Mortgage Settlement Mistake: The Banks Are Already Forgiving Short Sale Deficits

The Obama Administration won a political victory with the $26 Billion mortgage settlement announced last night. But the most impactful part of the plan – principal reductions – may be nothing more than what the banks are already doing by forgiving the unpaid balances on short sales.

The New York Times reports:

Despite the billions earmarked in the accord, the aid will help a relatively small portion of the millions of borrowers who are delinquent and facing foreclosure. The success could depend in part on how effectively the program is carried out because earlier efforts by Washington aimed at troubled borrowers helped far fewer than had been expected.

Still, the agreement is the broadest effort yet to help borrowers owing more than their houses are worth, with roughly one million expected to have their mortgage debt reduced by lenders or able to refinance their homes at lower rates. Another 750,000 people who lost their homes to foreclosure from September 2008 to the end of 2011 will receive checks for about $2,000. The aid is to be distributed over three years.

$2,000 is nothing but a bribe for votes. And refinancing at even lower rates is pointless as well – that ship has already sailed several times (and sunk). The whole hubbub about this plan is how it could lead to mortgage principal reductions for underwater borrowers.

But, there is a big problem.

HousingWire reports on Wells Fargo’s plans:

The San Francisco-based bank will provide $900 million in payment relief through refinances as part of the deal. The funds will available in March, the bank said.

Wells will also provide $3.4 billion in principal reduction and short sale programs that forgive deficient balances.

It will also pay $1 billion to the states as part of the payments to borrowers in foreclosure between 2008 and 2011. Eligible borrowers could get as much as $2,000.

Banks are already forgiving leftover balances from short sales. This is nothing new – they are just getting credit for something they are already doing. I suppose, technically, this is one way of reducing the total mortgage balance owed… but this is very different from reducing balances so people can actually keep their homes. This is not how this program was sold to we citizens.

We gave away legal immunity for nothing.

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About Greg Fielding

I am a longtime real estate agent who has pretty much seen it all during the housing boom as bust. With experience in selling high-end property and low-end foreclosures, raw land, short sales, development work, apartment buildings, and working with investors, I bring a well-rounded perspective to my work.I also have started to do some paid real estate consulting. If you have questions or just need some good real estate advice, book an appointment at http://whattodorealestate.com/In addition to selling real estate, my insights have been featured in The New York Times, The Big Picture, and regularly on Patrick.net. I have also done consulting work with ForeclosureRadar.Starting my career, in 2003, I have sold homes throughout Alameda and Contra Costa counties, specializing in Danville, Alamo, Blackhawk, San Ramon, Dublin, Pleasanton, Walnut Creek, Lafayette, and Orinda. I live in Danville with my three kids.


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9 thoughts on “Mortgage Settlement Mistake: The Banks Are Already Forgiving Short Sale Deficits

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  2. Tom Stone

    Greg, our ” Representatives” will be getting campaign contributions, speaking gigs and board memberships when they leave office. And maybe a consultancy fee here and there.

  3. Greg FieldingGreg Fielding Post author

    Here’s an update directly from Kamala Harris’ Press Release:

    “More than $12 billion is guaranteed to reduce the principal on loans or offer short sales to approximately 250,000 California homeowners who are underwater on their loans and behind or almost behind in their payments.”

    That’s a pretty strategic “or.”

    I’m guessing $11.99 billion will go to short sale loan forgiveness they are already doing. What a sham.

    https://oag.ca.gov/news/press_release?id=2625

  4. Michael Williamsen

    It looks to me like another smoke and mirrors to reimburse the banks for losses. Here is another article about the California robosigning deal:

    http://www.dsnews.com/​articles/​california-secures-18b-in-robo-​signing-settlement-2012-02-09

    This article about the CA settlement of $18bil states: “Another $3.5 billion will relieve about 32,000 foreclosed homeowners of unpaid balances.” How I read this, the unpaid balances are debts that should have been wiped out in the foreclosure. So the money goes back to the banks.

  5. Greg FieldingGreg Fielding Post author

    “How I read this, the unpaid balances are debts that should have been wiped out in the foreclosure. So the money goes back to the banks.”

    Exactly.

  6. Anonymous

    When an acquintance was bragging about stated income loans, he insinuated that he was getting more for his money in 1997. I997 the nagging feeling that I had was this violated common sense.

    Then the crazy appeciation happened because of multiple bad faith parallel ponzi schemes. The banks no longer held the note of your mortgage – does not make a difference to them (in short term) – but in the long run it did of course. Due diligence was turned on its head.

    President Obama – Prosecute those involved with this – even if they are friend or friends of friends…

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