For those that don't know, just about every mortgage has some form of insurance around it, whether it's Fannie Mae, Freddie Mac, FHA,to name some of the more common investors, or some other form of private or portfolio coverage; ever lender hedges their risk at some level. In order for a lender to be made whole in the event of a default, the lender has to demonstrate four (4) things:
- That the loan was originated according to the investor’s guidelines,
- That a subsequent default was an intervening act not relation to the making or execution of the note and mortgage,
- That the lender made a “reasonable” collection effort, and
- As a result of that effort, the lender suffered an “ascertainable” loss.
Obviously, words like reasonable and ascertainable indicate that some lawyer is getting involved but what we are talking about is the ability of public and private investors to encourage lending to less than perfect borrowers without the risk that they will end up losing money for their trust. In most instances, a reasonable collection effort means foreclosure, but that’s such a harsh result that investors apply the same standard to loss mitigation programs, like short sales and deeds in lieu of foreclosure. What I don’t understand is why the same lenders can push a foreclosure through like a bull in a china shop but abdicate the same responsibility when they have to decide if a short sale is reasonable?
I know this is a rhetorical question, but let’s open the debate. Except in those states, like Connecticut, where there is a mediation program for owner occupied property, the standard foreclosure timelines for investor loans, from referral to judgment, is 83 days, including half of which is spent waiting for court dates. The same files will take more than twice that long to negotiate a short sale, and by negotiate I mean, provide the lender with reams of financial background about the seller, which is never even a concern in the foreclosure. Since the goal is to demonstrate an ascertainable loss, then the only factor which should be relevant is the fair market value of the home as compared to the offer on the table. The deficiency amount becomes the difference between the debt due and the net proceeds of the sale, which is the same computation the lenders use in foreclosure.
I don’t want to appear naïve, I understand that someone is paying for these bad loans in the form of the mortgage insurance, however, I also don’t see any reason that the market should be so stifled elevating form over substance in the short sale process. Lenders don’t make money unless they are originating new loans so why continue to drag out the short sale process instead of encouraging new loans for those people who can afford them and getting rid of these non-performing assets more quickly?
David E. Rosenberg, Esq.
Managing Attorney at Marinosci Law Group, P.C.
100 Great Meadow Road, Suite 501, Wethersfield, CT 06109
(860) 967-0229 ext. 315 main
(203) 444-1264 cell
(860) 757-3838 fax