In Order To Deal With Looming Foreclosure, You Must Get Out of Denial

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A while ago, I got a call from a hard money lender, asking what I could to to "rescue" one of his clients by refinancing. He was being about as altruistic as a drowning man. What he really wanted was for me to get someone else (i.e. another lender) to voluntarily hold the bag on his money losing loan.

Unfortunately, this guy already had a Notice of Default filed on that loan. When it comes to new loans, subprime lenders would formerly sign off on 30, 60, and 90 day lates - but drop a notice of default on the property and even during the Era of Make Believe Loans the worst subprime lenders wouldn't touch it any more. Had he just held off on the Notice of Default - or even called me earlier, I could have taken care of it. Nonetheless, I have a method of dealing with even Notices of Default - "hard money" lenders. Unfortunately, the one undeniable requirement for "rescuing" someone in this situation currently is a Loan to Value Ratio below 70 percent. The current lender had a loan amount about $350,000, and represented it to me as a $550,000 plus property. Therefore, initial indications were that it could be worked with, and we set up a meeting with the owners.

At that meeting, I found out the address and characteristics of that property. That wasn't a $500,000 property. In fact, it might have been worth $370,000, absolute maximum, in the market at that time. Three words about the likelihood of any new loan: Absolutely none whatsoever. A paper, Alt A and A minus are certainly not going to touch that loan - even if the Default were to suddenly vanish, the effects on the credit score would have driven the borrowers below their minimums. Even with the ability to document enough income, subprime isn't going to touch a defaulting borrower at 95 percent loan to value ratio in the current market - and that's without rolling one penny of costs or penalty into the new loan. That leaves only other hard money lenders, and if there's one great constant about hard money, it's that they absolutely will not go over 75% loan to value ratio, ever. In fact, their limits are usually 65 to 70.

These folks could not refinance with any lender out there. They can't afford their mortgage - no way. Even had they protested to the contrary (they didn't), they wouldn't have been in foreclosure if they could have come up with the money. Unless they've got a wealthy relative who will save them, they're going to lose the property, and if they had that kind of benefactor, why hasn't he appeared before now? The only mystery about the entire situation is the precise mechanism whereby they're going to lose the property, and precisely how badly they will be hurt.

Now from some of the code phrases that the hard money lender they're already with dropped, I am pretty sure he knows this - he's just hoping for another sucker to volunteer to take his loss by refinancing his loan out. Well, I'm not going to knowingly commit that sort of blunder. Nobody sane is. Do you think even the stupidest brokers haven't figured out they're going to be liable for bad loans by now?

Furthermore, San Diego's recovery would be complete if not for HVCC and other disastrous regulation imposed from without (I'm looking at you, Barney Frank). There are no longer nearly as many foreclosures and defaults for sale and a good portion of what's out there are "regular" sales.

But when I asked him about waiting, he represented that "I need my money now." Well, that's fine and that is his right. However, if he needs it now, he's not going to get all of it. What he was really trying to do of course, is build a path of least resistance where I hose myself, the new lender, and the owner so that he can walk away with every penny that's technically "his." Like any sane loan officer, I'm going to decline to do that - the money I might make no in no way compensates for what's going to happen later. Questions of ethics and whether the loan should have been made in the first place aside, he willingly undertook that risk when he made that loan, and he was richly rewarded for doing so by an interest rate well into double digits. Even the stock market doesn't return that kind of money over time, and it definitely doesn't do so without risk. But evidently nobody covered that in "Loan sharking 101."

So when I did the logical thing and started talking to the owners about minimizing damage, he freaked out. He said I'd lured him there "under false pretenses," and that was before I had said one word about short sales. Nothing could be further from the truth; he was the one who led me to believe the situation was other than it was, and everything I had said was explicitly predicated upon the representations he made to me over the phone. But he saw his carefully constructed scenario collapsing in front of his eyes, and he didn't want to accept that collapse. Unfortunately, the consumers involved were Spanish speakers, and he spoke much better Spanish than I do. I've written about sharks marketing to a given ethnic group in the past, and this appears to be a prime example. He hustled them out of the room, no doubt intending to look for some other sucker. Unfortunately for him but fortunately for everyone else, the loan officers who were willing to do that in my area have long since been forced out of business, and even the ones who may have gotten away with it in the past are not eager to take new chances in this environment, and I think that's a very good thing.

For several years, the real estate and loan market was not much short of an ATM feeding cash out as quickly as it could. That has now changed. Instead of way too loose, loan standards have become way too tight as investors in full panic mode abandon all but the most perfect of borrowers. Many people who became used to the way the market was working in the last few years still don't understand that it has changed, why it has changed, and why it's not going back to the way things were the last several years. They're still in denial that, having bought all the rope necessary to hang themselves, they're now struggling with that rope around their necks some distance above the ground. It doesn't much matter if that distance is half an inch or several miles - they're in just as much trouble in either case.

The sooner you get out of denial and accept the damage that has already been done, the sooner you will be able to limit future damage - and the damage does keep getting worse, There are alternatives that don't hurt as bad as foreclosure. Furthermore, there are those out there who will claim they can perform miracles, but they are almost always setting you up for a scam.

Here's the bottom line: If you don't make enough money to make your payments and pay your real cost of interest, the best thing that can be said for you is that you're circling the drain. But if you'll make up your mind to get it over with, and deal with the situation based upon the facts, you'll come out with less long term damage. Not to mention more life still in front of you than would be the case otherwise. There really aren't any good reasons not to get past an unsustainable situation as fast as you can.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on April 29, 2014 7:00 AM.

"Should I Refinance?" - Consider Overall Cost of Money, Not Payment was the previous entry in this blog.

"All Mortgage Money Comes From The Same Place" is the next entry in this blog.

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