Chicago Tribune real estate columnist Mary Umberger recently asked me to offer advice to homeowners who are behind on their mortgage payments. From this morning’s Chicago Tribune:

Making the most of workout
Mary Umberger

April 13, 2008

Options exist for homeowners behind on their mortgage payments—if they act quickly. Lisle attorney Steven Bashaw and Michigan real estate broker Ralph Roberts offer these:

• A forbearance agreement may help borrowers with short-term financial problems, Roberts said. It’s a payment plan with a set pay-back period, and the bank will want proof you can live up to it. “If you owe $3,000 in back payments, for example, the bank may allow you to pay an extra $250 per month for 12 months,” he said.
• Reinstatement entails paying all past-due payments, costs and fees to bring the account current. This may be a good short-term solution, Roberts said, but homeowners have to make hard decisions about whether they can keep paying the loan in the long haul.
• Mortgage modification means working out a new loan, with many possible variations. The bank may agree to roll the amount owed in missed payments, penalties and interest into the total loan amount, for example, Roberts said. Or a modification might lower the interest rate or change the loan’s term.
• Sell the house in a timely manner, pay off the loan and fees, and end the problem, Roberts and Bashaw said.
• A short sale occurs when a lender agrees to take a loss by selling the house for less than the amount owed. “I don’t encounter those as much as you’d think,” Bashaw said. “They’re not the panacea that speculators and investors and real estate agents want you to think they are.”
• Bankruptcy. “It can give you more time to restructure your debt,” Roberts said. “Bankruptcy takes you off the market, the collection proceedings can’t keep going. The clock just stops running.” But it’s extreme, and a lender might get court approval to proceed with the foreclosure anyway, Roberts said. Plus, it poisons your credit-worthiness.
• Redemption. In Illinois, a foreclosed borrower has a certain amount of time after the house is sold at auction to redeem it by reimbursing the purchaser for the sale price and other costs.
• Rescue plans can come from all manner of folks. They are too varied to describe here—except to say that homeowners must be wary of scams.

Bottom line: Don’t sign a quit-claim deed to someone who says this will “fix your problem,” Roberts says. It may be a ruse to steal the house. Check with a lawyer before you sign.

Below is an article published earlier today by Inman News. The author–noted real estate columnist Ilyce Glink–interviewed me for the article, which I thought I would share here…

Look before you leap into foreclosures — Avoid problems with ‘Dummies’ author’s 12-item checklist

BY Ilyce Glink, Wednesday, March 12, 2008
Inman News

As if Detroit, and the entire state of Michigan, hasn’t suffered enough.

Last year, Detroit led the United States in foreclosures, with close to 5 percent of its households entering some stage of foreclosure, according to California-based RealtyTrac, an online marketplace for foreclosure listings.

That number was nearly five times the national average, and almost double the number of foreclosures the city experienced in 2006.

But every cloud has a silver lining. Just ask Ralph Roberts, a top real estate agent in Detroit who says he has personally bought and sold more than 2,000 foreclosures during his career.

“This could be a great time to buy a home — if you have the resources,” he said.

Roberts, who is the author of “Foreclosure Investing For Dummies” and “Flipping Houses For Dummies,” said in a recent interview that he believes more than 6 million families are in distress nationwide.

“Maybe 1 or 2 million are behind in their mortgages and more have received their foreclosure notice,” he said. “But 2 million families will lose their home this year.”

Roberts says that now is the time to pick up properties at fire-sale prices.

“Properties could double in value over the next 10 years. But you have to be willing to go in, buy them, and hang on for the longer term,” he advises.

With foreclosure investing, he says, you get what you pay for. His book on foreclosure investing isn’t of the “get rich quick with no work and zero down in cash” variety.

Instead, he values doing as much homework ahead of time. To learn how to read complicated real estate and tax records, he suggests doing an exhaustive search on your own personal residence. Once you become familiar with how the information you know to be true is laid out in tax records, documents and deeds, you can begin to research homes in distress.

