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 16,724.11 -80.60 -0.48%
Nasdaq 4,393.22 -28.87 -0.65%
S&P 500 1,933.33 -12.83 -0.66%
Treasuries 2.40 0.00 0.04%
Data as of 12:48pm ET
Company Price Change % Change
Bank of America Corp... 16.70 -0.12 -0.71%
Apple Inc 98.76 -0.42 -0.42%
Facebook Inc 76.19 -0.36 -0.47%
Ford Motor Co 14.49 -0.10 -0.69%
Intel Corp 33.42 -0.57 -1.68%
Data as of 12:33pm ET

Sections

The bull market hit some turbulence in September, but that didn't stop these stocks from generating lots of interest from investors. More

Linda Tirado's post about her life in poverty went viral in 2013. She is now the author of 'Hand to Mouth.' More

While big chains are telling customers to stop bringing in guns, some small restaurants are embracing them. More

Linda Tirado's post about her life in poverty went viral in 2013. She is now the author of 'Hand to Mouth.' More

Market indexes 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. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.