does anyone know of a new FHA guideline that states if you are approved for a modification you do not qualify for a short sale at all. Ever.

 I have been trying to work with US Bank on a short sale now for a few months. We sent our complete package up to the short sale dept. in June.  After many, many calls for status updates, I was finally told that we were in review.  I asked them " we are in review for an approval for the short sale, right?"  Answer was" yes" every time.  Turns out that it was in review for a modification.  My clients were approved for the modification, however, the amount for their trial payment  period was still to high for them to make the payments.  Now I am being told that due to the fact they have been approved for a modification they no longer will ever qualify for a short sale because of the new FHA guidelines.  Can this be true??? Never qualify!!!! Does anyone know anybody I can get in touch with at US bank to try and work something out for my clients?

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If the mortgage is an FHA LOAN, The guidelines are the FHA's not the lenders.

FHA guidelines states that the homeowner:

"May be approved to participate in an FHA Short Sale if you meet all of the following criteria:

"You don't qualify for a loan modification or other FHA home retention option
You're experiencing a permanent financial hardship such as a job loss, divorce, medical emergency, or a death, and are unable to afford your current mortgage
You have only one FHA-insured loan

"Your property is owner-occupied, unless the following apply:
- Your reason for leaving the property is the same reason you couldn't make your mortgage payments
- The property wasn't purchased as rental investment or used as a rental unit for more than 18 months

"You're able to offer a clear title to the property."

If your clients were offered a loan modification then that is all they are entitled to under FHA guidelines.

Short sales are seen as the mode of last resort after modification programs have failed.

There needs to be a PROVABLE form of financial hardship in order for a modification to be given.

A short sale would be the next step after that failed modification.

The damage to the credit rating and the 1099c consequences are also things to be considered with a short sale too.

I never hear about "New" FHA guidelines, but I hear many times lenders reps BS. Just call FHA directly and ask them about it. You can also file a complain with them against US Bank. They should help you straight this out. Loan Modification is a new contract and your clients have a right to decline it. They are also the owners of the property so they can sell it. I would send new package with the offer for SS approval so there is no confusion what the intent of your clients is. When you ask the bank for SS approval before you have the offer and sell contract in your hand you giving bank an option to qualified your clients for loan mod. FHA guidelines are that lenders have to offer the loan mod before process SS but again, homeowners have a right to decline it.

This has happened to many of our clients and unfortunately, the loan mod is only dropping their payments by $20 - $50 per month or sometimes even raising their payment to tack the deficiency to the loan amount.  This is not enough to help them out of their financial situation, especially as many times homeowners forget to add all of their expenses to their loan mod financial statement.  There are a couple of options at this point...

1.  They can reapply for a loan mod if their financial situation has changed.  Make sure they include ALL expenses including yearly ones such as auto and home maintenance, medical co-pays, prescriptions, (don't forget children's school lunches) etc and divide by 12 to get an estimated monthly expense amount.  If denied from the mod this time, they can then be reviewed for a short sale.

2.  If financially they can no longer remain in the home, some choose to vacate the home and then reapply for a loan mod.  They will not qualify for the modification as they are no longer living in the property, allowing them to then be referred for a short sale.

Of course, if they can afford the loan modification payments, the best choice is to be grateful and learn to love their home again until the market raises enough for them to sell at a price that will settle their current loan.

Lisa wrote:

1.  They can reapply for a loan mod if their financial situation has changed.  Make sure they include ALL expenses including yearly ones such as auto and home maintenance, medical co-pays, prescriptions, (don't forget children's school lunches) etc and divide by 12 to get an estimated monthly expense amount.  If denied from the mod this time, they can then be reviewed for a short sale.

Loan Modifications are set up to evaluate the total gross income of a household, working on a 31-42% Payment to Value. 

Sending in update financial information, monthly expenses etc., will be helpful, it should have been done the first time, but, will not necessarily affect the modification results. When I sent out modification application paperwork, a standard monthly expense work sheet was also sent out, this was in addition to the work sheet found on HAMP/MHA documentation. I am including a copy of such a sheet.

Please note the mini Miranda text on the document:

  •  I agree that the financial information provided above is an accurate statement of my financial status. I understand and acknowledge that any action taken by the lender of my mortgage loan on my behalf will be made in strict reliance on the financial information provided.  My signature below grants the mortgagee the authority to confirm the information I have disclosed in this financial statement, to verify that it is accurate by ordering a credit report and to contact my real estate agent and/or credit counseling services representative if applicable.   Discussions and negotiations of a possible foreclosure alternative to foreclosure will not constitute a waiver of or defense to my lender’s right to commence or continue and foreclosure or other collection action and an alternative to foreclosure will be provided only if any agreement has been approved by my lender.  I may be required to provide additional information.