In addition to doing your due diligence on a particular home, Roberts suggests you create a file that contains:

• a copy of the foreclosure notice or notice of default;
• title commitment and a 24-month history in the chain of title or the last two recorded documents;
• a copy of the deed with the current homeowners’ names;
• the last recorded first mortgage, so you know how much the current homeowners owe (some of this may be available online);
• copies or documentation of all liens against the property, including property tax liens;
• a map showing the location of the property;
• your exterior home inspection (with photos and videos), plus neighborhood photos;
• city worksheet on the property showing all repairs, inspections reports and other information;
• local multiple listing service (MLS) data showing how much comparable homes are selling for in the area;
• copy of the tax bills and notes on whether they are paid up or not;
• notes from meetings with or calls to neighbors, if you met with them while doing your research;
• and, a copy of the SEV (standard equalized value) of the property, on which property taxes are based.

“Most people, when looking for a foreclosure, think ‘No’; they don’t think ‘Know,’ ” Roberts says. “To successfully buy a foreclosure, you have to build a Rolodex, get on the Web, talk to brokers, and go do your research.”

Roberts said that the Internet has been a boon for foreclosure investors.

“Go to the county’s Web site and see what kind of information they have listed. Sign up for the local legal newspaper. It costs about $1 per week,” he explains, adding that he subscribes to a number of foreclosure Web sites, some of them paid sites. “You get what you pay for.”

What I like best about Roberts and his books is that he appears to care a lot about consumers. He cautions foreclosure investors to think about homeowners and their redemption rights. He warns against being dishonest (foreclosure-rescue fraud schemes have grown exponentially, according to the latest figures from the Federal Trade Commission and the FBI).

And, he has put a lot of time and money into fighting mortgage fraud (see www.flippingfrenzy.com). Last year he published “Protect Yourself from Real Estate and Mortgage Fraud,” written with attorney Rachel Dollar.

If you live in or around the Phoenix, Arizona, area and are interested in learning more about safely investing in foreclosures or about how to defend against foreclosure, consider stopping by the Phoenix Convention Center this Saturday where Lois Maljak and I will be presenting the following workshops:

TOPIC: Foreclosure Self-Defense: The Short Sale and Other Proven Strategies for Surviving a Homeownership Crisis
When: Saturday, February 23, 2008
What Time: 11:00 a.m. - 11:45 a.m.
Where: Phoenix Convention Center

When most people fall behind on their mortgage payments or receive a notice of default or foreclosure, they panic and waste precious time trying to hide the problem. They mistakenly believe they have only two options – pay up or face eviction. Lois Maljak and I, co-authors of Foreclosure Self-Defense For Dummies, know better. In this informative workshop, we reveal over a dozen strategies for keeping your home or selling it and cashing out the equity, including:

• Negotiate a short sale by convincing the lender to accept less than the balance due on your mortgage.
• Ask a third-party to negotiate the short sale on your behalf – if the bank refuses to work with you.
• File for bankruptcy…or at least let the bank know you are considering that option so you gain leverage in the negotiating process.
• Negotiate a mortgage modification, essentially rewriting the mortgage with a more affordable interest rate and terms.
• Sell your home, so you don’t lose your home and your equity.

In this workshop, you discover the truth about foreclosures that the banks don’t want you to know–they need to resolve the problem as much as you do, and sometimes more than you do. Everything is negotiable, including how much you owe them!

TOPIC: Safely Investing in Foreclosures
When: Saturday, February 23, 2008
What Time: 2:00 p.m. - 2:45 p.m.
Where: Phoenix Convention Center

Safe foreclosure investing is like safe flying–the only completely safe way to invest in real estate is to not do it. However, you can employ several strategies to make investing in foreclosures safe. In this intense 45-minute workshop, I reveal field-tested strategies for maximizing your profit potential and minimizing your risks, including the following:

• Adjusting your profit estimates for different markets
• Bidding on first mortgages or at least buying the first if you buy the second
• Underestimating profits while overestimating expenses
• Thoroughly researching a property to avoid surprises
• Starting with a single property and working your way up
• Setting a bid limit before you even think of bidding

In this workshop, I guide you safely around the most common and costly pitfalls, so you avoid the mistakes that often eliminate the less careful investors.

For more information, visit the 2008 Arizona Real Estate and Mortgage Expo website.

