In a move that will expedite some foreclosures, Wells Fargo & Co. has stopped granting extensions for certain distressed homeowners to complete short sales.
The change last month preceded recent revelations of faulty documentation at two major mortgage servicers — JPMorgan Chase & Co. and Ally Financial Inc. — that suspended thousands of foreclosure actions to review their processes. Wells said it does not have the same problems as those servicers.
The company said it changed its policy on short sales at the behest of investors for whom it services mortgages, including the government-sponsored enterprises.
Early last month, Fannie Mae told its servicers to stop unnecessarily delaying foreclosures. The GSE said it would hold servicers responsible for unexplained delays to foreclosures with fines and on-site reviews.
In a memo e-mailed to short sale vendors last month and obtained by American Banker, Wells said it will no longer postpone foreclosure sales for those who do not close short sales by the date in their approval letter from the company. Only extension letters dated Sept. 14 or earlier would be honored, Wells said.
Mary Berg, a spokeswoman for Wells, confirmed that the memo was genuine. But she said it had "caused confusion," and stressed that Wells still grants extensions on loans in its own portfolio (including those it acquired with Wachovia Corp.) and in cases where investors allow it. For those two categories, Berg said, Wells allows one foreclosure postponement, provided these conditions are met: a short sale has been approved by Wells, by junior lienholders and by mortgage insurers; the buyer has proof of funds or approved financing; and the short sale can close within 30 days of the scheduled foreclosure sale.
Berg would not say how often Wells' investors allow extensions.
The new policy on short sales was put in place "over the past couple of months … in response to various investor changes," Berg said. Those investors "would include the GSEs, HUD and those investing in private-label" mortgage-backed securities.
In a short sale, a home is sold for less than the amount owed on the mortgage and the lender accepts a discounted payoff. The transactions are often less costly to the lender than seizing and liquidating the home.
"As long as there is a short sale possibility, the loss will always be less," said Rayman Mathoda, the president and chief executive of AssetPlan USA, a Long Beach, Calif., provider of short sale training and education. "Basically foreclosure sales should be delayed for any responsible homeowner that has a real buyer available."
Wells' decision also follows efforts by the Obama administration to encourage short sales for borrowers who do not qualify for loan modifications.
"It makes no business sense why they are doing this, since it's wrong for the borrowers and for the government," said Eli Tene, the CEO of IShortSale Inc., a Woodland Hills, Calif., firm that advises distressed borrowers.
But experts on short sales said that in recent months servicers have been reluctant to approve the transactions out of concern that they will fall through, further prolonging the process.
"There is also a growing issue with the new buyer and financing issues, either losing their jobs ahead of closing or the new lender not being ready to close, which then gives rise to the buyer running out of patience and walking," said Jim Satterwhite, executive vice president and chief operating officer of Infusion Technologies LLC, a Jacksonville, Fla., provider of short sale services.
Satterwhite said many servicers have reached the point where they know which borrowers do not qualify for a modification and are moving those borrowers through to foreclosure to deal with the backlog of inventory. "A lot of servicers are just falling in line with Fannie," he said.
Moreover, the expectation that housing prices will fall further is forcing servicers — and the GSEs — to push for a quicker resolution through foreclosure, since short sales can involve further delays. "Values are dropping faster and that also means the losses on short sales are going up," Satterwhite said.
Of course, the recent reports of "robo-signing" at Ally Financial's GMAC Mortgage and at JPMorgan Chase could gum up the foreclosure works again. For example, on Friday, Connecticut Attorney General Richard Blumenthal asked state courts to freeze all home foreclosures for 60 days to "stop a foreclosure steamroller based on defective documents." The day before, Acting Comptroller of the Currency John Walsh said he had told seven major servicers, including Wells, to review their foreclosure processes.
Another Wells spokeswoman, Vickee J. Adams, said the company's "policies, procedures and practices satisfy us that the affidavits we sign are accurate."