Do You Know Who Just Read Your Hardship Letter?


Senior Supervisor, Bank Hardship Letter Department

Have you ever been curious about what “test” the Big Banks apply when deciding to allow short sales?  I have.  What follows is my analysis only.  Readers are free to disagree; but remember, a couple of anecdotal stories overheard at a cocktail party, do not a trend make.  There are rules and there are exceptions to those rules.  I’m interested in the rules. – PCQ

First, we know that the Big Banks all base their borrower assistance programs on the concept of “deservedness.” Now, with the help of a sleeper agent working “deep cover” at the highest levels of a Big Bank, we have discovered the following purloined paperwork (including this candid staff photo taken at work), describing, in depth, the inner workings at one lender’s Hardship Letter Department:

You get our help only if you deserve it. To be deserving, you must have a “hardship.” We get to define the meaning of “hardship.” It must relate to something unplanned or beyond your control[1]:  Such as illness, death, divorce, job loss, financial inability to pay, mandatory relocation, etc.  Pregnancy cannot be “unplanned” or “beyond your control” according to the Planned Parenthood folks, so it won’t get you into our “deservedness” line.

When you seek our help, we expect you to prepare and sign, under oath and penalty of perjury, a “Hardship Letter,” describing in detail, your tale of woe, beginning from early childhood and continuing through adulthood.  We ask that it be hand written on cheap bond notebook paper (blue lines only – and no fancy yellow legal pad paper!), with a No. 2 pencil and shaky hand.

Before writing your Hardship Letter, we recommend watching one or more of the following sad movies to serve as your cinematic Muse and help conjure up the appropriate melancholy [in no specific order]: Titanic, Schindler’s List, Steel Magnolias, and Ordinary People.  For the distressed older Baby Boomers, we suggest Love Story and Old Yeller.

We will evaluate your hardship and score it based upon the following ascending 1 – 4 scale, using our proprietary algorithms:

#1  Nice try, but we believe your “hardship” was contrived and probably relates to some embarrassing moment on your first date.  By the way, self-flagellation is not a hardship.

#2  You’re getting warmer!  However, we suggest that you go back to your hovel and immerse yourself in your misfortune for another six months so that it marinates properly.  By then, what is now merely a recipe for disaster, will have become a real disaster.

#3  Very good!  Now, you’re getting the hang of it.  This sounds like a hardship story that would get you on Oprah’s Book List.  Warning:  Don’t try plagiarizing from James Frey’s bogus autobiography, ” A Million Little Pieces, we read the book when Oprah first recommended it, and didn’t believe it then either.

#4  Bingo!  You’ve hit the Motherlode!   Your hardship letter shouts “Pick me, pick me, I’m the most deserving!  My hardship is harder than yours!”  We suggest that you immediately register this letter with the U.S. Copyright Office and start a reality show of your own.

Once we approve your hardship, we will elevate your file to the “Office of the President and CEO” which is reserved for deserving borrowers who are “almost there; now please send us your updated financial information again – it’s already a week old.”  This approval is sure to raise your hopes, assist your digestion, smooth wrinkle lines, help your sleep, and with luck, hold your marriage together.”

So, for those distressed borrowers who have dutifully queued up in these diabolical short sale approval lines, how many have been denied because their hardship was not hard enough?  Speaking for myself, I’ve never heard of any.  Distressed homeowners may be turned down with a vague excuse that they “don’t qualify” for a particular program, but not because anyone actually read, evaluated, and commiserated with them over the contents of their Hardship Letter.

This leads me to surmise that Hardship Letters are a ruse.  They are required solely because the Big Banks need to create a grand illusion that they actually care about their borrowers’ welfare.  It is a canard of the first order; letting borrowers believe that their hardship is as important to the bank as their financial information.  The PR guys at the shallow end of the lenders’ think tanks have apparently recommended that they create an impression that fate rather than finances, plays a big part in the approval process.

The result is that Big Banks now view themselves as the metaphorical equivalent of the hospital emergency room for distressed borrowers:  “If you’re on life support, you will get our attention, but if you’re not hemorrhaging, gasping, or fainting, please wait outside.”

The Short Sale Ruse. A good example of this is found in the short sale approval process.  Besides the actual offer, seller-borrowers must provide their lender or servicer with all of their personal financial information along with the Hardship Letter.  But if a buyer’s offering price for the short sale is consistent with the lenders’ broker price opinion (“BPO”) that is actually the end of the bank’s “deservedness” evaluation.  The Hardship Letter plays little or no part in the process – unless, of course, the borrower falsified it in the mistaken belief it would move them to the front of the line.

Once the short sale offer has received preliminary approval, the primary issue for the bank is making sure that they know exactly what the net, net, net proceeds will be to them.  That is why they require that escrow prepare a pro-forma HUD-1 settlement statement, disclosing the exact amount of money it will receive on closing. It is also why the lenders’ final approval makes it clear that the actual signed settlement statement must be the same as the pro-forma settlement statement that was preliminarily approved.  Not a penny is permitted to fall off the closing table.  It is this net, net, net distribution of the short sale closing proceeds – not the blood, sweat and tears that went into the Hardship Letter – that determines whether the short sale will be approved.

