As the unemployment rate goes up, increasing numbers of American homeowners who used to have good credit are unable to meet their mortgage payments, creating a wave of new foreclosures and defaults. Although the collapse of the nation’s real estate market began with defaults on subprime loans, it is in fact the much more popular prime loans that are currently dragging down the market.

Economists are now predicting that the unemployment rate will continue to rise over the coming year, reaching even as high as the double digits from where it currently is, around 9%. Rates this high would likely exacerbate the situation banks are facing with losses, and add pressure to the economy as a whole.

Foreclosures, in that case, are only going to get worse. This “third wave” of foreclosures, separate from the first two spikes of the economic crisis, features foreclosures on homeowners who are modest borrowers and whose loans originally fit their income just fine. Last year, only 29% of foreclosures were caused by unemployment- this year, it’s likely to be 60%.

A couple who took a thirty-year, fixed-rate mortgage (the standard for residential real estate) and originally had no trouble making their payments is not falling further and further behind because of unemployment.

Families in situations such as these would be well advised to try to ‘cut a deal’ with their lender and go for a loan modification.

California Loan modification laws have always been complicated, but there has been some good news in the past year. In July of last year, a new law was passed through the California state legislature that requires all lenders of mortgages and residential loans in California to agree to accept loan modifications in almost every foreclosure situation. The new rules, stated in Civil Code 2923.6, however, actually can be applied to any applications made from the beginning of 2003 that are also secured by real property of the residential variety, and are occupied by the lawful owner.

Almost every residential mortgage in the state has a PSA, or a “Pooling and Servicing Agreement”, a duty to maximize net value to investors and other, related parties. The new laws will extends and generalize the PSA duty, requiring lenders and servicers to accept all reasonable loan modifications with their borrowers. It clearly states that servicers act in the best interest of everyone if they engage in loan modification for those who are in payment default but can reasonably expect to stay on track once they have received a loan mod. It also stipulated that they are obligated to do so if they can expect to recover more money than through a foreclosure, which is most often the case.

Basically, this is great news for homeowners; those in California in search of a loan modification can use their lenders if they meet all the above criteria and their bank still will not grant a request for a loan modification, or if they are illegally foreclosed on.

The State Bar of California received the resignation of a few attorneys and is currently filing charges against another this month in a continuation of its new, harsher policies towards alleged loan modification fraud.

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The Bar’s supervising counsel in the trail, Suzan J. Anderson, commented recently that southern California seems to be something of a mecca of loan modification scams. Recently, a lawyer from Dana Point, California resigned with various charges against him related to his affiliation with a loan modification group. Another attorney may have his status with the bar changed to ‘involuntarily inactive’, a process that expedites punishment before formal charges are made. It is alleged that he abandoned all of his clients while prematurely and suddenly closing his office without returning fees, and he has admitted to misconduct.

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A third lawyer has had an application for involuntary inactive status filed against him as well, due to an affiliation with Home Relief Services and his misrepresentation of the size and ability of his services to unsuspecting clients. Apparently, he also collected illegal, advance fees and didn’t perform the necessary services to even attempt to get a loan modification for his clients. There will be a hearing on the involuntarily inactive application in four days.

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All in all, more than four hundred complaints about California loan modification specialists are being investigated by the California State Bar in the coming months, hopefully giving homeowners in search of a loan mod some peace of mind.

When a loan modification just doesn’t make sense, avoiding real estate foreclosure means getting pretty savvy and creative with different options: namely, the shortsale.

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A shortsale is the idea that a lender will be willing to accept all the proceeds from the sale of a house in exchange for forgiving all of the homeowners debt, even if the house is no longer worth enough to pay off the principle and interest. It definitely requires the cooperation of the bank or lender in question, but why would they agree to this if they are taking a loss?

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The entire transaction is anything but simple- these types of short sales can take months to negotiate, selling them at the market value of what they are worth today, instead of what they were originally purchased for. (The average time to complete such a transaction is anywhere from two to six months.) And in the end, it often makes financial sense for lenders to accept this, because on average real estate foreclosures result in about forty percent loss to the lenders, and short sales on average only lose about nineteen percent.

