and they’ve gone fairly well. Your only recourse is that the lender has to postpone the sale and foreclosure process and they have to sit down with you and talk to you about the alternatives to foreclosure.

This doesn’t necessarily mean that they are going to give you a loan modification or find you some other alternative; it just means that they are going to follow the law and sit down with you. What the county is doing is giving you a 90 day postponement of the sale. If a loan modification is an option, they should discuss it with you. If a loan modification is not an option, it’s my belief that the next best thing for them to talk to you about would be a short sale. They should give you a certain amount of time and incentives to do a short sale because it saves them money in the long run.

If you feel you have a claim to file or have a question, please send me an email or submit a question via our website. Lawyers Realty Group can help you with all of your real estate and short sale needs, so please contact us today.

LAWYERS REALTY GROUP is an attorney owned and operated short sale brokerage. It was formed to help level the playing field between struggling homeowners and the bank lawyers who are threatening them with foreclosure, deficiency judgments and collection actions.

Traditional real estate agents are simply not trained to deal with the underhanded tactics used by the banks, and it is illegal for those agents to discuss or negotiate the legal and tax issues raised in a short sale. This leaves homeowners vulnerable and unprotected. By combining a real estate brokerage with the knowledge and skill of an experienced real estate attorney, Lawyers Realty Group is able to provide full protection for homeowners while charging all costs and fees to the bank.

Clients of Lawyers Realty Group receive free and comprehensive legal counseling, a full analysis of all options, and vigorous representation on both the legal and transactional sides of a short sale. We specialize in handling all aspects of short sale transactions, from listing and marketing homes to negotiating with the banks and commencing legal action when necessary. Lawyers Realty Group aggressively represents clients against the banks and maximizes every advantage for homeowners to help them begin their financial recovery.

Derik N. Lewis, Esq., is the founder and president of Lawyers Realty Group. Derik is a California real estate attorney and real estate broker. He graduated magna cum laude from Boston University School of Law and has 20 years of real estate experience. Derik served as legal counsel for some of the world’s largest lenders including Bank of America, Wells Fargo and JPMorgan Chase. Homeowners facing foreclosure or seeking a short sale can find help from a skilled real estate broker and experienced short sale attorney by contacting Lawyers Realty Group today.

Thanks for joining me; I’m Derik Lewis with Lawyers Realty Group. We are located in the Southern California area and are here to assist you with all of your traditional real estate and short sale needs.

I wanted to talk a bit about the Mabry case and how the courts are dealing with it. If you’ve watched my previous video on the foreclosure timeline, you know that the lender is supposed to reach out to you, make contact and help you see if there are any alternatives to foreclosure. During the period of time between when you’ve stopped making your payments and the lender reaches out to you, pay close attention to what the lender is saying and doing. If they aren’t sending you the appropriate information and attempt to make contact with you, they are breaking the law with respect to filing the notice of default.

If you happen to take action against them, they will postpone the foreclosure process, but all they really have to do is talk to you about the alternatives to foreclosure. They don’t have to grant you a loan modification or find an alternative for you, they are just doing what the law requires of them and meeting with you.

Essentially what you need to do for this meeting is compile you documents and present them to the lender. If a loan modification is not an option, they should be suggesting to you a short sale on your home. It saves them money and time in the long and doesn’t have such a drastic affect on your credit. It’s my opinion that they should give you a certain amount of time to pursue a short sale and also give you incentives to do one.

If you have any questions regarding this or if you have a claim against your lender and would like more information, visit our website to submit an email or give us a call. Lawyers Realty Group can help you navigate the short sale process, so give us a call today.

Hello, I’m Derik Lewis from Lawyers Realty Group in Southern California. Lawyers Realty Group is here to answer all of your questions about short sale transactions.

Currently I’m discussing the non-judicial foreclosure process in California. I wanted to show you some of the documents that lenders would send you and some of the things you would see and hear in the process so you have a basic knowledge of how the process goes.

Foreclosure can’t commence until you are in default; default can be not paying the mortgage, insurance or taxes. Once you’ve stopped paying, you’ll start getting letters and calls from the lender. There are all sorts of things they are required to send you before they can start the formal foreclosure process. It will usually take up 3-4 months before they will move to the next step. Before moving on, they are required to provide you with alternatives to foreclosure, such as a loan modification or short selling your home.

The foreclosure process is commenced when they send you a notice of default and election to sell. They have to wait 90 days to give you the right to cure your default, such as refinance or do a reverse mortgage. After the 90 days, they are allowed to record the notice of trustee sale. They set the date, time and location of where your property will be sold. At the sale, someone will either purchase your home or the bank will take it back. Once your property is no longer yours they have to give you a notice to quit and evict you. Essentially from beginning to end, the entire process can take around 8-9 months.

If you are facing foreclosure, you can always consider short selling your home. There are lots of alternatives out there and short selling is one that gives you many benefits that other alternatives can’t offer you. If you have any questions or would like to discuss your specific situation, please visit our website. There is an abundance of information out there regarding short selling your home.

Hi, I’m Derik Lewis from Lawyer’s Realty Group. We’re located the Southern California area and are here to help you navigate the tumultuous real estate and short sale market. Today I’m discussing short sale transactions on your property.

A short sale is basically the sale of your property for an amount that doesn’t pay any outstanding mortgages or liens. That means you’ll need lender approval to do a short sale.

