What seems like a well-meaning offer from corporate America has turned into a hurdle for some borrowers in the late stages of a short sale.
Big-name lenders are notifying certain homeowners that they can get the debt of their second mortgages wiped out and those liens released, just like that.
The ideal outcome is to help borrowers who've defaulted on their home loans build equity so they no longer owe more than their homes are worth, which encourages them to continue making payments and stay in their properties.
Some of these offers have come with issues though, mainly for Bank of America clients. In some cases, the offers of full second loan forgiveness have or could have jeopardized those in the middle of a short sale, deals in which people sell their homes for less than what they owe on the mortgage as long as the lender gives the green light. In other cases, homeowners still don't have equity post-forgiveness.
These instances highlight the imperfections and unintended consequences that come with rolling out a massive program to help a lot of consumers quickly, said Katherine Porter, the California monitor of a $25 billion deal between 49 states and five banks that was signed in the spring. Lenders including Bank of America have forgiven and released second-loan amounts averaging $69,000, as part of that landmark deal that settled accusations of long-running mortgage abuse.
"There's definitely an effort to reach out to so many people, but there are definitely these friction points," said Porter, in an interview with the U-T San Diego. She has heard of similar issues from consumers throughout the state.
Brian Ruhl, a short sale Realtor in San Diego, has worked with clients who have experienced that kind of friction. In one case, Wells Fargo, the owner of the first loan, gave the OK to do a short sale, an offer good for only 30 days. More than a week later, the homeowner realized his second lien, owned by Bank of America, had been extinguished since he didn't opt out by the required date.
Even though Bank of America had fully discharged the debt of the second loan, it hadn't fully "released" the lien, which is required for a short sale to close. The estimated time for lien release was up to 90 days, which would cause his client to miss the 30-day closing deadline imposed by Wells Fargo.
"They can't sell the property," said Ruhl, referring to the snag. "It delays the short sale process."
Ruhl had been unsuccessful in persuading Bank of America officials to release the lien sooner until the U-T began to ask questions about the transaction earlier this month.
Bank spokesman Richard Simon repeatedly told the U-T a second lien extinguishment would not affect the timeline or approval of a short sale and the goal is to release the second lien within a month to six weeks. The bank then corrected itself after looking into the file for one of Ruhl's clients.
"It appears that a limited number of short sales in the late stages of approval were interrupted and closed as the second-lien extinguishment program was rolling out and the short sale teams were uncertain how to treat the unfamiliar situation for him," Simon said.
Banks officials have promised to change the process and provide training to representatives so that these delays no longer occur, Simon said.
San Diego short sale negotiator Jacalyn Blank actually told two of her clients to say no to the second-lien forgiveness from Bank of America because she feared that their short sales would be delayed. Bank reps gave her a 90-day release estimate, which again, would have delayed the short sale from closing, Blank said.
Another issue that has cropped up: Some borrowers will see no benefit from the program because they would still be underwater after their second-lien debts are discharged.
In both of Blank's cases, neither borrower would have been in an equity position following a forgiveness.
"I think it's a publicity stunt," said Blank, referring to the program. "I think it's a way for Bank of America to improve their public image. If you don't know the circumstances surrounding the individual's second loan, then it could look like you're doing a great thing."
So far, more than 2,800 homeowners in the nation have had their second liens "extinguished," totaling $199 million, or a rough average of $69,000 a person. Those numbers are based on a government report that covers March through June, the first four months of the settlement, so those figures have likely risen since then.
Bank of America, the most aggressive of the five banks in providing full forgiveness of second liens, is in the process of notifying about 150,000 of its borrowers that they qualify for these wipe-outs. Many of these second loans were absorbed after the purchase of Countrywide, which did a lot of piggy-back loans during the housing boom, said Porter, the public official keeping tabs on the mortgage settlement for California.
The more relief banks give, the more credits they get through the mortgage settlement. The sooner they rack up the needed credits, the sooner they are off the hook in providing consumer relief. Credit amounts also vary by relief.
Porter said she's aware of these second-lien forgiveness issues and stresses that no banks have received credits yet for any consumer help they've given so far.
The five lenders in the settlement agreement -- Bank of America, Wells Fargo, Citi, Chase and Ally -- must routinely submit reports to the national mortgage monitor. At some point, they will be grilled over the relief they receive and how much credit they would be due.
"I want the banks to get credit only where credit is due," she said
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