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However, one technique that lenders have begun to do to try to get more money is a ‘deficiency agreement’, in which the lender requires that they mortgagee needs to eventually pay back the difference, or the loss, in full. It is better to try to negotiate a situation in which the bank itself will ‘eat’ the discrepancy.

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In many counties in California short sale territory, the number of pending short sales has quadrupled in the past years. They’re taking longer to complete than they have in the past, and no one is sure why.

A short sale in and of itself is what happens when a borrower sells their property for less than the amount of money they owe on the loan, and the lender agrees to forgive the rest of the loan in exchange for all of the proceeds from the house. This method of getting out of a mortgage has become more popular as people begin to realize how damaging foreclosure is for all parties.

However, short sale and foreclosed inventory are dropping quickly, which seems to indicate that the market is actually hitting something of an upswing for the first time since the economic crisis. However, some analysts say, no, this isn’t the case. Instead, the drop in inventory demonstrates only the increase in slow escrows and sales, the fact that they take much longer to complete than they used to. The overall number of listed homes that have been sold is actually down about four percent from just a few months ago.

And of course, we all know that there has been almost a 60 percent decline in inventory of exiting homes for sale.

However, this is good news for some of us- anyone trying to engage in a short sale may be pleasantly pleased with how well it sells.

In many counties in California short sale territory, the number of pending short sales has quadrupled in the past years. They’re taking longer to complete than they have in the past, and no one is sure why.

A short sale in and of itself is what happens when a borrower sells their property for less than the amount of money they owe on the loan, and the lender agrees to forgive the rest of the loan in exchange for all of the proceeds from the house. This method of getting out of a mortgage has become more popular as people begin to realize how damaging foreclosure is for all parties.

However, short sale and foreclosed inventory are dropping quickly, which seems to indicate that the market is actually hitting something of an upswing for the first time since the economic crisis. However, some analysts say, no, this isn’t the case. Instead, the drop in inventory demonstrates only the increase in slow escrows and sales, the fact that they take much longer to complete than they used to. The overall number of listed homes that have been sold is actually down about four percent from just a few months ago.

And of course, we all know that there has been almost a 60 percent decline in inventory of exiting homes for sale.

However, this is good news for some of us- anyone trying to engage in a short sale may be pleasantly pleased with how well it sells.

Although in the past investors would push servicers to foreclose on those who couldn’t make their payments on their mortgages, today investors are all about loss mitigation. Foreclosure, it turns out, is a costly hassle, leading to thousands and thousands of dollars of loss. Extrapolating these losses over entire portfolios, or even over the entire country, they add up to billions of wasted dollars.

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Obviously, investors and government agencies don’t like that, and they have begun convincing/enticing/forcing the servicing community to help discover new methods of loss mitigation, create special departments for their execution, and generally to pursue less wasteful alternatives to foreclosure. These new plans include tactics such as delicate loan modification negotiations, forbearance plans, deed-in-lieu of foreclosure, and real estate short sales. Now, every single operation features such programs, it is assumed. And even better, it works. The huge losses of sudden foreclosures and defaults are largely a thing of the past, replaced by the smaller losses of loan mods, the short sale, and other mitigating actions.

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Sadly, this improvement is not without its drawbacks. Loan servicers, especially the ones in residential situations, have become bogged down in layers of litigation that come with loss mitigation, because trying to reach a workout of loss mitigation while simultaneously, and often secretly, pursuing the channels of foreclosure created a lot of angry people claiming that they were engaging in deceptive practices.

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There is a court case that set a strong precedence in these matters. Richter v. Bank of America (1991) led to a court awarding Richter about three million in damages against a lender who had ‘breached it’s duty’ to deal in good faith towards the goal of restructuring a loan, and had engaged in negligent misrepresentation by going for foreclosure while ‘taunting’ the borrower with promises of a loan modification.  It was a landmark case, demonstrating the power of expectations for genuine loss mitigation efforts over the old foreclosure practices or unscrupulous fraud. It also made servicers nervous and hesitant to engage in loss mitigation efforts if foreclosure might be legally simpler.

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However, most lenders have come to the conclusion that the risk to their interest is worth the prevention of major loss during foreclosure or short sale.  And there are some pretty simple and effective steps lenders can take to protect themselves from potential risk, not the least of which is hiring a loss mitigation specialist.