Why is this so?  Why do lenders disregard their borrowers’ hardships, and focus entirely on the proceeds from the short sale?  Here’s my take – just follow the money:

  • By the time the short sale offer is being reviewed, most borrowers have stopped making their payments to the bank.  [They better have, since most banks won’t approve a short sale unless their borrower is on life support, i.e. in default on the loan.  If  borrowers are current, the bank views them as “undeserving” and will send them out of the emergency room and into the dark of night.  [And why not?  The banks figure that borrowers who are current will stay current, even after their short sale is disapproved.  Would you give money to the homeless guy on the corner if he was wearing an Armani suit?  – PCQ]
  • The ONLY way to get foreclosed by your friendly bank is to stop paying on the first mortgage [i.e. the “trust deed” in Oregon law – PCQ].
  • With some exceptions, in Oregon, if the first loan is secured by a primary residence, there’s a good chance it qualifies as a “residential trust deed” and immune from any deficiency exposure, regardless of whether the foreclosure is judicial or non-judicial.
  • If there is a second mortgage, there may be some deficiency exposure, but not if the loan originated from the same lender at the same time[See 2010 amendments to ORS 86.770. – PCQ]
  • If there is some lingering deficiency exposure, that is exactly why the short sale option should be the first pre-foreclosure solution to explore, since it will shine a bright light on what the lender and borrower can agree upon – and if commenced early enough, will likely occur well before a foreclosure can be completed.
  • So…quoting Dirty Harry, the bank has to ask itself, “Do I feel lucky?” It has just two choices:

(1) Approve the short sale, thus removing the nonperforming loan from its books, and transferring the property into the marketplace; or

(2) Disapprove the short sale and foreclose the property, thus taking it back into its already bloated REO department, continuing to pay the taxes, insurance, maintenance, weatherization, HOA dues, real estate commissions, etc., and then hope to sell the property in the next 6 – 8 months.

  • Even for the Rube Goldberg-esque decision making process of the Big Banks, this is a no-brainer:  Will disapproval of the short sale actually improve its financial position?  Of course not.  Approval gets the property into the marketplace with a financial goose egg. Disapproval gets the property back into REO with a financial goose egg. The first choice stops losses, the second perpetuates them.[2]
  • Where the bank has little or no chance of recovering a deficiency against the borrower-seller, it would rather get the non-performing loan off its books via the short sale, than keep it on the REO books for the next 6-8 months, with the continual downward spiral of Oregon property values.[3]

So What Good is the Hardship Letter? My opinion is that the Hardship Letter is a necessary part of the charade that Big Banks will only help those who “deserve” it.  But in reality, the litmus test for short sales is whether the short sale price is consistent with the banks’ view of the current market value of the home in question.  If it is, the sale will likely be approved.  If not, “Please leave the emergency room.”

The Take Away. This is not to say that distressed borrowers seeking short sale approval should take the Hardship Letter requirement lightly.  They should be truthful and sincere – and it is the price of admission.  Admittedly, however, one person’s “hardship” could be another’s dream.  For example, assume that Borrower A has lost his job and only source of family income; the failure to pay his home loan speaks for itself.  But what about Borrower B who has a secure job, but has $100,000 of negative equity in a falling real estate market?  Even if Borrower B pays religiously for the next ten years, he will not see a penny of positive equity.  Even if he could qualify under the misguided logic of HARP II, all that does is permit him to refinance his negative equity so he can repay the bank at a lower interest rate and still remain underwater.  A sale within the next the next ten years will still be a short sale, and like today, he’ll still have nothing to show for it.

Notwithstanding the fact that negative equity is – in the view of the Big Banks – not a “hardship,” both Borrowers A and B can no longer afford to make the payments – Borrower A because of immediate inability due to job loss; the other because of a long term inability based upon recognition that it would be financial suicide to mortgage the next ten years of his life, indentured to a bad loan on a house that is deeply underwater.

Today, (1) if both A and B stopped making their mortgage payments, thus triggering foreclosure, and (2) neither have serious deficiency exposure from doing so, their banks will be faced with a purely economic decision – regardless of A and B’s relative hardships:

  • Either approve the short sales and cut the bank’s losses; or
  • Disapprove the short sales and prolong those losses through foreclosure.

If A’s and B’s short sale offers are validated with bank BPOs, both transactions will likely be approved.  Thus, the outcome – i.e. closing – is the same for both A and B, regardless of their disparate Hardship Letters.

Memo to Big Banks: Cut the charade.  The end-game is whether you can advance your financial position through approval or disapproval.  We’ve known this ever since HAMP was rolled out with inflated predictions of success back in 2009.  In reality, if the NPV test shows that the short sale will yield a better financial result over foreclosure, it will be approved.  If foreclosure will bring in more money, the short sale will be denied, and foreclosure will follow.  Deservedness was never really a part of the equation.  So, why pretend that it is?

Memo to Realtors®: When deciding to list a short sale property, don’t evaluate it by the amount of the seller’s “hardship.”  If the property is saleable, list it, and take the ball to the hoop.  Encourage the seller to write the best Hardship Letter possible – even if it reads something like this:

“Dear Big Bank: Try as I might, I can no longer afford to make my loan payments to you while also trying to save for my retirement, my children’s schooling, emergencies, and the other vagaries of life.  Accordingly, I respectfully decline to mortgage my future and my family’s future on a house that is no longer a home.”

[1] Note: These terms are not synonymous.  Going to jail for five years may have been “unplanned,” but likely was not “beyond your control.”

[2] I acknowledge that this analysis ignores the fact that loan servicers make more money on nonperforming loans, by piling on late fees, exorbitant force-placed insurance, and other assorted charges that increase their bottom line. But I suspect that in most cases, short sale approval of a properly priced offer can still occur.  Remember, the owner/investor of the loan, not the servicer, supposedly makes the final decision.  Just don’t ask me about lenders who own their loans and service them.  I haven’t figured that out….

[3] According to the Regional Multiple Listing Service (“RMLS™) for the Portland Metro area, average sale prices in June, July, August, and September, 2011, dropped 7.8%, 7.4%, 9.2% and 4.2%, respectively, from the same period in 2010.  Delay in moving distressed properties back into the marketplace likely means more money will be lost.