I was recently given the opportunity to talk with Alex Markels from U.S. News & World Report about some of the topics covered in Foreclosure Investing For Dummies. Alex asked some great questions, which I’m pleased to share here (for anyone who may not have a subscription to U.S. News & World Report).

By Alex Markels — U.S. News & World Report
February 13, 2008

Ralph Roberts is a Realtor who has written many books about the real estate market and flipping homes, such as Foreclosure Investing For Dummies. U.S. News talked with Roberts about some of the first things a potential investor should know before getting into the foreclosure market. Excerpts:

Investors are understandably skittish about getting into the real estate market. Why do you think now is the time?

If you can afford to buy a piece of real estate, there’s never been a better time in my 30 years of business than now. We have good prices, and unbelievably great interest rates. For a ma and pa investor, if you’re willing to buy a rental property, you can leverage it, and 10 years from now it will be worth double what you paid for it. All the people who have been displaced because they can’t afford to pay $2,500 a month, they surely can pay $1,500. If everybody had bought a 30-percent-cheaper house, we wouldn’t have had as many foreclosures as we have now. There are a lot of tenants out there who are displaced and were at one time living the American dream of owning a home, but they still need a nice home. People who are displaced become renters.

What about the concern that the market may only get worse before it gets better?

There’s always a boost in real estate after an election. I know all those people who are saying there’s going to be change. Well for sure there’s going to be change—George is not running. By January of 2009, you’re going to see the market turning the other direction and showing appreciation again. So between now and 2009 is a great window of opportunity to buy. The best plan is to buy it, fix it, hold it, and sell it 12 months and one day or further in the future, and you will get another benefit of getting a tax rate of long-term capital gains versus ordinary income. The long-term capital rate is only 15 percent.

How does foreclosure investing differ based on your locality?

Whatever city or county you’re going to invest, you’ve got to check what inspections they have. What do they require before you can put the house back on the market to rent it, or back on the market to sell it? You are responsible to follow those rules whether you know about them or you don’t. You must at least contact the city hall or the township hall before you make an investment.

What are some misconceptions about foreclosure investing?

Just because it’s a foreclosure does not mean it’s a good deal. Some people pay too much for a property if it’s a foreclosure because they think it’s automatically a home run. You should go to your broker and run the comps in the neighborhood. The most important thing is what’s selling right now. What’s your competition? That gives you a range. The next thing you want to do is check how many houses have sold in the past 90 days. You need to have your house priced the best for the condition that it’s in because you don’t want it to be the fourth house if only three are bought in your time frame.

Why is having a time frame so important?

Time is money. The average holding cost on a house is $100 per day. You’ve got to have a B plan. If it doesn’t sell in X amount of days, you’ve got to rent it until the market improves.

Most of the people doing foreclosure investing are not doing it as their primary source of income. How do you do it and balance the rest of your life?

First you make sure your spouse is completely on board. You want to have support from your family. You’re doing this to improve your lifestyle; you’re not doing this to take quality time away. Then you draw a circle on a map, and mark where you work at, where your wife works at, where your school is at, and put those items inside that circle. That’s your target area. If you drive 20 minutes to work one direction, and then you drive back home, and then 20 minutes the other direction to your investment property, you’re 40 minutes away from it versus if it was in your target area. Some people go too far out of their marketplace and that’s how they get into trouble.

How do you avoid taking advantage of people in this business?

Treat the people with dignity and do what’s best for them. Let’s say they tell you they have a rich uncle who could help them, but they’re just too embarrassed to tell him. Help them tell the rich uncle. By doing the right thing, it’s going to come back to you 10 times.

I am pleased to announce that I have been offered an opportunity to speak at the Association of Real Estate License Law Officials (ARELLO) Midyear Meeting, which is being held April 24-26, 2008, in Pasadena, California. If you’re unfamiliar with ARELLO and the important role this organization plays in the real estate industry, here’s some background:

ARELLO was founded in 1930 to facilitate the exchange of information and cooperation among regulators and policy makers in the area of real property. Today, the organization has grown in stature and in recognition by growing its membership, attaining financial stability, and formulating and adopting uniform policies and standards in the fields of education, administration and enforcement. The association’s membership is deeply committed to the effective administration and enforcement of the license laws and of the importance of regulation in a healthy marketplace.

