More Mortgage Companies Are Refusing To Foreclose When the Borrower Stops Paying

[cdmosaic]

Interesting article that causes me pause in moving before the NOD and sale date. I've made 1 payment in 8 months to Countrywide and still no NOD.



By Rachel Lynn Foley


I explained to Susan that mortgage companies are abandoning homes left and right instead of choosing to foreclose on the property. Yes that sentence was not a typo. I explained to her that the mortgage companies are the ones walking away and not the debtors.

This concept is very hard to wrap one’s mind around because why would the mortgage companies walk away from a property? They lent money to the borrower to purchase a home and now the borrower is not making payments. It only seems logical that the mortgage company would want their property back. In today’s economy logic does not enter the equation.Quite frankly logic did not even enter the equation when the mortgage companies made the original lending decision. The mortgage companies have issued so many loans that should have never been issued. This fact becomes more evident as each day passes. Those lending decisions are now haunting everyone from the debtor through the chief executive officer of the sub prime lenders and regular lenders alike. There are currently more than 3.6 million homes on the market. Ongoing foreclosures would only increase the number of homes on the market today.

When there is an increase of homes for sale a condition described as a glut occurs. So if you were a mortgage lender what would you do if the borrower stopped paying? Would you harass the borrower into paying? Although this was effective in years past the nagging calls of collectors fall on deaf ears these days.

So would you waste even more money by paying some attorney to sue a non-paying borrower? Chances are the borrower is not only unemployed but also has cashed out or sold every asset he or she has. Or would you just ignore the fact that the borrower is not paying the mortgage?

In today’s market the mortgage company is probably going to ignore the fact that the borrower has not made the payments. The amount of time that the lender will ignore the non-payments will depend on several factors. What condition is the house in? If the property is in poor condition or has a small value then the mortgage company will be less likely to foreclose because they do not want to take care of the property. How many properties are being sold in that particular area? If the properties are not moving than the mortgage company is less likely to foreclose because this reduces their chances of selling the property to a third party. What is the amount of the taxes due and owing for the property?

Keep in mind that mortgage company wants to make money on the deal, not lose even more money by paying the back property taxes. So the mortgage company will delay as long a possible to foreclose hoping that the borrower will pay the back taxes or that the taxes will be paid if the property is sold to a third party.

Now if you would ask the lender why they do not foreclose on a property they will deny the very thoughts outlined above. There is no way that the lender is going to admit that they are purposely and systematically refusing to foreclose on a property. To admit that they are refusing to foreclose would be to admit that they made fiscally irresponsible loans to borrowers.

So what is the end result from refusing to foreclose? The county continues to collect taxes and hold the debtor responsible. After three years of non-payment the county, generally, can foreclose on the property but the nice mortgage company sometimes will come to the rescue and pay one to two years of the taxes that are due and owing. Why? Because the mortgage company does not have to buy back the property and it stays in the hands of the borrower. In addition to the taxes the property management remains the responsibility of the borrower. This is main reason I believe of why the lenders are not foreclosing.

If the mortgage company forecloses on the property they will more than likely have to purchase the property back themselves because no one else will. Therefore if they purchase the property, the mortgage company will be responsible to cut the yard, keep yard waste picked up and make sure no one vandalizes the property. Why? Because if they don’t the city where the property sits may issue a code violation to the mortgage company who is now the recorded owner of the property. The most common code violation is noxious weeds. Noxious weeds occur when the yard grows out of control from neglect.

Keep this point in mind. It is a critical point to get across to borrowers especially those who file for bankruptcy and surrender their property. The borrower enters the bankruptcy court to eliminate his or her debt by surrendering their primary residence only to wind up in municipal court or jail for code violations on their primary residence that they walked away from thinking they were debt free. All because the lender refuses to take responsibility by foreclosing. Bankruptcy only eliminates the debt related to the property. Only a foreclosure or a sale will eliminate the responsibility related to the property.

Some of my clients that have surrendered their properties have faced the situation of the mortgage company refusing to foreclose. I have one client who lived rent free for over a year only having to pay the utilities and housing association dues. Another client is going on seven months of no payments and the mortgage company keeps threatening to foreclose but to date has not begun the process. Another client surrendered his home over a ear and half ago. We have brought an action before the bankruptcy court requesting assistance in forcing the mortgage company to foreclosure. This is because Countrywide refuses to foreclose even though their counsel and myself have requested that they begin this process. Unfortunately the judge said that there is nothing in the law or the mortgage contract that would give him the ability to order a foreclosure on the property.

So what should you do if you cannot make the payments on the property? What I advise my clients to do is start saving the amount of money that you would have made towards the payments or as close to that amount as possible. Do not spend that money. Wait out the period until you receive the foreclosure notice and the sale date has occurred before you move. Have a back up plan of where are going to move, even if it is just temporary so you can move on short notice. Take the time you are living rent free to pack the things that you want and weed out those things that you no longer need. Keep in mind that this scenario may only work if you do not have kids involved. Regardless of whether you stay or move you must maintain the property until the property sells or has been foreclosed upon.

