The Foreclosure Mess- opportunities for all and a time for some new thinking

The news lately has been full of stories about how many mortgage lenders were playing fast and loose with the rules, committing perjury in the interest of expediency and profits, to push through foreclosures. This creates new risks for those who consider buying foreclosed properties. My point in this article is that while close attention needs to be paid to this, people who have the right counsel and an appetite for calculated risk may do quite well. And on the other side, for lenders and everyone else it is time for some innovative approaches involving reasonable business decision-making instead of the limited and failed foreclosure process

The New York Times reporting on this has been excellent
See for example the story of the poor woman whose case and the actions of her courageous volunteer lawyer started the furor when he fought GMAC who was trying to foreclose on her home:  http://www.nytimes.com/2010/10/15/business/15maine.html

On the risks created by lenders misbehavior, see "Avoid Foreclosure Market Until the Dust Settles" (NY Times).

So what does it all mean?
If you are a potential buyer of a foreclosed or distressed sale property, it's "buyer be careful". I would not go into one of these sales without an experienced attorney who knows the foreclosure process and the title issues, or an experienced broker or some other source who knows the market. I would demand a "Certificate of Regularity" or spend the money up front to do an examination of the court records and the title. If the deal doesn't pan out, consider it money well spent as it saves you from worse troubles. (Check the procedures in your state and get advice of local counsel)

If you are the one whose property is being foreclosed, it is time to evaluate all the options and alternatives with independent experienced advisers, who are professionals in their field and are not offering quick or easy solutions.

Time for Lenders to Think Outside the Box
If anything, the current brouhaha puts a lot of pressure on lenders to do what they should have been doing all along, namely to consider options besides foreclosure. In New Jersey, it is taking up to 20 months just to get to a sheriff's sale, with a lot of stumbles and delays along the way. If we look at the parties' interests, in some cases, there are better choices for everyone than foreclosure.

First, why not help the borrowers sell the property themselves?  If lenders made short sales  quick and easy to arrange, without a lot of bureaucratic red tape and reasonable and fair incentives to owners, brokers and attorneys. In even the recent past, those trying to do short sales faced illprepared and overworked lender personnel with little discretion to make business decisions, and lots of time and effort needed to so something that made good sense. Whether that has changed or will change is anyone's guess.

Ironically, a bankruptcy is a way to help this process, where there are multiple mortgages and liens that need to be cleared to deliver good title. Chapter 13 provides tools that may make it easier for cooperating lenders and borrowers to get a sale through. More on that in a later post or article.

Fair and open leaseback arrangements are another option that lenders should support. I have heard that lenders who have gotten foreclosed properties back are not putting them on the market. Indeed, there have been credible reports that there is a huge "shadow inventory" of such properties waiting to come on the market. Logically, flooding the market with such properties only depresses the market more. It makes sense for a lender to consider renting rather than selling in this market. At the same time, the borrower needs a place to live. If the borrower can afford a reasonable rent, why not lease the property they used to own? Why not even include a simple, fair and realistic purchase option for the future?

The answer may be that the lender does not want to have to evict the tenant later to sell the property. IMHO this is part of the business decision that has to be made, but the benefit may outweigh the risk. And an agreement with the borrower-now-tenant for financial incentives to move out if and when the time comes, ie "cash for keys" makes sense.

All these are innovative and out-of-the-playbook solutions. But in these times, all the parties to the foreclosure mess have to start thinking outside the box. The "bankers playbook" that I suspect lenders and the trustees who hold securitized portfolios of mortgages have imposed on themselves has to change. If this happens, we will all be the better for it.