Lenders' Two-Track Forclosure Process Under Fire

Mortgage lenders call it "dual tracking," but for homeowners struggling to avoid foreclosure, it might go by another name: the double-cross.

Dual tracking refers to a common bank tactic. When a borrower in default seeks a loan modification, the institution often continues to pursue foreclosure at the same time.

Lenders contend that dual tracking simply protects their investment if the homeowner is unable to qualify for new loan terms. Mortgage servicers can lose money if they don't foreclose in a timely manner, and repossessions often are complicated and lengthy.

Regulators and consumer advocates say the practice lulls some homeowners into thinking they are no longer at risk of having their homes taken away. (VERY, VERY TRUE!!!)

Federal banking regulators issued settlements with major banks and home-loan servicers that would, among the many provisions, stop foreclosure once a homeowner is approved for a temporary mortgage modification. In ordering the changes, the regulators said they found "critical weaknesses" in the way the lenders handled foreclosures.

Some still feel the regulators didn't go far enough especially in regards to the subject of "dual tracking". A separate coalition of state attorneys general and federal agencies including the departments of Justice, Treasury and Housing and the Federal Trade Commission is still negotiating details of a foreclosure-system overhaul that could include a near-ban of the practice.

The demands by the attorneys general would prohibit lenders from starting the foreclosure process on a home if a borrower has submitted an application for a loan modification. The terms require that mortgage servicers provide homeowners a written list of any missing documentation from their modification package within 10 days of submission. Mortgage servicers would also be required to immediately notify a homeowner in writing of any new sale date if the foreclosure clock already begun when a borrower reaches out for a modification. If the loan modification is denied, then a mortgage servicer would be required to submit an affidavit in court summarizing all of the efforts to work with a borrower and the basis for denying a modification. In states such as California, where a court order isn't required to foreclose on a property, the mortgage servicer would be required to send that sworn statement directly to the borrower.

The Obama administration in effect banned dual tracking in most cases last summer under its signature foreclosure relief initiative program.

Most major banks service loans for investors who have set up specific rules governing how and when they must proceed with a foreclosure. If a bank doesn't follow those guidelines, if can lose money.

Furthermore, depending on the jurisdiction, certain states can set up strict timelines for when certain steps in a foreclosure must be taken. If those deadlines aren't met, duplicate costs can result.

Quick Recap:

What: Dual tracking is a common practice in which a lender continues to pursue foreclosure even though the homeowner is applying for a mortgage modification.

Why: Lenders say the practice protects their investment if a homeowner doesn't qualify for new loan terms. Consumer advocates say it discourages homeowners and leads to unintended foreclosures.

Limits: A coalition of federal regulators has ordered major banks and mortgage servicers to halt foreclosure when homeowners qualify for loan modifications.

Ban: A coalition led by state attorneys general has proposed prohibiting lenders from starting the foreclosure process if a borrower has applied for a loan modification.

Note: The full article written by Alejandro Lazo of the LA Times