The Secret Seedy Underbelly of Sacramento Foreclosures

Contrary to popular belief, sweeping California legislation that changed many of the laws about foreclosures and short sales a few years ago does not contain protection provisions that some people expect, probably due to political compromises. For example, did you know that a homeowner who is in default (behind on mortgage payments) and in escrow pursuing a short sale can be foreclosed upon by the bank? But if a homeowner is chasing down a loan modification, the bank is not allowed to continue with foreclosure proceedings.

A provision kicks in to protect short sale sellers against foreclosure but not until 2018. Today, the basic way to stop a foreclosure during a short sale is to receive the approval letter. Although most banks are certainly free to postpone the trustee auction, there are rules and restrictions, and having an offer on the table is no guarantee of a postponement.

I’m seeing new seediness creep into the foreclosure market, stuff that I haven’t seen for about 10 years is now popping up, and it’s across the board. Bank of America has mostly shutdown its short sale operations and sold off its bad debt. It’s rare to work on a Bank of America short sale these days. If it starts out as a Bank of America short sale, typically it doesn’t end that way as the bank scurries to drop at least the servicing of its underwater loans, if not to sell the mortgage outright.

FHA short sales fall under HUD (Housing and Urban Development), and I’ve recently watched HUD sell the loan to a third-party investment company that handles conventional financing, right in the middle of the short sale, and after it issued the Approval to Participate. I guess it forgot the Approval to Puke-atate. The investment company sent a so-called appraiser to the seller’s home to determine whether it would make more money to evict the seller through a foreclosure action. The guy was part of an investment group that buys homes in bulk through lenders and on the courthouse steps as Sacramento foreclosures.

It should be criminal that banks can own mortgage insurance companies that slap on its policies to insure worthless paper on underwater homes. Doesn’t that boggle your mind? There is a market for bad paper, and the banks profit from it, even after the mortgage insurer rejects the short sale and opts for foreclosure, stripping a homeowner of the option to short sale and without the owner’s permission to allow mortgage insurance. In some instances, owners were guaranteed upfront that an 80 / 20 combo loan meant no mortgage insurance, and once hard times hit, the bank attaches its own MI policy. What? How is that not fraudulent? Why doesn’t Kamala Harris investigate this sort of scam?

Even our own quasi-government entity Fannie Mae is not immune. It routinely pads the appraisals to demand more money than a Fannie Mae short sale would provide — since a short sale generally involves buyer financing and buyer financing is based on a valid appraisal. Foreclosures are profitable for Fannie Mae and for institutional banks as well. They get paid to do foreclosures and there are sometimes so many monetary incentives for a foreclosure that it’s the more attractive alternative.

You may hear a lot of lip service about loan modifications and short sales, but bottom line, even our own government is telling us there are more financial rewards in foreclosures. That’s like telling an expectant mother she can’t use a public restroom and needs to go crap in a ditch.