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Finding forgiveness during housing crisis

Banks are offering loan modifications and short sales to those who qualify

Banks are offering loan modifications and short sales to those who qualify

April 26, 2008|By ARNOLD S. PLATOU

WASHINGTON COUNTY -- Lewis "Lew" Kirby was fast running out of time to pay the mortgage on his home near Hagerstown - when the lender agreed to forgive nearly $50,000 of his loan.

Angela, 34, a Hagerstown woman who doesn't want her last name used, was about at wit's end, too - when her lender agreed to forgive $60,000 of her debt.

"Definitely, believe me, it was an answer to prayer," Angela said.

Kirby and Angela are among a small, but growing number of people cashing in on a silver lining in the dark clouds of the housing crisis blackening the skies over Main Street America.

In essence, they are benefiting from the costly situation lenders are in as more of their assets are becoming the deeds to foreclosure properties that are expensive to maintain and hard to sell.

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Foreclosure is "not good for the homeowner, and it's not good for the bank," said Alison Tavik, spokesperson for the Maryland Bankers Association. "Banks are not property owners. That's not what they're in the business of doing.

"... On average, I believe, it's like a $68,000 loss to the bank" just in taking over a property, Tavik said. "All the attorney side of it, the loss of interest on the loan, the amount of time that the bank has to hold the property on the balance sheet, but it's not an earning asset, the maintaining of the property. That's just not the business they're in."

This is not for everyone

So increasingly, according to local Realtors and titling agents turning their businesses to take advantage of the situation, lenders are downsizing their mortgage departments and opening what are being given names such as Loss Mitigation Department or Home Retention Team.

In effect, they are partial-loan forgiveness departments.

Don't jump out of your chair yet - this is not for everyone.

Lenders are being very careful in judging who qualifies, looking at such factors as personal hardship in view of a debtor's ability to pay and whether or not the home's resale value is far below the amount of the mortgage.

Doing them "has to make sense to the bank ... of what they feel is an acceptable loss for them," Tavik said.

The deals are basically of two types - loan modifications and short sales.

Loan modifications "would exist where a client maybe had an adjustable-rate mortgage and it would be ready to adjust substantially, from maybe one of the glorified teaser rates they came in at to, say, 4 points higher than that," said Tina Nash, owner of Nash Homes For You Real Estate in Hagerstown.

"If you call the bank, either yourself or have someone do it on your behalf, the bank will negotiate" if they are persuaded the circumstances are right, Nash said. "They will say, 'OK, look, we're not going to change your interest rate,' or they will change it to something you can afford."

Then, there's the short sale, when a lender agrees to let someone buy your house for less than you owe, and to forgive you for the rest of the debt.

Anna Couffer of Tri-State Signature Settlements in Hagerstown said short sales are a "pre-foreclosure" action. She said the debtor must prove a hardship - death in the family, loss of a job or something else that cripples his or her ability to pay the mortgage.

"Some lenders require you to be in default on your mortgage. Some don't, if the lender knows your house has been on the market for a year, and prices keep dropping and dropping," Couffer said.

"And the owners know they can't put it on the market to sell it to pay off the mortgage. That's when they need to contact the lender to say, 'Hey, I'm not behind on my mortgage, but I've got this trouble, so if I can't sell it, I am going to be in trouble.'"

The actual number of local homeowners resorting to short sales to avoid foreclosure isn't known.

But it seems clear such deals still are a very small segment of the real estate market in the county when compared to the 1,398 properties listed "for sale" here by Metropolitan Regional Information Systems Inc.

MRIS records show that in the past year, there have been at least 66 local properties where foreclosure or short sale was involved, said Joan McLernon, president-elect of the Pen-Mar Regional Association of Realtors.

There could have been more, but those are the only ones with the words "foreclosure" or "short sale" in their descriptions, she said.

Of those 66, McLernon said, seven have settled - including one in the last 30 days - and 14 were under contract - some "with a kickout, which would most likely be with a house to sell" before the deal could go through. The remaining 45 apparently are still on the market, she said.

The number is small because the idea of short sales, while not new, didn't edge into the mainstream until recently.

"Many, many (real estate) agents had never even heard of one," McLernon said.

In addition, lenders are only slowly embracing short sales, some Realtors said.

When Nash began specializing in short sales two years ago, lenders were coy, she said.

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