Congress Sits on Legislation Designed to Help Borrowers
Borrowers need help. Although the worst of the foreclosure crisis is apparently behind us, many homeowners are still dealing with upside down mortgages that are in default or on the verge of default. Foreclosure is not always the best way to resolve the situation for a troubled homeowner. Yet lenders and servicers are still slow to help.
President Obama’s HAMP and HARP programs were designed to offer relief. In essence, these programs were created to allow borrowers whose home values were less than the outstanding balance of their mortgage to reduce the principal balance, interest rates and therefore, monthly payments so as to be able to afford to stay in their homes. (Information about HAMP and HARP can be found at http://www.hmpadmin.com and http://www.harpprogram.org.) However, no standards or rules were implemented which require banks to act with any urgency to approve a borrower’s modification application. As such, the approval process for loan modifications often takes months, sometimes over a year, resulting in the defaulting borrower to accrue insurmountable default rate interest and causing the new payment amount to be only nominally lower than the prior payment amount. This bank practice continues today.
Similarly, borrowers fortunate enough to find buyers for their homes need approval from their servicers or lenders for the resulting short sales. Again, no guidelines or rules require lenders to act promptly in approving a request for short sale and often, potential buyers grow frustrated with the delays and cancel the contracts. “The Prompt Notification of Short Sale Act”, S.361, a bill designed to speed up the short sale approval process, stalled for over two years in committee and ultimately died when the 113th Congress adjourned last year. But there is hope. Representative Brian Higgins (D, NY) re-introduced a modified version of the Act on July 23, 2015, now titled “The Vacant Homes Act” (H.R. 3203).
If passed, the Act would require lenders and loan servicers to decide whether to approve a short sale within 90 days from receipt of notice of an offer from the owner of a home in foreclosure. If the offer is rejected, the “Mortgage Owner” must provide the reason for the rejection and the rejection must provide a counteroffer which includes an alternative price which would be acceptable to the Mortgage Owner, together with an economic analysis which demonstrates a reasonable expectation of the expected market value of the property one year following the 90-day period. This is a big improvement from the legislation proposed in the last Congress which simply provided that the lender or loan servicer had 30 days from “completion of the file” in which to approve the short sale. The prior legislation did not define completion of the file, leaving borrowers at lenders’ mercy because checklists were open ended as is the current practice. Representative Higgins has addressed this problem by starting the clock upon the date that the borrower notifies the lender of the pending sale. While lenders and loan servicers will likely require the same information they now require from borrowers in order to approve the request for short sale, the impetus will be on the lenders and loan servicers to make sure that the information is timely received. The proposed Act also requires Mortgage Owners to negotiate with borrowers rather than allow an outright rejection of a proposed short sale. This provision would add more certainty for potential buyers.
The House Financial Services Committee should take action on this important legislation to move it forward quickly. Similar legislation should be offered for modifications, workouts and deeds in lieu of foreclosure. As lenders and servicers continue to delay working out these loans and mitigating losses, the foreclosure backlog increases when dockets could and should be cleared quickly. This legislation offers simple relief for homeowners needing relief.