Client was accidentally foreclosed on and now gets a 40 year loan. Legit?

Question

Keep in mind that this is second hand, so some of the details might be off, but here's my understanding of the situation. One of my client's loans was sold to another provider, who didn't do a good job reaching out to her, so she never knew that her provider changed and she continued to pay the original provider. After about 6 months, she started getting calls from all the investors who try to buy foreclosures, so she reached out and realized that her loan had been sold. Once she spoke to the new company, they mentioned that her loan had been in default and because of that they offered her an option to reset the loan into a 40-year at the same rate (3.4%) which would cut her payment by around $500 a month. She's 67, so she's unlikely to reach the end of this loan, but she also had 24 years left on her original, so she's unlikely to finish that one either. Is this legitimate? If so, shouldn't all investors do this?

Account Closed · Answer

Mmmm, some things are a bit off but the basic idea might be correct. Your comment: "One of my client's loans was sold to another provider" implies there was more than one loan. So, depending on the position of the (1st or 2nd or even 3rd loan) various things happen. 

Whomever she was making the payments to has the money in abeyance or has returned the checks. So, she would have received the checks back or gotten notice from the new servicer of the change or when the payments were not passed onto the new servicer, the new servicer would have either sold the loan back to the original servicer or started a foreclosure.

In a foreclosure, late statements, demand letters and notices of default are sent to the borrower over a matter of months. This doesn't happen over night and the lender would have made multiple attempts to call and mail the borrower. There really isn’t any way for someone to avoid knowing they haven’t been getting the payments to the bank. That part is not credible.

Banks will for sure make certain you know. Oftentimes they will send someone to the property to leave a note and to guarantee it isn’t vacant.

What is missing is probably the fact that the borrower actually wasn't making the payments.

Rather than foreclose, which on average costs the lender $55,000 the lender opted to gain an extra 10 years of interest and rewrite the loan at 40 years. Happens all the time. Banks don't want properties, but they do want payments.

$250,000 * 3.5% for 30 years is a total of $440.120 in payments$250,000 * 3.5% for 40 years is a total of $512.869 in paymentsSo, in this scenario the bank makes an extra $72,749 and doesn't eat $55,000 in foreclosure costs. And if the borrower doesn't make payments again sometime in the future, they can still foreclose and they pick up extra payments along the way.

Chris Seveney · Answer

@Jacob Pereira

When a loan is sold there are multiple letters that go out, so if the person lives there they really should open their mail.

Loans get sold all the time.

Yes there is a 40 year program through FHA where they are modifying loans to kick the can down the road to lower the amount of foreclosures on the market (which may sink home prices down the line when people walk away since they have no equity).

So what happened is probable.

Doug Smith · Answer

In addition to our real estate investment and lending companies, we own a private equity firm that purchase non-performing mortgage loans. I've handled special assets for over 30 years and I speak at national conferences, so I do have a background in this. Although you can't go to the mortgage broker and get a conventional 40-year mortgage, servicers do, indeed, have 40-year amortizations to modify a loan to avoid foreclosure. The CFPB wants servicers doing this. Her 67 year old age doesn't have relevance as you can't discriminate due to age. This is, indeed, likely legit.

Chris Mason · Answer

The loan mod into a 40 year term is plausible.

The loan servicers (old and new) "not doing a good job of reaching out to her" is not plausible or likely.

Investors shouldn't do this because that was far from a guaranteed outcome. There was a flowchart that the new loan servicer took her down, a series of both documents they collected and questions they asked, and she answered in such a way that she arrived at the end of that flowchart at a 40 year mortgage term. Her credit is probably trashed. And she likely has no idea how she answered the various questions, nor what the criteria were (was it based on her being moderate income? And was that moderate income relative to her census tract, her county, or the state? Etc etc). So there's no way to consistently reproduce this outcome.

The fallout of 2008 produced a bunch of "loan mod gurus." Some of them lost their real estate license, some are on the Freddie Mac Exclusionary list (meaning FHA/VA/Fannie/Freddie will not do ANY loan, ever, on any transaction that these people are involved in [even if they're involvement isn't as a buyer/borrower] -- basically the 'no fly list' for mortgages), and some are in prison. What the loan mod gurus didn't produce was consistently positive outcome for their clients.

Client was accidentally foreclosed on and now gets a 40 year loan. Legit?

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