Dual Tracking Short Sales
Created: 12/22/2011
December 2011 - In late November, CA Attorney General Kamala Harris attended a roundtable discussion of the housing market crisis held in San Francisco, during which she heard hours of testimony given by distressed CA homeowners. According to the Center for Responsible Lending (CRL), we may be no more than half way through the foreclosure crisis, in terms of housing units yet to go through the process.
AG Harris pointed out a particularly disturbing aspect of the mortgage crisis during her comments on the roundtable, known as Dual Tracking. This is the scenario where a mortgage servicer, while processing a short sale or a loan modification for a distressed borrower, is also moving the property through the foreclosure process. Imagine a borrower who is being told that their mortgage modification is being approved and is ready to close, receiving a Notice of Trustee’s Sale and having their home sold out from under them.
This is common across the country, and especially in CA and other states that do not require judicial oversight of foreclosures. Harris called this one of her “most urgent” priorities and has been working with state and national lawmakers to solve the problem, stating that she may take the matter up with the banks directly. Previous legislation to address this serious problem has passed the Assembly and ground to a halt in the Senate. In the absence of any legislative action, all of this talk has no more than the power of a suggestion, and if past actions by the big banks are any guide, the response will be as empty as the “suggestions”.
How and why does the Dual Tracking happen in the first place, when most agree that both the investor in the mortgage loan and the borrower/homeowner would be better served financially by completing a loan modification or a short sale, rather than a foreclosure? It’s not that complicated, once we understand the situation.
The investor is often an individual, a small investment firm, or the finance/treasury/pension department of a government entity. This is the party that holds the note. The loan SERVICER, is usually one of the major banks, and they do not own the note, because they sold all these toxic notes to investors when the mortgages were funded. They have generally retained the SERVICING contract for the pooled mortgages which is a lucrative part of their business. These servicing contracts compensate the banks for certain acts and duties related to collecting the payments, disbursing them to the investor and any other payees under the terms of the contract, and also for managing any processes related to loans that go into default, such as loan mods, short sales and foreclosures.
Here is where it gets simple. The foreclosure process is the highest-paying activity that the servicer can conduct in the execution of the servicing contract. It pays much better than the loan mod or the short sale activities. So, from a strictly business perspective, it benefits the banks to favor foreclosure over alternatives. Still taking the simple view, the investors do not have a powerful, well-funded lobby in Sacramento and DC looking out for their interests. Actually it is the government that is supposed to do this.
The major (too big to fail) banks with the mortgage servicing contracts have what is probably the most powerful lobby of any special interest group. This is the same lobby that got them the taxpayer-funded bailouts in 2008 and has been covering their backsides ever since. It looks from here as if the banking lobby will prevail over the investor lobby (our elected officials) once again, unless some people get some backbone in the halls of government.
Paul Sieving is a Realtor® with Good & Company Realty, a former Director and MLS Chair of NCAOR, was Board Chair of the Grass Valley Chamber of Commerce in 2004, and has served our community as a real estate professional for 12 years. Comments, questions and thoughts are welcome at Paul@PaulSieving.com or (530) 274-0906.
