Why foreclosure reform might be a good thing

This property is 10633 Chiquita in the Universal City area of Toluca Lake.  I sold this to Carlos and Elaine back in 2007 for $867k.  It had been extensively remodeled and was gorgeous.  Unfortunately, Carlos and Elaine fell on hard times (didn't everybody?) and attempted to modify their loan last year.  RCS, the servicer, gave them the run-around.  At the beginning of this year, just as the owners began to consider the short sale process, the lien holders foreclosed on the owners.

And then turned around and sold it to an investor for $440,000, stating that it was a 2+1 instead of a 3+3.

But somehow, before that, RCS couldn't be bothered to reduce the interest rate for Carlos and Elaine even a little bit, let alone write down principal.  Or give them time to short sale it.

Why not? If the lien holders were willing to take such a big hit, for way under market value, why couldn't they modify the original loan? Your guess is as good as mine.

Something is really, really wrong here.

By the way, the house is back on the market now in the mid-$500's and the listing agent (and I) think it will go for the mid-$600's.  That's a tidy little profit for the current owner.

Gretchen Morgenson and Michael Hiltzik explain the foreclosure settlement

I was so excited.  I thought the almost-nationwide foreclosure settlement between the five big banks and the states would provide relief for underwater homeowners.  I thought it might be an end to short sales as we've come to know and love them.  But no. 

New York Times business columnist Gretchen Morgenson bursts the bubble here. (BTW, Gretchen is really readable -- she makes even the most arcane, convoluted financial stuff very easy to understand. Really.)  Here are a few quotes:

"There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file."

And "For most homeowners, it will barely move the needle. Forgiving $17 billion in principal “is a drop in the ocean ... given that close to 11 million borrowers are underwater on their loans to the tune of $700 billion in total.”

Michael Hitlzik from the Los Angeles Times is my other favorite financial columnist (along with David Lazarus) and his column from today's LAT is here. Some quotes:

"I believe the technical term for all this is "big whoop." The provisions mostly require mortgage lenders and servicers to comply with what I would have thought was already the law, which prohibits, you know, criminal fraud. The rest is pretty much out of the best-practices manual of customer service, which benefits both the customer and the institution."

And "In the words of business consultant...Yves Smith, "We've now set a price for forgeries and fabricating documents. It's $2,000 per loan." She observes, quite properly, that the payoff is a minuscule fraction of the costs these practices have imposed on borrowers, the court system and the economy."

Whew. So much for thinking that things were going to change -- silly me.  Thanks, Gretchen and Michael.