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Lenders like loan modifications


Part three in a three-part series on mortgage relief


July 21, 2010 - Lenders don't like foreclosures, say Carolyn Chevrier and Jim Boehler of Lakes Community Credit Union (LCCU) and Eric Dyson of Oxford Bank.

And they do like loan modifications.

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Jim Boehler, of LCCU, and other lenders say they prefer customers go for a loan modification instead of a short sale or foreclosure. Photo by Megan Collier (click for larger version)
But that's about where the financial institutions' common beliefs end.

What follows is part three in the series on mortgage relief – the lender's perspective.

Banks

"Everyone needs to know banks don't want to foreclose," said Dyson. "They're willing to make significant concessions to avoid foreclosure."

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Why isn't foreclosure palatable to lenders? It leaves them with an often neglected and damaged house and a pile of legal fees.

But Oxford Bank isn't keen on short sales, either, says Dyson. Only two ways Oxford Bank would look to do a short sale. One way is if the property had such significant issues/damage that the bank wouldn't want it back. In short sales, it's the borrower's job to find a buyer.

The other way is if the borrower paid the deficiency balance. For example, if the borrower owed $150,000 on the house, but sold it in a short sale for $120,000, the bank would expect to be repaid the $30,000 difference.

Dyson says Oxford Bank doesn't typically forgive deficiencies, though some larger lenders do because it's not worth the effort to pursue a borrower for a deficiency.

"If there's a deficiency, we aggressively pursue the balance through a number of different avenues – law suit, small claims court," he said.

And it's the same avenue with a foreclosure.

Dyson says the only advantage a short sale has over a foreclosure, to a bank, is with a short sale there's no redemption period. With a foreclosure, borrowers have a redemption period where they live in a house without making payments.

"In that time, a lot of damage can be done to the home," said Dyson. "That's the only positive that I see."

Dyson says, often different professions have different opinions about the benefits of a short sale, but, those professions – like lawyers or realtors – have the opportunity to make money on a short sale. Banks don't.

As far as the difference between the short sales or foreclosures affecting the borrower's credit, Dyson says there isn't a huge difference – a short sale will stay on your credit score for the same number of years as a foreclosure.

"It's six of one, a half dozen of the other," he said. "Anything that's reported stays for 10 years on your credit."

Instead of foreclosures or short sales, Dyson says borrowers should try for loan modifications.

"If you've had a change in your income, most banks are going to work with you to modify the note to an affordable payment," he said, adding that Oxford Bank has a pretty good track record on loan modifications and a high success rate from keeping people out of foreclosure.

"It may only be a $300 reduction, but that's $300 someone has to put food on the table," said Dyson.

He noted that, if he was a borrower, he'd pay his debts.

"I would pay the debt I agreed to pay on the note obligation. If I were having an issue – maybe my employment hours were cut, or my income reduced – I'd contact my lender to see what modification programs are available. There are quite a few. Banks, including Oxford Bank, are certainly willing to work with customers to reduce payments to an amount that's affordable, within reason."

Credit Unions

LCCU hasn't done any short sales at all and have had very few foreclosures as well. How? Why?

"We were very cautious in our lending in the first place and we never loaned any more than 80 percent of the value of a home. Being a smaller financial institution, we had to be cautious," said Chevrier.

Another reason is the credit union's success rate with loan modifications. A loan modification should be your first move with mortgage troubles, says Chevrier.

"You should go to your lender and talk to them about your situation. If you can prove that you can afford a lower payment, here at the credit union, we're looking for that," she said, noting that in most cases, a modification has worked for their members.

But if a borrower has to go for a short sale or foreclosure, pick a short sale, say Boehler and Chevrier.

In a short sale, the lender has to agree to it and it's up to the borrower to find a seller. The short sale process can start when the future looks gloomy but while mortgage payments are still current.

"That helps your credit score, because credits scores are affected greatly by delinquency," said Chevrier. "A short sale or foreclosure will affect your credit score, but a delinquency can affect it almost as much."

In a foreclosure, the process is started after payments are delinquent.

Credit unions do things differently than big banks, says Boehler.

"I've heard for a lot of banks, for you to qualify for a short sale, you have to go delinquent and then claim some sort of hardship. A lot of short sales turn into foreclosures because you can't get a buyer or the lender won't accept the offer, etc. (Credit unions) take a more proactive approach," he said. "If we see a member that's struggling, we try to work out some sort of payment arrangements so we don't have to repossess the house."

He says lenders don't like houses in foreclosure because they have to absorb the financial loss and are stuck with a house or piece of property.

Chevrier says one down side to short sales is that banks have been hit with such a high volume of them, that the process for a potential buyer is extremely long.

"I know of a young lady who it recently took 18 months to finally get through a short sale and she probably put offers on eight homes," said Chevrier. "Short sales are probably what's best for the lender and the homeowner, but not very many of them are going through."

Boehler says many lenders won't even consider a short sale if the borrower doesn't have some sort of hardship, like loss of employment or medical bills.

"If you're making your payments, (lenders) don't see you as having any problem. There has to be some sort of traumatic event to trigger a short sale," Boehler said.

What's life like after a short sale or foreclosure? It can be difficult.

A short sale or foreclosure can leave your credit score 200 to 300 points lower, says Chevrier, which affects interest rates a borrower will pay for future loans, and even the ability to get a job and good insurance rates. Borrowers might not be able to get another mortgage for two to seven years.

Be on time for all bill payments afterward, says Chevrier.

A payment that's 30 days past due can lower your credit score 40 to 110 points – even if the payment was for something small, like a $500-limit credit card. Utilities and cell phone companies report payments, too.

A deed in lieu of foreclosure is 85 points to 160. A bankruptcy can affect you 130 to 240 points.

"I saw one person go from around the best credit score to the worst from one 30-day late payment." Chevrier.

Credit score calculations are so complex, there's no way to predict exactly what will happen after a short sale or foreclosure, says Boehler.

But, even if a borrower knows he/she is going to have to leave the house (in short sale, foreclosure, whatever) they should keep making mortgage payments as long as possible to alleviate damage to your credit score, said Chevrier.

Hardest Hit program

As of this week, lenders in Michigan are getting information on a new federal program called The Hardest Hit Program. Federal dollars are coming to five states, including Michigan, to help borrowers and lenders. Michigan is supposed to get around $154 million, says Chevrier.

Money will be used to help borrowers get up-to-date on their mortgage payments by either making payments for them, or reducing the balance.

"They're just rolling it out and lenders have to get approved," said Dyson. "They're going to provide for delinquent individuals different stages of relief. They could make a payment for them to make them current."

He added, "That's something I'm pretty excited about right now to see if it's going to work. It's actually a program that benefits a borrower and bank, which is unusual. Most of the concessions made right now are on the bank's side."

The program will go into effect by the end of July. Contact your lender for more information about the program and the approval process.

Reporter, Lake Orion Review
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