As you can imagine, fraud is a topic of high interest to ARELLO members, and I have been asked to address the group on current trends in real estate and mortgage fraud, what to look for when attempting to determine if fraud is present in a transaction, and emerging trends in real estate and mortgage fraud forensics.

If you would like to learn more about ARELLO or the 2008 Midyear Meeting, visit the ARELLO website or the Midyear Meeting page today.

Nationally syndicated talk radio show host Michael Dresser was kind enough to interview me yesterday about my latest book, Mortgage Myths: 77 Secrets that Will Save you Money. Click here for the recorded version of the show, or here if you would like to learn more about the new book.

During the current mortgage meltdown, the press has turned its focus on the most obvious culprits–the irresponsible and often unethical loan officers, mortgage brokers, appraisers, Realtors, and even the borrowers. Those are the people I like to call the riggers–the people you usually think of when you picture someone taking out a loan or buying a home.

Working behind the scenes, however, are other culprits who facilitate and often encourage the riggers to commit fraud. These are the people I call the triggers. When the triggers and the riggers got together, they ignited the blaze that has engulfed the mortgage industry. The riggers spilled the gas, and the triggers dropped the match. Now homes, communities, cities, states, and the entire nation are ablaze.

Recently while talking to a senior underwriter for a major Wall Street bank, she shared with me that she had witnessed the sinister inner workings of the lending industry first hand. The underwriter’s job is to provide an unbiased assessment of the risk level of a particular loan. This particular underwriter has always taken great pride in protecting the lender/investor from approving overly risky loans and protecting the borrower from becoming saddled with debt that he or she cannot repay.

She and her colleagues did their best to identify bad loans and sound the alarms, but the bank’s managers and account executives prevented them from doing their jobs. The underwriters were expected to let the loans slide through the approval process despite the fact that many of these loans should never have be approved. The underwriters were told that they should be happy to have jobs.

Feeling the stress of being forced to act unethically, many of her colleagues resigned. This particular person felt that it was her responsibility to remain on the job and call attention to this problem from the inside, where she could witness this institutional fraud with her own eyes. Currently, I cannot disclose the identity of my source or the bank she works for.

SLC: Submit, Lock, and Close

What this senior underwriter and her colleagues have witnessed can be summed up in a single acronym: SLC (Submit, Lock, and Close). As soon as a loan application is submitted , they lock their focus on it and move it through closing. It’s like a sweat shop for the loan industry, an assembly line, no questions asked, where they approve and process as many loans as possible, so they can make money and stay in business.

As underwriters, they have called their managers’ attention to blatant signs of fraud–fraudulent income and assets, questionable transactions, and so on. The managers have told them to let it go. They call it a “business decision,” a “relationship building tool.” In fact, it’s fraud, plain and simple.

How It Works

In the good old days, lenders viewed underwriters as the good guys and gals, protecting lenders from approving bad loans. Most recently, however, brokers and account executives, driven by greed, have found ways to work directly with one another to bypass the underwriter.

Here’s how the relationship typically develops:

1. A prospective borrower visits a mortgage broker to take out a loan.
2. The loan officer (working on behalf of the broker) has the borrower complete the loan application and then collects all the documentation, packages it up, and sends it to the lender/investor for approval.
3. All files go to underwriting.
4. A senior underwriter examines the documentation and discovers a problem; for example, a fraudulent pay stub. He reports the problem to his manager. The good news is that the senior underwriter has done his job to protect the lender/investor.
5. The loan officer is informed that the loan application he has submitted has been rejected.
6. The loan officer reports the problem to the manager of the mortgage company.
7. The manager of the mortgage company contacts the account executive for the lender/investor and threatens to pull his 20 closings a month, which would negatively affect the income of the account manager.
8. The account executive approaches the manager of the underwriting department and reminds him that they both get paid on volume and that this loan needs to be approved in order to preserve future business.
9. The underwriting manager instructs the senior underwriter to approve the loan and simply document any concerns that she may have in order to protect herself. The manager justifies approving the loan as a business decision that is beyond the senior underwriter’s pay scale.

As you can see, the system in place is designed to protect the lender/investor, and it would work well if the underwriters were allowed to do their jobs. The trouble is that, in this case, greed has turned the system upside down, exposing the lender/investor to loans that are likely to have high default rates.

