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'Bill of Rights' Protections Favor Loan Mods Over Short Sales

Written by on Tuesday, 26 February 2013 6:00 pm
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California's "Homeowners' Bill of Rights", which became effective January 1, 2013, prohibits banks and mortgage servicers from "dual tracking" when a homeowner is pursuing an alternative to foreclosure. However, the dual tracking prohibitions are quite different, depending on whether the homeowner is seeking a loan modification or if he is attempting a short sale.

Dual tracking is the practice by lenders of continuing the foreclosure process while at the same time negotiating with the borrower over a foreclosure alternative. Regrettably, the real estate lore of recent years is replete with horror stories of foreclosures taking place within just a few days (or less) of the borrower being told that he has been approved for whatever foreclosure alternative he had been seeking.

So it is a good thing that the California legislature adopted bills that, among other significant measures, prohibited the practice of dual tracking. But it is not so good that they treat loan modifications and short sales so differently. In the case of the latter, the dual tracking prohibition is of considerably lesser value.

In the case of a loan modification, the servicer cannot record a notice of default or notice of sale, or conduct a trustee sale, if the borrower's completed application for a loan modification is pending a decision. To be sure, seasoned agents will notice that the application must be complete, and they will wonder how or when that will be determined. There are also too many stories about various applications (both for loan modifications and for short sales) that were never complete because this or that document was missing. Even though it had been sent numerous times. At least, under the California legislation, there is now a procedural requirement that the receipt of documents be acknowledged. And there are other procedural rules that should help.

So, let us say that a loan modification application is complete. At that point, the foreclosure process stops. Moreover, if the application is denied - and it must be done so in writing - there is then a thirty-day period during which the borrower may appeal the decision. No foreclosure activity may occur during that period either.

In short, a person who applies for a loan modification may, after a complete application is submitted, has a period of about sixty days during which no further foreclosure activity may take place.

What about the borrower who is attempting to accomplish a short sale? The provisions are considerably different.

Unlike applying for a loan modification, when a borrower applies for a short sale the stop on foreclosure activity does not begin when the application is complete. It doesn't begin until the application has been approved, plus other requirements.

Not only must there be written approval from all lien holders (e.g. 1st, 2nd, and mortgage insurer, as applicable), but also "proof of funds or financing has been provided to the servicer."

Now, in a good short sale, you might have 1st and 2nd lien holder approval within 45 - 60 days. Of course it could be triple that. Then, and only then, would the buyer be likely to engage in the actual process of applying for loan approval. These days, that could be another 30 - 45 days. So, not until both of those things had happened (roughly 75 - 105 days) would the stop provisions apply to foreclosure activity. All of which is to say, a foreclosure could easily occur during the attempt to bring about a short sale.

California short sale sellers who are counting on the Homeowners' Bill of Rights to give them a break from dual tracking should be aware of this. So should their agents.

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  About the author, Bob Hunt

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