At the end of the day, the information provided would not necessarily be enough to affect the monthly repayments offered by a modification.

In the case of an appeal, if the decision does not change, it would not automatically allow them to apply for a short sale. The decline would show that there is sufficient income to meet the new modified repayments. 

2.  If financially they can no longer remain in the home, some choose to vacate the home and then reapply for a loan mod.  They will not qualify for the modification as they are no longer living in the property, allowing them to then be referred for a short sale.

Are you seriously suggesting that they put their credit and financial livelihoods at risk by doing this? Short sales are not a mandatory requirement and are up to the description of the lender, in this case the FHA.  Your suggestion to the homeowners would look rather fraudulent to anyone doing a review and analysis of the file. By the way, verification of separate address would be required, usually 30 days proof of residency is asked. Even if the residency requirements weren't there, you're putting the owners under extreme risk by recommending this course of action.

You're suggesting that one of the two parties on the mortgage move out, then have that remaining person reapply. Would this advice fall within the code of ethics that Realtors are supposed to follow? Would it even fall within any legitimate company business practice policy?

Joint tenancy mortgages require both signatures as well as full financial disclosure. Hubby may move out to the Motel 6, but he's still going to have to provide income and other documentation. His name will still have to be on the documents. He and she, for that matter, will attest that the information is true and correct.

If the information is found to be "less than honest" then they are setting themselves up for a whole lot of hurt, up to and including the lender making an immediate demand of all past due payments. Failure to meet that demand could result in a forced repossession of the property.

Do you REALLY want to give that sort of advice to a client? What liabilities would this place against you, and your broker?  Just a few things for anyone to consider, before even considering whether or not to take this rather risky course of action.

"But we're separated."  Says Mrs. Homeowner " Fine, Mrs. Homeowner. Please provide written confirmation of this, as well as copy of the legal separation agreement."

Of course, if they can afford the loan modification payments, the best choice is to be grateful and learn to love their home again until the market raises enough for them to sell at a price that will settle their current loan.

Modifications are set up not to make the homeowner "better off", that's what a refinance is for. Modifications are set up to make the mortgage payments more affordable, based on the present income and financial circumstances of the homeowner.

Secured debt will always take priority over any other debt or financial commitments.

It is up to the homeowner to make whatever arrangements with their other creditors to insure that the secured debt is paid.

Attachments:

Rueben,

I understand and fully agree that sellers should be FULLY HONEST on all financial statements.  I always stress this to each client very clearly.  We have many clients who come to us from paying significant money for loan mod "professionals" to help them and as we have reviewed their financial statements to find out why the way the loan mod is not possible for them financially, have found that there are many day to day living expenses that were not thought of and added to their original statements.

As they submit another application for a loan mod, many times they are offered a more reasonable modification payment that will help them survive day to day with their current hardship and remain in the home.  Let me stress that these are new clients that cannot make the new mod payments despite being approved and can prove their financial hardship.  We do not work loan modifications on our team, but are willing to help them for no charge to try again if their situation has changed.  If denied, they then may be given the option to pursue a short sale.

We also never advise the client to move out of the property and I NEVER suggested above to fraudulently have one party move out in order for the other to apply.  I am not even sure where that came from but would never be a party to any fraudulent actions.  Not sure what caused the inflammatory rant but guaranteed - that is simply wrong and never advised and was not alluded to in my previous post.

Many sellers who have been "approved" for a loan mod but cannot afford the terms, simply have given up and moved out expecting the home to go to foreclosure.  When they finally contact a Realtor for advice, they are then told that they can reapply for the Pre-Foreclosure Program with an updated hardship and explanation letter as to why they moved out of the home.  It will at least give them some options again rather than just letting the home foreclose.  If the home is vacant, they will not qualify for a loan mod and may be given the option of short sale.

As a member of the community, it is hard to see the vacant and vandalized properties and if a homeowner can receive a mod and stay in their home and still afford to feed their families - that is the best case scenario for all.  It is only when a loan mod does not address their true financial situation, it deserves to be looked at to find out why and to try again.  If a loan mod is truly not going to be approved for all of the right reasons (the homeowner simply cannot afford it), then short sale is a great option to move forward.  I know that this forum sometimes gets off on rants but truly, the best option is the honest one that helps the homeowners - I think that we all agree to that.

Ummm no rant from me Lisa, sorry if you took it that way.

