Based on the mortgage giant’s weekly survey, lenders offer a rate of 20% down payment for borrowers with good credit and the upfront fees averaged 0.7% of the loan amount. The average fee offered on a 15-year fixed-rate mortgage was 4.32%, which is well-known as a refinance loan for borrowers wanting to pay off their mortgages faster. That was down from 4.33% a week earlier, with 0.7% paid to the originator.

The five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.05% this week with 0.6% of the loan balance paid to the lender. It has a fixed rate for five years before becoming variable. That was down from 4.11% last week, Freddie Mac said.

Borrowers frequently can find slightly lower rates by shopping around according to home-lending professionals.

Wrong.

Former homeowners may still be on the hook if there’s a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these “deficiency judgments” are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”

Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called “liar loans” where they didn’t have to verify their income.

Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

“After the banks foreclose, it’s very common now to have large deficiencies with houses not worth the balances owed,” said Don Lampe, a North Carolina real estate attorney.

Lenders mostly declined comment. Although Corey’s lender, BB&T did indicate it was pursuing more deficiency judgments.

“They follow the rise and fall of foreclosures,” said the spokeswoman, who would not discuss Corey’s account.

Can they come after you?

Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

“Once they have a judgment, they can pursue you anywhere,” said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. “They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail.”

In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims.

Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

“People shouldn’t have a false sense of security that a deficiency judgment may not be later sought,” Zaretsky said.

He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.

“The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting,” Zaretsky said.

Ticking time bomb

What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

It wasn’t until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

“I told them, ‘Hey, you guys released the title,’” he said. “As far as I know, I’m off the hook.”

He wasn’t. Releasing title does not necessarily end the debt. It’s complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.”

Lenders are also very inconsistent. One of Zaretsky’s short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.

Strategic defaults

Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.

Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago.

Published by Yahoo News.

In California the banks can not go after you if the money was purchase money.  If the money was refinance money then they will come after you for the deficiency.  The best scenario is to do a short sale and negotiate the deficiency judgements on refinance money at closing.

ANGEL LYNN

The multipronged fix calls for companies to help as many 4 million struggling borrowers by modifying loans so housing payments are no more than 31% of monthly gross income. Separately, homeowners who haven’t missed a payment can refinance into lower-cost loans even if they have little or no equity. This is expected to help up to 5 million homeowners.

While borrowers are being encouraged to contact their loan servicers, companies said it would be several weeks before they can start processing applications.

The $75 billion loan modification plan will provide incentives to borrowers, servicers and mortgage investors. The government will also subsidize interest rate reductions to get borrowers to affordable monthly payments.

“This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans,” said Housing Secretary Shaun Donovan.

Administration officials once again stressed that they are not using taxpayer money to bail out irresponsible homebuyers, listing those who will not qualify for assistance: people who bought investment properties, lied on their mortgage documents or purchased multimillion dollar homes.

“The cost of not acting outstrips that of acting boldly,” said a senior administration official.

Borrowers can now contact their servicers to see whether they are eligible for assistance. Federal officials have posted additional information for borrowers to determine their eligibility at www.hud.gov. They will also promote the program at homeownership events nationwide.

However, servicers, who just received the guidelines on Wednesday, said it will take them some time to upgrade their systems and train their staffs to handle borrower calls. Fannie Mae, for instance, said the lenders and mortgage brokers it works with will be able to process refinancing applications starting in April.

Many firms, however, have said they will put foreclosures on hold until they can implement the guidelines.

The administration Wednesday released additional eligibility criteria and guidelines for the refinancing and modification prongs of the program.

The refinancing portion, which is open to homeowners who took out loans from Fannie Mae and Freddie Mac, allows borrowers with less than 20% equity in their homes to refinance to the current prevailing rate. However, borrowers cannot owe more than 105% of the value of their home and must be current on their payments.

The program ends in June 2010. Each servicer will provide details on the terms and costs associated with refinancing, which is aimed at helping borrowers suffering from the decline in home values.

The government provided far more information on the loan modification plan, which it is spearheading. This portion focuses on people who are behind in their payments or are at risk of default.

