Do Distressed Borrowers Know Their Options?

Do Distressed Borrowers Know Their Options?Nevada has long sat atop the list of states most devastated by foreclosures. In 2010, one in 11 households received a foreclosure filing of some kind, according to year-end figures from RealtyTrac. In the Las Vegas-Paradise metro area, the situation was even more dire, with one in nine housing units – almost 11% – receiving a filing. Amazingly, these numbers represent decreases from what was experienced in 2009.

To gain an understanding of the foreclosure mess from a consumer's perspective, the Nevada Association of Realtors (NVAR) embarked on a multiyear research project, which culminated in a report released last month titled ‘The Face of Foreclosure.’ Among the report's findings was that 23% of borrowers surveyed admitted having strategically defaulted on a loan. In some cases, consumers said they were encouraged by servicers to fall behind on their mortgage in order to qualify for a loss mitigation program.

As if that were not bad enough, the report also highlighted the fact that efforts to promote alternatives to foreclosures and loan modifications – namely, short sales – have fallen woefully short. As part of its research, NVAR conducted interviews last August with borrowers who live in high-foreclosure neighborhoods as well as borrowers who either went through the foreclosure process, were going through foreclosure or had recently avoided foreclosure.Â
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According to the results, more than one-quarter of respondents had never heard of short sales and 61% had not heard of the federal Home Affordable Foreclosure Alternatives (HAFA) program.

‘Very few of those facing foreclosure even knew about the programs available, and fewer still found them helpful,’ the report said.

Though a frighteningly large 61% of respondents were unaware of HAFA, it may not be considered all that surprising, given the program's slow ramp-up, says NuView Financial President Greg Hebner. What is perhaps more troubling, he says, is that so many borrowers appear to have not been informed about short sale transactions more generally.

‘There should never be a situation under any waterfall that I'm aware of where that option is not presented as part of a pre-foreclosure loss mitigation,’ Hebner says. ‘Once our retention option is exhausted, 100 percent of the time we need to address liquidation options.’

The only exceptions to that rule are when investors are trying to accelerate a deed-in-lieu of foreclosure and cash-for-keys deals. Those situations amount to a very small percentage, he says.

Mike Young, a Lake Tahoe, Nev.-based real estate agent and president of NVAR, points to another important statistic in the association's report: Fifty-eight percent of respondents said their lender was ‘not willing at all’ to work with them on foreclosure alternatives. In turn, one might conclude that borrowers who sought but were denied assistance may have been missed opportunities for servicers.

‘There is some breakdown there,’ Young says. ‘If they couldn't get information from the lenders, then borrowers probably weren't finding out about short sales.’

Even in situations where borrowers are familiar with – and good candidates for – short sales, the process has too often failed them, Young says. Real estate agents typically do not receive a response from banks until a third or fourth prospective buyer begins negotiations, he explains. Of borrowers surveyed by NVAR who had gone through foreclosure, more than 60% replied that a simplified short sale process would have either ‘definitely’ or ‘probably’ helped them avoid foreclosure.
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‘We've heard from Realtor members that they submit short sale packages and they're just shut down by the banks,’ Young says. ‘It goes too long. If you're having to wait three or four offers before you finally, just by timing, get the bank to respond, you're running out of time.’

Despite efforts by the federal government to streamline short sales, the industry is still struggling to move documents through to completion. Because of this, real estate agents have become hugely dissatisfied with servicers, and they are losing confidence in the industry's ability to process a short sale, adds Steven Horne, CEO of Wingspan Portfolio Solutions. This trend could contribute to the lack of awareness among borrowers, he says.

‘I think a lot of it comes from the fact that most of these real estate agents just aren't pushing the idea at all for borrowers who might otherwise be good candidates for short sales,’ Horne says.

Horne and Hebner agree, however, that, with program administrators having recently eased HAFA's guidelines to the benefit of borrowers, the Obama administration could do a better job of getting the word out. The Home Affordable Modification Program has received a ton of hype, for better or for worse; HAFA, on the other hand, has not. Public service announcements could highlight the more streamlined process, Hebner says.

‘The program is now better; it's easier to qualify for,’ he says. ‘I would have expected more of a push in that regard, and the industry has so much to gain by effectuating short sales. It seems like a wise investment.’

(Please address all comments regarding this article to John Clapp, editor of Servicing Management, at clappj@sm-online.com.)

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