In the process, the mortgage broker/loan officer loses all respect for the underwriter’s decisions and calls the account executive on every file. The account executive calls the manager who rubber stamps every file, overriding the underwriters, who have no power to stop it. According to my source, “The managers would overturn every decision to deny a loan, every request for complete documents, bank statements, or pay stubs. Everything we questioned in our capacity as underwriters was overridden.”

The Hype

The underwriters were reminded daily of all the companies like theirs that were shutting down as a result of the mortgage meltdown and that their company was one of the few survivors. They were told to keep closing loans. With all of those other companies going out of business, they now had a golden opportunity to increase market share and become the lender of choice. They were told that management was aware and that they were over staffed, but because they were doing so much business, nobody would have to be laid off. They didn’t have to worry about having a job as long as they continued to close loans. “It’s a bad time to be looking for a job in this industry, so we all need to work together.”

From my perspective, this is just one of the pieces that contributed to the mortgage meltdown and why it will continue until the underwriters are allowed to do their jobs. As I have always stated, it takes more then one to hold a “fraud party.” Most people would never imagine that the lending industry functions as a good ol’ boys network, with favors being traded to the detriment of consumers, the industry, and the entire economy, but that’s exactly what’s going on, and it continues even with all the bad press swirling around.

This situation has been turned into the authorities, and FBI interviews have begun. To the credit of this lender/investor, once they were presented with the information, they acted quickly and have already released one of the offenders from employment. There is more that needs fixing, however, than simply removing a few bad apples. This case demonstrates several problems:

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• Lenders being pressured to approve more loans to feed Wall Street’s insatiable appetite for mortgage-backed securities
• Lowering the FICO score to allow more borrowers to qualify for mortgage loans
• Risky products, including adjustable-rate mortgages, being pushed on unsophisticated borrowers
• A system of checks and balances that was designed to curb irresponsible lending but that was all too easy to circumvent
• Greed, pure and simple

The REALTOR’S® many obligations to other REALTORS is awfully clear, especially when it comes to talking about one another. Take for instance Article 15 of the National Association of REALTORS’ “The Duties to REALTORS®,” which reads:

REALTORS® shall not knowingly or recklessly make false or misleading statements about competitors, their businesses, or their business practices. (Amended 1/92)

Standard of Practice 15-1

REALTORS® shall not knowingly or recklessly file false or unfounded ethics complaints. (Adopted 1/00)

Standard of Practice 15-2

The obligation to refrain from making false or misleading statements about competitors’ businesses and competitors’ business practices includes the duty to not knowingly or recklessly repeat, retransmit, or republish false or misleading statements made by others. This duty applies whether false or misleading statements are repeated in person, in writing, by technological means ( e.g., the Internet), or by any other means. (Adopted 1/07)

Why am I mentioning this now? According to CrimeLibrary.com, police have arrested a 42-year-old Miami-Dade, Florida REALTOR named Dean Isenberg for posting fake escort ads on the Internet that included the personal contact information of a rival REALTOR. According to police, the incidents began last summer, when 44-year-old Debbie Blasberg, a local Miami REALTOR and a married mother of two, reported that she was receiving hundreds of unsolicited phone calls and text messages from strangers inquiring about sex. One of the callers had confessed that he found her number in an escort ad on Craigslist.org.

Ethically speaking, what Dean Isenberg did is reprehensible in every sense of the word. In addition to the criminal charges he now faces, I sincerely hope the National Association of REALTORS censures and condemns his actions with a lifetime ban!

With the author’s permission, I am posting a reader’s follow up thoughts to yesterday piece on the fiduciary responsibility in the current mortgage meltdown:

Thank you, Ralph, for your very balanced article today. I think you framed the situation pretty well. It’s so nice to read an article that provokes thought (rather than the usual outrage or hysteria).

I, too, have pondered the incentives created by a commission-based compensation system. It does lend itself to the salesman mentality. However, the mortgage market, because of its unequal treatment of market participants, tends to work against any alternative. In a simplistic sense, the market is composed of brokers and bankers. Brokers are required by law to reveal all of their compensation (including yield spread premium). Bankers are not. As a result, a banker always is able to make his loan LOOK cheaper by burying fees and his compensation into the interest rate.