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The most self-explanatory, but often hardest to execute plan is to simply “be a straight shooter”. Lenders who suggest that they plan to pursue loss mitigation avenues instead of foreclosure need to admit that, actually, they will be proceeding with foreclosure procedures until a document executed by both parties is produced that sets out specific, agreed-upon loss mitigation alternatives.  They need to straight out document the fact that they are in danger of foreclosure, and that they should not definitely rely on loss mitigation results, and be aware that they are in very real danger of losing their homes. Lenders cannot be in the business of giving out false hope, because it can lead to more loss, and sometimes lawsuits.

Most people are generally familiar with fixed-rate mortgages and ARMs, but there are a lot more types of home loans to choose from, and knowing all the variants can definitely help in loan modification negotiations.

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Low-documentation Loan: this type of mortgage can be handy for those whose income is difficult to accurately track with paperwork- often self-employed people, professionals who work on commission, or those who rely on tips for a large amount of their income. Lenders in these types of loans don’t generally ask for proof of income or assets. Ratios such as debt-to-income and housing-to-income are not considered. Unfortunately, this can lead to much higher interest rates, because these types of loans are thought to have higher risk of default. Your credit must be very good to take advantage of this type of loan.
Pre-Payment Penalty Loans:  this can be a part of any type of loan, and you must check to see if your mortgage has such a provision. It generally results in lower initial payments, in exchange for promises of a lump sum if the homeowner refinances by a certain date.This can end up being a hindrance, however, in the case of a short sale.
Reverse Mortgage: This allows borrowers over the age of 62 to transfer a part of their equity into income. These are becoming wildly popular as the baby boomers enter retirement. This allows seniors to pay for a variety to expenses, secured by the home, only to be repaid upon selling the house or death.
Various types of loans have advantages and disadvantages- it may be cost effective to hire a loss mitigation specialist to help you if you’re thinking of refinancing or asking for a loan modification.

What exactly is loss mitigation, and what does it mean for Californians?  It’s the effortful goal of trying to stop foreclosure on a home, usually headed by a representative of the loan holder, or an impartial third party working in the best interests of the mortgage holder. (Third party loss mitigation consultants tend to be more impartial and reliable from the home-owner’s perspective, because they can deal with the lenders without personal stakes involved.)

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Loss mitigation was first created as a collaboration between the mortgage industry and the federal government to try to help homeowners avoid foreclosure and catch up on delinquent payments. The basic idea of loss mitigation is to mitigate the possible loss from the bank and the homeowner’s standpoint, to try to reach an agreement whereby an alternative to foreclosure can be found.

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Loss mitigation counselors generally first attempt to garner a loan modification plan or repayment plan that is doable for both the bank and the homeowner. And though the goal is to keep the mortgage holder in his or her home, if there is just no way to make up the payments, the loss mitigation consultant will then try to ‘mitigate’ those  losses, helping the homeowner get as much out of a short sale, deed-in-lieu, or a foreclosure as possible

Many people are only familiar with the basic 30-year, fixed-interest home loan, but there are many more options for loan modifications. A buy-down mortgage, for example, is a home loan that lets you have a nice low interest rate by paying a fairly large lump-sum fee, or by paying a sum fee that is spread out over the life of the loan in each payment. Buy-downs are usually paid by the builder or the seller, normally as an incentive for the buyer to buy, creating nice attractively low monthly payments. The cost may be incorporated into the selling price, however, making you pay more for a home than its genuine appraised value.
There happen to be two basic kinds of buy-down mortgages: the temporary variety, and the permanent ones. A temporary buy-down acts over the first few years of the loan, creating low interest rates and low monthly payments. At first. It might be an 8% loan with what is called a 3, 2, 1 buy-down: the first year, the interest rate is 5%, then 6%, and so on until the fourth year when the interest rate reaches 8%. This all costs “points”: generally, about six to eight thousand sollars on a $100,000 loan.
Permanent buy-downs is just what it sounds like: a permanent lowering of the interest rate for the life of the loan. This, again, costs points, and it may only reduce the interest rate by one percent over the course of the mortgage.