Housing mess: You can't stay if you don't pay

foreclosure.gi.top.jpgDelinquent borrowers aren't likely to avoid a foreclosure just because of paperwork problems. By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- Just because a lender screwed up your foreclosure paperwork doesn't mean that you get to stay in your house for free.

Of course, plenty of enterprising lawyers will try to tell distraught homeowners otherwise.

But the best that most delinquent borrowers can hope for is that the current flap over foreclosure documents will prompt financial institutions to grant more affordable loan modifications, experts said.

Even if the banks didn't have the paperwork required to foreclose, "that doesn't mean you'll get a free house at the end of the day," said Ira Rheingold, head of the National Association of Consumer Advocates. "There is no panacea here."

The nation's largest servicers, including Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), are currently reviewing their foreclosure paperwork and practices after court proceedings revealed major problems. Some banks were having employees sign thousands of documents a month without reviewing their content, while others never filed the proper notices to update a mortgage's ownership in the public records after it was securitized.

Federal regulators are now requiring servicers to clean up the mess, while attorneys general are investigating their practices. Several institutions have halted foreclosure proceedings and sales until their reviews are completed.

Meanwhile, lots of lawyers are trying to capitalize on the confusion by promoting their foreclosure rescue services to troubled borrowers. But homeowners should beware of scams, Rheingold said, because if you can't make your payments, they ultimately can't help you.

Anyone who's behind on their mortgage needs to recognize their ability -- or lack thereof -- to make their payments, he said. Homeowners who are unemployed, or who just don't have the money to catch up, should call a housing counselor or legal aid attorney to find the best way out of the house.

"Unless you fix the underlying economic issue that got you into foreclosure, not much has changed [with the document flap] except you'll get more time," said Doug Robinson, spokesman for NeighborWorks America, a housing advocacy organization.

But homeowners who can afford a reduced payment might be in luck. The current spotlight on foreclosure practices may make servicers more inclined to negotiate a loan adjustment. Under the circumstances, they may find it cheaper and faster to adjust a mortgage than to straighten out all the documentation and foreclose.

Indeed, servicers have completed 1.3 million modifications so far this year, but consumer advocates say they could be doing much more. All told, there are 3.1 million loans in foreclosure, according to a Morgan Stanley analyst report.

"The paperwork problems will create an added incentive for the banks to consider loan modifications," said Kathleen Engel, Suffolk University law professor and co-author of the forthcoming book "The Subprime Virus."

The temporary freeze that some banks have placed on the foreclosure process gives homeowners time to press for a modification or to find a job so they can afford their current payments. Their first stop should be a housing counselor, who can provide free assistance in negotiating with the banks.

"All the foreclosures that are happening are not inevitable," said Alan White, a law professor at Valparaiso University. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,810.06 91.06 0.51%
Nasdaq 4,712.97 11.10 0.24%
S&P 500 2,063.50 10.75 0.52%
Treasuries 2.32 -0.02 -0.86%
Data as of 1:50pm ET
Company Price Change % Change
Bank of America Corp... 17.12 0.12 0.71%
Kinder Morgan Inc 39.75 -0.17 -0.43%
Apple Inc 116.47 0.16 0.14%
Intel Corp 35.59 -0.36 -1.00%
Microsoft Corp 47.98 -0.72 -1.48%
Data as of Nov 21

Sections

This arrangement, announced Friday, illustrates how the lines have blurred between traditional TV networks and newfangled options like Netflix. More

The Obama administration is touting that its immigration action will boost wages. But the hike amounts to only $170 a year by 2024. More

Regin is malware has been lurking in computers for as long as six years, according to Symantec. But experts don't know much about where it is from, what it does and who has been targeted. More

Obama doesn't have the authority to create a startup visa, but part of his reform announcement could include a workaround for entrepreneurs: 'parole status.' More

Nearly half of all Americans say there's a chance they'll have to work during a holiday between Thanksgiving and New Year's, according to a new poll. And one in four say they'll have to work whether they want to or not. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.