Federal officials clarified the definition of “at risk” as those: suffering serious hardships, declines in income or increase in expenses; facing an interest rate hike; having high mortgage debt compared to income; owing more than their house is worth, or demonstrating other reasons for being close to default.

The modification program will be in effect until the end of 2012, but loans can only be adjusted once.

Officials also unveiled more details on how servicers will modify the loans. First, they must reduce interest rates so that borrowers’ total house payments are not more than 38% of their monthly income. The government will then subsidize servicers dollar-for-dollar to lower that ratio to 31% – but the interest rate can’t go below 2%.

The new interest rate would then remain in place for five years, after which it will increase by 1 percentage point a year until it reaches either the original rate or the prevailing mortgage rate at the time of the modification, whichever is lower. This should prevent borrowers from suffering the “payment shock” that sent many borrowers with adjustable-rate mortgage into default in recent years.

If rate reductions aren’t enough to get payments to 31% of income, a lender can extend the term up to 40 years, or shift part of the principal to the end of the loan at no interest. Servicers also have the option of reducing the loan’s balance.

Servicers will receive $1,000 for each loan modified, as well as additional annual bonuses if borrowers keep up with payments. Mortgage investors will receive one-time $1,500 incentive payments for restructuring qualifying loans that are not yet delinquent. Finally, borrowers who keep up with their new payments will receive up to $1,000 a year in principal reduction, for up to five years.

While the program is voluntary, once servicers commit to participating, they must evaluate all loans that may be eligible. Financial institutions that receive government money going forward must participate.

Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify.

The government is also providing incentives to servicers and borrowers to enter into “short sales” or “deed-in-lieu of foreclosure” agreements with those who can’t afford to stay in their homes. In these cases, the bank agrees to take back the home for less than what’s owed without filing for foreclosure.

The program also includes a new provision to eliminate borrowers’ second mortgages, which will reduce their overall debt levels. Investors in those mortgages, who at times have blocked modifications because they don’t benefit from the adjustments, will be paid to eliminate those claims. Details on how much they’ll receive will be announced in coming weeks, senior government officials said. Servicers that get second-mortgage holders to participate will receive an additional $250.

While borrowers can now start contacting servicers, it may take several weeks for companies to implement the guidelines, said a senior mortgage industry official in a conference call with reporters.

Servicers are adding staff to handle the expected deluge of calls. Bank of America, for instance, just boosted its servicing staff by 1,000 people.

JPMorgan Chase, which said it “strongly supports” the president’s plan, will need a few weeks to get the program up and running, a spokesman said.

Officials warned borrowers – many of whom have complained of long waits and unresponsive staff at servicers – to be patient. Until then, they can find out whether they meet the basic criteria and can start gathering the financial documents they’ll need to give their servicer.

“There will definitely be a flood of activity, so it’s important for consumers to be patient and be persistent and to take a hard look at their own personal financial situation so they can come prepared to really move the process forward as rapidly as possible,” the official said. 

The Home Affordable Foreclosure Alternatives Program providesfinancial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed, according to an announcement on the Treasury’s website.

Guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders.

The incentives, first announced in May, expand on the government’s Home Affordable Modification Program, known as HAMP, that has seen limited success in lowering payments for distressed homeowners. The Treasury earlier on Monday stepped up pressure on mortgage companies to make permanent the 650,000 trial modifications they have started.

“While HAMP program guidelines are intended to reach a broad range of at-risk borrowers, it is expected that servicers will encounter situations where they are unable to approve” or offer a modification, the Treasury said in its announcement.

Financial incentives for completing short sales or similar deed-in-lieu transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would receive $1,500 in relocation expenses.

Short sales are favored by real estate agents and community groups over foreclosure because they can preserve the borrower’s credit rating and leave the property in better condition than when a homeowner is evicted. While primary lenders typically realize steep losses, their recovery is typically far better than under foreclosure.

But short sales have been frustrating for borrowers and real estate agents, often hung up by negotiations with multiple lien holders and mortgage insurance companies. Real estate agents have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.

Among requirements, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt.

It also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.

