HORROR stories abound across Foreclosure Nation. But once in a while, a new one comes along to remind us just how dysfunctional our mortgage market is.
Chaos and conflict rein over many mortgage workouts. Until that changes, housing will struggle.
The case at hand — and it’s a whopper — involves a short sale on a condominium in Deltona, Fla. Short sales are transactions in which a bank and a borrower agree to sell a property for less than the amount owed on the mortgage.
While loan modification programs have received the greatest push from the government, short sales are crucial to cutting the inventory of foreclosed properties. And yet they are far less common than deals like loan modifications and forbearance plans that let people retain their homes.
In the first quarter of 2012, for example, Fannie Mae and Freddie Mac, the mortgage finance behemoths, completed just 30,601 short sales versus some 112,000 home-retention actions. Since the government took over the companies in 2008, the totals are 315,000 versus 1.9 million.
Last month, Fannie Mae announced new guidelines intended to prod the mortgage servicers into doing more short sales. “Our goal is to incentivize servicers to get to the solution that is appropriate for the borrower,” said Andrew Wilson, a spokesman for Fannie Mae.
Short sales are easier said than done, however. Some borrowers who have tried to work with banks report responses ranging from reluctance to outright recalcitrance.
But nothing beats the experience of Alexandra J. Garcia, who bought the Deltona condominium in 2007 as an investment. An employee at the Department of Motor Vehicles in Queens, she said she put 20 percent down on the $250,000 condo and got a mortgage from Countrywide, which then sold the loan to Fannie Mae.
When the market collapsed and she couldn’t rent the property, Ms. Garcia fell behind on the loan. Bank of America, the servicer, filed for foreclosure in 2009. She tried unsuccessfully for a loan modification.
Ms. Garcia then tried to persuade Bank of America to let her make a short sale. In February this year, she submitted the necessary materials to the bank. On Feb. 8, she got a letter approving a short sale for $72,000.
The letter said the bank “and/or its investors and/or insurers,” in this case Fannie Mae, had agreed to accept the payoff. Among their conditions were limits on closing costs and real estate commissions and a requirement to close by March 23.
The letter had even better news for Ms. Garcia. The owner of the mortgage and Bank of America agreed to “waive their right to pursue collection of any deficiency following the completion of your short sale and your debt is considered settled.”
Though she had lost her down payment and ruined her credit, Ms. Garcia said she was thrilled to get out of the property. She agreed to pay the bank $1,000 in the deal. She was home free.
The deal closed on March 5; the money was wired to Bank of America.
Then the weirdness began.
On March 7, it rejected some of the terms noted in the closing documents and returned the money. The next day, it sent a letter approving the same terms. Worried that the deal might be scotched, Ms. Garcia revised the documents to the bank’s earlier specifications and paid an additional $575.
On March 16, Bank of America asked Ms. Garcia for the $575 that had already been sent. But, the bank employee wrote: “I did receive and approve your closing docs today.”
Three days later, Ms. Garcia’s lawyer again wired the sale amount to the bank. It rejected the wire and on March 20 sent Ms. Garcia a letter declining the short sale. The deal was off, even though the property had changed hands, the buyer had moved in and the new ownership had been recorded.
The letter said the sale had been denied after it was submitted to the investor, Fannie Mae. Fannie had said no “due to (insufficient offer, not willing to sign a deficiency agreement, or contributing to the loss),” the letter added, never clarifying whether one or all three of those factors were behind the denial.
The bank then told Ms. Garcia that it might reconsider the sale if she would accept responsibility for some or all of the loss or get the buyer to pay more. In other words, actions that the bank said were unnecessary two weeks earlier.
Jose Oliveira, a lawyer in Orlando who represents Ms. Garcia, sued Bank of America, claiming breach of contract. He asked the court to declare her mortgage satisfied and to order the bank to accept the payment it had agreed to.
Asked about the Garcia matter, Mr. Wilson of Fannie Mae said it had neither approved nor denied the transaction but had delegated the authority to allow or deny the deal to Bank of America, as is its custom.
After receiving inquiries, Bank of America agreed on Friday to settle the matter. The bank satisfied the mortgage on the terms of the short sale and said it would pay Mr. Oliveira’s legal costs.
Jumana Bauwens, a spokeswoman for Bank of America, said it had reviewed the transaction and found inconsistencies in the documents leading it to decline the transaction. “Additional information should have been requested and the file ultimately approved,” she said. “We are sorry for the delay.”
This short sale ended happily, but far more do not. Some foreclosure experts contend that such sales are stymied because of conflicts inherent among mortgage servicers who decide them on behalf of institutions like Fannie Mae.
April Charney, a foreclosure defense lawyer formerly with Jacksonville Area Legal Aid and now in private practice in Sarasota, Fla., said mortgage servicers lose fees when a short sale occurs. Handling defaulted loans is more lucrative than handling performing ones.
“Why in the world would a bank ever finish one of these deals?” Ms. Charney asked. “When they renege, they get to keep servicing a defaulted loan.”
To be sure, short sales can be tricky. But Dixon Pearce, a lawyer in Mount Pleasant, S.C., whose firm does many short sales, said they don’t have to be so difficult. He has a recommendation. “The government ought to get in there,” he said, “and do a uniform process and make this easier for everybody.”
