November 27, 2008

By: Stephen J. Nash

Nash & Lodge, PLLP

nash@nashandlodge.com

    The Home for America program was designed to save 400,000 people from foreclosure kicked off in October. This month a number of major lenders announced their own programs to help borrowers modify their loans. Freddy Mac and Fannie Mae have announced a temporary moratorium on foreclosures. Does this mean that real estate professionals no longer have to deal with foreclosure issues? Should the homeowner go for a modification or a short sale?

      I believe it would be a mistake for anyone to ignore foreclosures under to belief that they are going away anytime soon. Don't get me wrong, one of these or one of the many new initiatives that are sure to follow may have a significant impact on foreclosures. Unfortunately, the track record of the multitude of initiatives that have previously been announced has not been extremely favorable.

      In the first month of the Home for America program only 42 applications were submitted nationally! To date, I'm not aware of one lender who has agreed to participate in this program.

      In November a number of lenders announced that they initiated new programs to help troubled borrowers that would take effect beginning December 15^th. One of those lenders was Citibank who shortly thereafter was on the governments doorstep seeking another bailout. Will they really be able to concentrate on saving their borrowers while they are fighting for their own survival? Maybe.

      How does this effect real estate professionals? Whether any of these or future initiatives have any impact on foreclosures remains to be seen but every time a new initiatives is announced it creates confusion in the market for consumers and lenders alike. The consumer hears that the lender wants to work with them to save their home, which they desperately want. Unfortunately, the lenders are never prepared to actually implement the program that they announce so the consumer only runs to into frustration and confusion – can they save there house or not? Do they try to sell their house or wait to see if their lender will ever work with them?

     In the mean time, the homeowner who attempts to sell their home runs into a road block because the lender stalls in making any decision with respect to a short sale because everything is up in the air for them – are they going to modify mortgages, suspend foreclosures or simply go back to what they had been doing before the announcement?

     The confusion only grows when a new initiative is announced before the last one is even implemented. Does that mean the last initiative is gone? Is there going to be a new initiative that will take the place of the new initiative?

     While real estate professionals may have grown cynical after seeing initiative after initiative go no where, a homeowner in trouble who is in a desperate situation can't afford to look at each initiative so cynically. They will cling to the hope that this initiative is the one that will save them.

     So what does the real estate professional do when faced with the confused homeowner? First, define what your role is and don't exceed it. Second, read everything you can about each initiative to educate yourself but don't assume everything you read or are told is correct. Third, don't make ultimate decisions for the homeowner.

     A homeowner wants you to have all the answers and for you to resolve all of their problems. Unfortunately, these situations are complicated and have great consequences. There are no easy answers or solutions. What makes it even worse is that everything keeps changing. As soon as you think you have a handle on something, it changes yet again.

     First, you must define your relationship with your client. Make clear with your client from the beginning what you can and cannot do. In many disputes we find that the listing agreement did not fully describe what the agent was being hired to do nor was it discussed. Often the homeowner thinks the agent is responsible for something that the agent has no intention and/or knowledge and experience to carry out. Don't assume that your client understands what you can or cannot do for them. For those areas that you cannot provide a service needed by your client establish a network of other professionals that you have confidence in to use as referrals. Resist the urge to be everything for your client.

     If you don't set boundaries with your clients based upon your expertise and if you don't stay within those boundaries, you will be taking a tremendous risk. A risk that you aren't being paid for and which there is no upside. If things work out, that is just the way it was supposed to work, if it doesn't work (with 20/20 hindsight, of course), it is your fault.

     Next you must educate yourself as to all of the changes occurring in real estate. The vast majority of transactions today do not involve “traditional” transactions. Is negotiating a short sale a traditional part of a real estate transaction? Have you received training in short sale negotiation? How much knowledge do you have regarding foreclosures? If your training is based upon what you learn in the market are you learning at the expensive of your client? With a market that continually changes basing your actions on how something was done before is dangerous. What was right before might be wrong today.

     In order to be knowledgeable in this ever changing market you have to continually seek out education regarding foreclosures, short sales and the numerous modification proposals. While educating yourself make sure that you rely on reliable sources. What is their training? Their experience? In other words, what is the source of their knowledge? If their knowledge is totally based on experience and what they have heard how reliable is their knowledge in a changing market? An example of this are the individuals who first negotiated short sales. They became “experts” because they did them; however, they often did not truly understand the process. They did not realize that a short sale did not wipe out the underlying debt of the mortgage that was satisfied by the lender so as to allow the sale to proceed. As a result, we have numerous short sales that have occurred with no written documentation as to whether the lender wrote off the debt or not. If the lender later sues the borrower on a debt that the borrower thought had been forgiven, who do you think they will blame? If your defense is that you did not know that you needed to negotiate the satisfaction of the underlying debt as well as the release of the mortgage, you will lose.

      Finally, you must not make ultimate decisions for the homeowner. There is no upside. If it turns out okay, you do not get paid more and there is not even a pat on the back because the homeowner expected it to turn out. On the other hand, if the transaction does not turn out, you will be blamed. Give the homeowner the facts, provide them with advice relating to your expertise – marketing the home – provide the homeowner with references for professionals that can help the homeowner on issues that you are not an expert and then let the homeowner make their decision.

     In theory it is easy to apply the above rules but in practice it is much more difficult. For instance, when the desperate homeowner asks you whether they should put their home on the market or try to get a loan modification, what do you say? If you say, “Put it on the market because the modifications never happen” but it turns out that this time the lenders really mean it, what is the homeowner going to think if they now believe they needlessly lost their home? If you say, “Try to get a loan modification” but then it turns out that the homeowner wastes 3 months chasing a loan modification while the market continues to drop and runs out of time to get a short sale approved, what is the homeowner going to think? Since you cannot predict what is going to happen, you have no upside in trying and a big downside if you are wrong.

     Stick to informing the clients about facts, stay away from predictions and don't make the ultimate decisions for them. If the your client needs more information refer them to the appropriate professional which may be a CPA, an attorney or a non-profit housing agency depending on the answers the client is looking for.

     If you or your clients need the advise of an experienced and knowledgeable real estate attorney, do not hesitate to contact Nash & Lodge. Our attorneys have an average of 20 years of real estate experience! Like you, we only provide legal advise but if you are looking for tax, appraisal or title issues we can provide you with trusted referral.