I was responding to something you wrote (Note the second paragraph please.):

" Reply by Lisa Caccavella 20 hours ago:

"This has happened to many of our clients and unfortunately, the loan mod is only dropping their payments by $20 - $50 per month or sometimes even raising their payment to tack the deficiency to the loan amount. This is not enough to help them out of their financial situation, especially as many times homeowners forget to add all of their expenses to their loan mod financial statement. There are a couple of options at this point...

"...If financially they can no longer remain in the home, some choose to vacate the home and then reapply for a loan mod. They will not qualify for the modification as they are no longer living in the property, allowing them to then be referred for a short sale."

I was responding directly to what had been written in context with your opening comments as quoted.

I have worked on all levels of loan modification, up to and including, short sale, deed in lieu of foreclosure, and foreclosure, for four years.

The bast majority of homeowners,close to 95%, over those four years, were honestly seeking a way to keep their property and homes intact. The small remainder were comprised of homeowners who looked at the mod. process as a cheaper way to get a refinance, or had some sort of feeling of entitlement.

One cannot help but wonder what " for all the right reasons" means, insofar as modification approval is concerned,one either qualifies for it, e.g., meeting the HAMP/MHA guidelines, or not.

While the system is not perfect, it was never set up to have the same features and benefits as a refinance. As I mentioned earlier, the process is geared to make mortgage payments more affordable under the present income circumstances.

Over the four time I have been able to reduce the interest rate to the floor rate of 2%, on both a step rate, where, after five years the rate caps out at 4.75%, or on a permanent basis.

I have both seen and have reduced the monthly repayments, in ,any cases, by as much as 50%.

I have approved far more modifications than declines. I have seen several hundred thousand dollars written off, in on case over $38K of back payments taken off the books.

I have also been able to reduce the interest rate by 2%, and the monthly repayments by $50.00-$100.00 a month, because the financial and credit information, as well as the type of mortgage warranted it. I would say that the majority of these types of reductions came about due to the type of mortgage involved, usually an ARM or some sort of interest only type mortgage.

I have seen, and worked files that were up to 48 months begin with their payments. The only time requests for help came with most of these accounts was when a Notice of Intent to Accelerate was issued and a foreclosure sale date had been set up.

In one instance, on a Principle and Interest only mortgage, the arrears outstanding was actually greater than the outstanding principle balance. The application was declined.

Modifications are given based on the financial realities of the situation. They ARE approved for the " Right Reasons" Lisa. The homeowner could afford the monthly repayment commitments based on their current income and financial circumstances.

They are also, sadly, declined for "The Right Reasons" too. Not being able to afford the modified mortgage, due to income (It all boils down to that litmus test question, "Is the income sufficient enough to afford a mortgage payment?" A basic underwriting question that many MLO's seemed not to have asked in the first place.), we then transition them to the process of short sale, trying to get them qualified for relocation assistance under HAFA or similar lending programs.

Since making the transition over from one side of the desk to the other side, and as I prepare to enter into this area of real estate, I am struck with the observation that many realtors, on other forums for example, not either here, or you specifically Lisa, tend to put more credence and emphasis on the short sale, and are while they are knowledgeable about this process, seem to lack what I would call, even a basic understanding of the "whys and wherefores" of both the HAMP/MHA process, or even what the requirements are in the first place.

There is no entitlement for modification, or, for that matter, even a short sale. The FHA for example, has specific guidelines relating to the short sale process.

I think it is a matter of education. Both for the homeowner, and for the third party reps., in this case, the realtor, concerning what the process is and is not.

I have worked with some of the most switched on realtors and brokers across 48 of the 50 States, during both processes, and can say that those realtors who brought their A-game to the table, insofar as educating their clients about the realities of both the modification process, as well as the short sale process, had a much easier time explaining to their clients what their options were.

Personally,I think having an additional training designation as a modification specialist would be a good thing. While I don't advocate doing loan mods as well as sell real estate, it can be time consuming, I do advocate some sort of training/education be given, particularly if we are going to work with a homeowner who just isn't eligible for modification assistance. It makes the transition easier. I was able to have several excellent realtors and brokers, over a four year period, walk me through their own internal processes for short sales, as well as tell me what their sense of frustration was with the whole thing. Some things we were able to sort out, others, not so much.

I just think that we all need to be very, very clear as to the kind of advise that we may give a client. After all, for better or worse, they look to us to be the expert in our subject field, and have no idea of how much we know, or don't know.

Is this a rant, or an invitation for perhaps a deeper discussion on an unpleasant situation that perhaps deserves more respect and training than may exist at the moment.

Just a thought or three.

Call FHA direct. Oklahoma offices and file a complaint. They are very good to work with

and will follow thru on this for you.

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