Many people ask why a lender would approve such a thing. If they don’t do a short sale, their other alternative is to foreclose on the property. If they foreclose, most of the time they are going to become the owner of the property and are responsible for maintaining it and paying all of the taxes and insurance, all in an effort to sell the property to a new buyer. If you are able to bring a buyer to the table and conclude a short sale that gets them as much as they would get after foreclosure, they are usually willing to cooperate and avoid the hassle.

People also wonder why an individual would want to short sell their home. One reason is that individuals get to avoid a public foreclosure and a public eviction process; you don’t want to see these on your credit. A short sale won’t have as much of an affect on your credit as foreclosure will and it will allow you to purchase a home again sooner than a foreclosure would. The number one reason that people usually do a short sale is to have the ability in that process to negotiate away deficiencies and liabilities from second lien holders, lines of credit and outstanding HOA fees. In a short sale you can negotiate and use the buyer’s funds to hopefully pay them off. If you go to foreclosure, a number of creditors will have the ability to sue you for the balances.

Take a look at our website where we have plenty of resources about traditional real estate and short sale transactions. As always, if you have any questions about short selling your home or you need assistance, please contact us at Lawyer’s Realty Group.

Hi, I’m Derik Lewis from Lawyers Realty Group. We are here to assist you with all of your real estate and short sale needs in the Southern California housing market. If you are facing foreclosure and seeking an alternative to it, you can always consider short selling your home.

I’ve been getting a lot of calls recently regarding people getting letters from their lender stating their loan modification application has been denied due to the net present value test. I have a three part blog on the net present value test on our website if you wanted to take a look at it for a more detailed explanation, but I just wanted to touch on it briefly here today.

When you apply for a loan modification, there are two tests a lender has to go through. The first is a fairly easy concept, the affordability concept; you look at your gross income and the guidelines say you can afford about 31% of your income towards you housing debt. If you are above 31% the lender can reduce their rate and extend the term; if they can do these things and get you to the 31%, then you are approved on the first part of the test.

The second test is the net present value concept, which is a problem for a majority of people. Basically, the bank is looking at the value of the property and trying to determine if they were to foreclose and sell, how much money would they make in that sale. What they do is compare the amount they would make in the sale versus giving you the loan modification you would need to get you to that affordability rate and seeing which one has less of a loss to them. If selling the property gets them more money, then their guidelines dictate that they have to sell that property rather than give you that loan modification.

If you have any further questions regarding this or other alternatives to foreclosure such as short selling your home, please visit our website or contact us. We can help you assess your situation, save your credit and short sell your home.

Thanks for visiting the website; I’m Derik Lewis with Lawyers Realty Group. We’re here to help you with all aspects of traditional real estate and short sale transactions in the Southern California area. If you are facing foreclosure and are seeking an alternative to it, you can always consider protecting your credit and doing a short sale on your home.

Today I’m going to discuss my opinion about another alternative to foreclosure that I’m a little skeptical about, trial loan modifications. I had an individual ask me if trial payments on a loan modification are a bank tactic. When you apply for a loan modification, they ask you some general questions and then send you some documents to fill out. If you’re anywhere in the range of being eligible for a loan modification, they are forced to send you the documents and talk you through it. The servicers have an incentive to enter you into a trial payment plan. The trial payment is a way to get you to keep sending them money while they take more than enough time evaluating your loan modification.

It’s my belief that the servicers are collecting the payments, taking their fees first and then sending the remaining balance towards the payment. After a significant amount of time, people are still receiving debt validation notices telling them they are behind by so much money, even though their loan modification application hasn’t been denied yet. I feel that the servicer will put just about anyone into a trial modification period in order to get the payments coming in so the servicer can collect their fees.

I’m not saying that there aren’t some valid loan modifications out there; I think you just need to be cautious about making the decision of doing a trial loan modification. We have a lot more information on our website concerning this, so feel free to check it out. There is also an abundance of information if you are looking for other alternatives to foreclosure, such as short selling your home. If you have any further questions regarding trial loan modifications, short selling your home, or current real estate information please contact me today. You can email me or give me a call. We’re happy to assist you at Lawyers Realty Group.

Hi, this is Derik Lewis with Lawyers Realty Group. We are here to help you with all of your real estate and short sale needs in this rocky Southern California housing market. I wanted to discuss a few things concerning bankruptcy because I’ve gotten quite a few inquiries this past week. One important thing to remember is that bankruptcy is not going to save you from foreclosure; if you are looking to stop the foreclosure on your home, you can always consider doing a short sale.

You can file a chapter 7 or chapter 13 bankruptcy claim; the U.S. Trustees website will break it down for you, but essentially a chapter 7 is a complete liquidation. A chapter 13 bankruptcy is a reorganization. You can notify all of your unsecured creditors that any amount you have over necessities in income will be allowed towards those creditors for the next 3-5 years. If you complete that plan, the rest is forgiven. Some people may make too much money to qualify for a chapter 7 bankruptcy, so they are forced into doing a chapter 13.

A lot of people have asked when they can file and how it may affect a foreclosure. If you are looking to postpone the foreclosure sale and protect assets and liability, you’ll want to file at least two business days before the foreclosure date.

Bankruptcy is not an alternative to foreclosure because the lender can ask to continue with the foreclosure; if you are looking for an alternative, you can always consider short selling your home. At Lawyers Realty Group, we work in coordination with the bankruptcy filing and we reach out to the lender as your lawyer and start discussing early on the opportunity for a short sale. This buys you extra time, but also gives you the benefit of not affecting your credit as much. If you would like more information about short selling your home, or are wondering if you qualify to short sell your home, please feel free to check out our website, email us or give us a call.