One month ago, I wrote about the incredible deal that One West appeared to get when it took over IndyMac from FDIC. http://stevebeede.com/2010/08/are-modifications-or-short-sales-possible-with-onewest-bank/. Most readers agreed that this sweetheart deal seemed improper and led to more foreclosures. Others said that merely because OneWest could possibly make more money by foreclosing rather than by modifying, did not prove they actually did it. Evidence may now be here and OneWest justifies the practice.

One of our clients has been seeking a loan modification on her IndyMac loan (now owned by OneWest). She sought this through the Home Affordable Modification Program (HAMP) set-up by our government to help people keep their homes. She appeared to meet all HAMP requirements: her debt to income was well over 31% (actually 46%) and she had stayed current on her loan.  Yet, she was rejected on the grounds that the “Net Present Value” (NPV) of the deal didn’t warrant modification. When she called IndyMac to challenge the rejection, she was told “The NPV test is an economic loss test that basically is seeing if the modification is better for the investor than foreclosure”.  Further, in her rejection letter she was told that she could request the values which IndyMac used in its NPV calculation. When she requested these values, she was told “There is not anything that can be sent to you”.

A review of the HAMP guidelines on https://www.hmpadmin.com/portal/programs/hamp.html indicates that our client met the criteria.  However, the NPV instructions available on the site appear to leave discretion to the investor whether to participate or not or how to create its NPV values. Thus, while the HAMP guidelines have made for good political soundbites making it sound like modifications were available, the underlying NPV structure gives lenders an out.  OneWest/IndyMac certainly appears to be going through the motions only but without any real intent of modifying.  Given the better results from foreclosure under their FDIC deal, this is understandable but I very much doubt that this is what our government really expected in promoting the HAMP modification program.

So where does HAMP stand now? We have reported that only 4.5% of HAMP applicants get a modification. Other say that the ultimate number may be more like 2-3%.  With most HAMP modifications not including any principal reduction, failure rates are running at 50%.  Meanwhile, there appears to be no pressure on banks to do anything more. As recently reported by Alyssa Katz of Housing Watch: “The illusion that HAMP is helping most troubled borrowers while preventing big losses among banks and investors in mortgage-backed securities is part of what’s stopping Treasury from taking the kind of aggressive action it needs to – namely, reducing principal owed”.  http://www.housingwatch.com/2010/08/03/hamp-program-success-rate-much-lower-than-first-reported/

The bottom line for upside-down borrowers is that a home saving loan modification will remain unlikely. While it is still worth the attempt, owners should be prepared to face the reality of moving on either through a short sale or foreclosure. Although many of these same issues plague short sales (particularly mortgage insurance), most are successful in helping owners avoid foreclosure and potential deficiency liability.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re having problems communicating with OneWest or Indymac, get competent legal advise in your State immediately so that you can determine your best options. 

If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.

Over the past several years, we’ve assisted thousands of property owners in coping with upside down loans. Although very few have gotten actual modifications that made their homes affordable (the lenders and our government won’t go that far), most have used short sales to avoid judgments against their credit that would follow them for years.  Even most people who have gone through foreclosure have avoided the lenders’ deficiency recourse.  But now, many are shocked to discover that, although the lender has no judgment against them, the debt still appears on their credit reports as an unpaid debt. This can block future credit and could possibly used by a collection agency to force a payment that is no longer owed.

When a property is sold in a short sale, agreements are generally made with the lenders in which the unpaid balance is forgiven, ie: there is no deficiency recourse.  Similarly, in California at least, most foreclosures are done through a Trustee Sale process through which the foreclosing lender has no recourse against the debtor for any unpaid balance.  These unpaid amounts are considered “forgiven debt” and the debtor may be taxed on this amount unless they have an exemption such as the 2007 Federal Debt Forgiveness Relief Act, or their accountant determines that they are otherwise exempt: purchase money debt, insolvency, etc.  When this occurs, the debtor’s credit report should show the loan as “settled”; or “paid less than full” or some similar reference… not that anything further is due.  So what do you do if this happens.

First, get your records together to show that the loan deficiency was actually resolved.  This may be the short sale closing documents, particularly the lenders’ short sale consent letters addressing the deficiency (or removing any deficiency language). For a foreclosure, the type of foreclosure used will provide guidenance. In either case, the debtor should receive a 1099 form from each lender. A 1099C indicates that the debt is forgiven but sometimes the lenders use the wrong one.

Second, send a dispute letter to each of the credit bureaus - Experian, TransUnion, and Equifax - and challenge the debt reference. Send this my Certified Mail Return Receipt and keep all your records.  Once the credit reporting agency has received your dispute letter, they are obligated to investigate. According to the Fair Credit Reporting Act, the credit bureaus must take the following steps:

• The credit reporting agencies must resolve consumers’ disputes within 30 days limit, unless you have used the services of annualcreditreport.com, then the bureaus can take up to 45 days.
• In response to consumers’ complaints that documentation in support of their disputes was disregarded, the credit bureaus have to consider and transmit to the furnisher all relevant evidence submitted by the consumer the first time.
• Consumers will receive written notice of the results of the investigation within five days of its completion, including a copy of the amended credit file if it changed based on the dispute.
• Once information is deleted from a credit file, the credit bureaus can not reinsert it unless the entity supplying the information certifies that the item is complete and accurate and the credit bureau notifies the consumer within five days.

All of the big-three agencies are working on making sure that all disputes are handled within 30 days. See http://www.creditinfocenter.com/repair/Repair.shtml#4 for more specific details.

If a lender fails to respond to the credit bureau’s investigation, they may delete the refeence themselves. If not, or if the lender actually refuses to remove the derogatory credit reference, then you may need to initiate legal action against the lender. Reporting a false debt on the debt reporting system is slander and you could have a legal claim against the lender and the reporting credit bureau to both remove the reference and recover damages.

Are these strategies for you?  Every person’s situation is different. The information presented in this Article is not to be taken as legal advice.  If you are facing false credit reports which claim you still owe a forgiven debt, get competent legal advise in your State immediately so that you can determine your best options. 

If you have specific questions about your liability in California or about cleaning your credit report, short sales, foreclosure, or any legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.