In one of the most contentious issues gumming up negotiations between lenders, the guidance caps the aggregate proceeds to subordinate lien holders at $3,000.

Second lien holders in recent months have begun demanding more money from the first lender, seller, buyer or agent in exchange for releasing their claim, agents have said. Because primary lenders would face larger losses in a foreclosure, some subordinate lenders have felt empowered, the agents said.

The largest second-lien holders are Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co andCitigroup Inc.

Second lien holders may proceed with a short sale outside of the Treasury program, if they felt the cap was too low, a Treasury official said in October.

“If there was a short sale program that didn’t recognize the second lien holder position, it could have pretty damaging consequences for the industry,” Sanjiv Das, chief executive officer of CitiMortgage, said in an interview last week.

Okay well lets hope this all starts to go into effect asap.

Short Sale Help

The Obama administration has not yet issued its recommendations and they’re not expected until next year. The Center for American Progress plans to issue its report on the future of housing finance this fall.

You can be pretty sure there will be a bit of a frenzy over what to do about the housing finance market as the government gets closer to making a decision. In today’s marketplace, three key players — the FHA, Fannie and Freddie — buy 90 percent of new mortgage loans. The private mortgage marketplace has dried up. The U.S. government has propped up Fannie and Freddie with capital infusions totaling $96 billion plus almost ten times that amount through purchases of debt and mortgage-backed securities by the Treasury and Federal Reserve.

MBA wants to avoid any similar federal bailout in the future. It proposes that the new companies pay fees into a federal insurance fund that would guarantee interest and principal payments to bondholders if companies were unable to make them. This would replace the current system of assumed federal backing. Investors have lost confidence in the assumed federal backing and reduced their holdings of Fannie and Freddie debt.

MBA also wants the new smaller private companies to focus solely on the mission of mortgage creation, but not be allowed to hold large amounts of mortgages and securities, as Fannie and Freddie do now. Instead, the MBA calls for government agencies rather than the new companies to assume the mission of promoting affordable housing that Congress assigned to Fannie and Freddie.

Republicans want to end government conservatorship within 18 months, but Democrats haven’t spelled out a time line for this process. They likely won’t take a public stance until they get some word from the Obama administration, which won’t be until next year.

In a related story, FBR Capital said Freddie and Fannie have no “underlying value” to justify the recent tripling in their share prices this month. Since their big jumps, both dropped by about 50 cents per share from Aug. 28 to the close of market on Sept. 1. On Aug. 28 Fannie closed at $2.04, but dropped to $1.59 at the close on Sept. 1. Freddie was at $2.40 on Aug. 28 and dropped to $1.90 at close on Sept. 1.

Lita Epstein has written more than 25 books, including Trading for Dummies.

But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked in the law department of a major mortgage company, Ocwen Financial. “I don’t think they’re motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It’s a license to do whatever they want.”

Rich Miller, a governance project manager at Countrywide Financial and Bank of America before he left in January, said Bank of America had been reluctant to modify loans, which hurt the bottom line. The company has been waiting and hoping the economy will improve and delinquent customers will resume making payments, he said.

“That’s the short-term strategy,” said Mr. Miller, who oversaw training programs at Countrywide, which was bought by Bank of America. He now works as an industry consultant.

Bank of America disputed that characterization. “To think that somehow or other we would jeopardize investor relationships and customer relationships for the very small incremental income we would receive by delaying seems ludicrous,” said Robert V. James, the bank’s senior vice president for mortgage operations and insurance. “It’s not the right thing to do.”

Mortgage companies, some of which are affiliated with the nation’s largest banks, are paid to manage pools of loans owned by investors. The companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans.

Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years. A senior Treasury adviser, Seth Wheeler, said these payments amounted to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added that mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”

But experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month. “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

She cited Ocwen Financial, which reported that nearly 12 percent of its income in 2007 came from fees to borrowers.

Paul A. Koches, Ocwen’s general counsel, said: “We’d prefer that to be zero. The costs associated with our delinquent loans are in every instance in excess of the late fees.”

Its no wonder we are in the situation that we are in right now. The banks are taking advantage of the suffering home owner. This all needs to end we are living a mess.
Angel