I truly think the best thing we can do as a society is better train consumers about shopping for a mortgage. This training should start in secondary school. It’s ridiculous that we don’t equip our teenagers with financial skills. And we wonder why so many of them get in trouble with credit cards as young adults.

The government mandated that those who offer mortgages (and other consumer debt) reveal an annual percentage rate (APR) that accounts for costs associated with creating the mortgage. It’s a good tool for comparison shopping, but I don’t think most consumers know how to use it.

People have to be responsible for their own decisions. Let’s give them what they need to make informed, smart decisions.

Thanks again and Happy New Year.

Steve

——————————–
G. Steven Bray
Commercial and Operations Manager
Texas Lone Star Lending
“Your Loan Educator”

512-261-1542
877-546-7079
steve at lonestarlending dot com

Thanks, Steve. Appreciate the feedback.

I was discussing the mortgage meltdown with a colleague the other day, when we encountered an interesting question: Who do mortgage originators (brokers and loan officers) represent? Do they represent themselves, the lenders whose products they sell, or the borrowers?

As a REALTOR®, my relationship with my clients is clearly delineated. I have a fiduciary responsibility to the buyer or the seller I represent. The term “fiduciary” simply means that I must represent my client’s best interests. In a case of dual representation, REALTORS® are expected to treat both parties fairly and equitably.

A professional’s responsibility varies according to the profession and the specific role the person plays. A stock broker, for example, is supposed to sell investments to clients that are in the clients’ best interests. Someone who sells cars, however, is responsible for acting on behalf of the dealership, not the person who’s buying the car. Condemning a car salesperson for trying to sell the buyer additional optional features the buyer didn’t really need would be insane.

In real estate transactions, fiduciary responsibility is not always so clearly defined, and I believe this is at the root of many problems in the industry. For example, is an appraiser (paid by the buyer) responsible to the buyer or to the bank who uses the appraisal to deny or approve a loan? In the best of all possible worlds, the appraiser’s job is to provide an accurate appraisal of a home’s value, but in the real world, this doesn’t always happen. At the direction of a homeowner, loan officer, or real estate agent, the appraiser may inflate the appraisal, fooling the lender into approving a loan it would otherwise deny.

The fiduciary responsibility of mortgage brokers and loan officers is even fuzzier. Like a car dealer, a loan officer is merely selling a product supplied by the lender. Like an investment broker, however, the loan officer has some responsibility not to saddle the borrower with an overly risky loan. As you can see, the role that the broker or loan officer plays between the lender and borrower is clouded in ambiguity.

I believe that this ambiguity led to many of the problems leading up to the mortgage meltdown. In some cases, loan officers were overly ambitious in representing the borrower’s interests, which resulted in mortgage fraud. In other cases, loan officers who were overly eager to sell the lenders’ products pushed risky loan products (subprime mortgages) on unwary borrowers. Ironically, by acting solely on the behalf of either the borrower or the lender, these loan officers served neither party. Both lenders and borrowers got stuck with bad loans.

Some states have passed legislation that gives mortgage brokers and loan officers fiduciary responsibility to borrowers, but that addresses only one half of the equation. Brokers and loan officers also have to protect the interests of lenders.

I don’t intend to make mortgage brokers and loan officers the scapegoats in the mortgage meltdown. There’s plenty of blame to go around. Real estate agents, appraisers, title companies, Wall Street, the Federal Reserve, legislators, politicians, and homeowners all share the blame. Unfortunately, mortgage brokers and loan officers play the role of gatekeepers and are saddled with an inordinate amount of responsibility. They must serve two masters in a way that is in the best interest of both parties.

Perhaps mortgage brokers and loan officers need to stop thinking about their vendors and their clients and think in more abstract terms. Instead of selling products from lenders or representing borrowers as clients, maybe they need to be committed to making good loans. In many ways, the relationship needs to be governed by the same rules that apply to dual representation in the real estate industry — if it’s not a good deal for everyone involved, then it’s not a good deal. As an added incentive, perhaps brokers and loan officers should have their compensation tied to the success of the loan rather than receiving a commission on each sale.