The mortgage companies are hoping that if they leave the borrowers in the home long enough the market will come back. Then when they foreclose an individual buyer will actually purchase the home instead of the mortgage company themselves buying the property back. So if the mortgage company is going to use you to their advantage when surrendering a home why not use the mortgage company to your advantage and live mortgage free.

If you have not filed bankruptcy and are not going to file bankruptcy take this opportunity after you save at least three months worth of rent to pay off your debt. If you do not have any other debt than the house use the opportunity to build a nest egg for the future. This could be the time to make lemonade out of the lemons produced by the current economy.

Remember that knowledge is power and in this case the knowledge about the facts of foreclosure and surrendering property in bankruptcy will give your the power to stay out of jail.

[kent302]

Hi Cdmosaic, thanks for an informative, timely article.

See below for related "Shadow inventory" banks are holding, up to 30%.
I don't like where this is taking us, in term of the stresses added to the economy. But as the writer said, the banks went lunatic in lending to people, now we are maybe only at the beginning of the end?

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

"There is a real danger that there is much more (foreclosure) inventory than we are measuring," said Celia Chen, director of housing economics at Moody's Economy.com in Pennsylvania. "Eventually those homes will have to be dealt with. If they're all put on the market, that will add more inventory to an already bloated market and drive down home prices even more."

More than one-third locally
In the Bay Area, a Chronicle analysis of data from San Diego's MDA DataQuick shows that more than one-third of foreclosures are in shadow territory - that is, they are not registering in county records as having been resold.

For the 26 months from January 2007 through February 2009, banks repossessed 51,602 homes and condos in the nine-county Bay Area, according to DataQuick. Yet in the same period, only 30,823 foreclosures were resold, leaving about 20,000 bank repos unaccounted for.

Turnaround usually quick
Realtors say foreclosures generally go on the market a month or two after the bank takes title and then sell fairly quickly, often getting an accepted offer within a week or two of being listed and then closing escrow within 30 days. That means that foreclosures should register as being resold within three months.

But taking the foreclosures in any given month or selection of months and looking at what happened three months later also reveals a big gap between what banks took back and what they resold.

Tom Kelly, a spokesman for banking giant Chase in Chicago, said the bank sells foreclosed homes in a timely fashion.

"We try not to be in the business of owning homes," he said. "Our goal is to get them back on the market as quickly as possible. We want to maximize what we sell them for and yet do it quickly."

Kelly was at a loss to explain the shadow inventory phenomenon other than the quantities involved.

"The inventory might be growing because there is just a lot of volume coming in. That would not surprise me," he said.

Locally, the monthly number of foreclosures has decreased since peaking at 4,321 in August 2007. That has allowed foreclosure resales to start closing the gap.

Most observers say the recent fall-off in foreclosures came because California and many banks implemented foreclosure moratoriums in the fall, not because the problem has diminished.

Only 65.5 percent resold
A second DataQuick study of all Bay Area homes repossessed by banks in the 18 months ending January 2009 tracked how many of those homes had resold by mid-March. It found that 65.5 percent had resold. Discovery Bay's ForeclosureRadar.com compared its database of Bay Area foreclosures to MLS listings for the past 120 days and found that fewer than one-fifth of the foreclosures showed up as for-sale listings.

"Foreclosure numbers are artificially depressed," said CEO Sean O'Toole. He puts California's shadow inventory at about 100,000 homes.

So why aren't banks selling off their foreclosures?

Observers say several factors are at work.

-- The "pig in the python": Digesting all those foreclosures takes awhile. It's time-consuming to get a home vacant, clean and ready for sale. "The system is overwhelmed by the volume," Sharga said. "In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month."

-- Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. "With banks in the stress they're in, I don't think they're anxious to show losses in assets on their balance sheets," O'Toole said.

-- Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don't fall as fast. "They want to be careful about not releasing them too quickly so they don't drive prices down and hurt the values," O'Toole said.

Besides the shadow foreclosures, yet another wave of distressed properties is in the pipeline. These are homes with delinquent payments for which the banks appear to be prolonging the foreclosure process. Some of that could be because they're negotiating with homeowners about loan modifications or other ways to keep them in the home. But banks also could be deliberately foot-dragging for the same three reasons listed above.

"The problem is that no one knows how extensive (the shadow inventory) is," said Patrick Newport, U.S. economist with the Massachusetts research firm Global Insight. "It's a wild card. If it's a really big number, you'll see prices drop a lot more and deeper problems for the financial system."

Missing foreclosures
Only 65.5 percent of all Bay Area homes repossessed by banks in the 18 months ended January 2009 had been resold by mid-March. This study looked at the same homes over time, not an aggregate of all foreclosures.


County % foreclosures resold % foreclosures unsold
Alameda 58.6% 41.4%
Contra Costa 69.8% 30.2%
Marin 66.9% 33.1%
Napa 66.0% 34.0%
San Francisco 49.8% 50.2%
San Mateo 61.5% 38.5%
Santa Clara 62.0% 38.0%
Solano 67.5% 32.5%
Sonoma 75.3% 24.7%
Bay Area 65.5% 34.5%

Source: MDA DataQuick