Judging from the number of companies that now advertise on the Web as doing "forensic loan reviews" on behalf of homeowners, one would think we have finally achieved the Holy Grail to forestalling foreclosures.

Well, we haven’t. The forensic loan review is expensive (pricing is usually $2,000 to $5,000) and even if it is successful in discovering problems in your underlying mortgage documents, that’s usually not enough to make a difference with your bank.

The forensic loan review is an in-depth scrutinization and subsequent report on all documentation, transactional data and associated aspects of the residential loan origination process. The review often focuses on the closing documents to see if they contain violations of the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.

This type of review is only successful if you, as a consumer, go the next step, which is to bring a lawsuit against your lender.

"An audit by itself is not some magical way to make everything go away — it is just a beginning," notes Dean Mostofi, the founder of National Loan Audits in Rockville, Md. "Borrowers who contact lenders with an audit don’t get too far. It’s in their best interest to go in with an attorney."

The good news is most lawsuits based on the findings of a forensic loan review are generally successful in attaining for the borrower a loan modification. The bad news: hiring a law firm is just another big expense at a time when you are so hurting financially you are in danger of losing your home.

More than 50 percent of the loans our company reviewed have material misrepresentations, says Jeffrey Taylor, managing director and chief business development officer for Digital Risk LLC in Dallas, which does work for large banks and government agencies, not individual consumers.

One of the first companies to do forensic loan reviews for consumers was You Walk Away LLC in Carlsbad, Calif. "We found about 80 percent of the loans we looked at had some type of violation in them. Clearly, a lot of adjustable-rate mortgages had violations," says Jon Maddux, CEO.

After a number of months, however, Maddux decided to stop doing forensic loan reviews. "When we first launched the business, we thought it was going to be a great new tactic to help the homeowners," he says, "but we found the lenders in California weren’t really reacting to it, so we stopped doing it."

What happened was, lenders were, and still are, so overwhelmed with foreclosures that even if you walked into an office and handed them proof that there were problems in the original loan documentation, they still put you in the queue along with everyone else. Meanwhile, the clock continued to click down on the foreclosure process.

Maddux realized even with a forensic review no progress would be made with your lender unless you actually sued. …CONTINUED

"The borrowers are struggling to get the attention of overworked loan servicers, who are scrambling with as many modifications, workouts and deals as they can come up with," says James Thompson, an attorney in the Chicago office of Jenner & Block LLP. "You can get to the head of the line sometimes if you show up with an attorney and a forensic loan examination saying there is a TILA violation."

In researching the short history of consumer forensic loan reviews I hadn’t come across even one situation in which a homeowner lawsuit had actually gone to the end of the court process, mostly because if there is an actual, verifiable violation it would be difficult for lenders to win a case. So why should they bother to fight?

And, secondly, the lender doesn’t want to have to go through the process, which would be costly for it.

Here’s the way it has usually worked out: The homeowner’s attorney goes to the lender with this message, "If this goes to litigation it is going to cost you $200,000 in penalties plus the cost of legal work when all the borrower really wants is an affordable mortgage and affordable interest rate to stay in the home."

"I don’t see very many of these litigating," says August Blass, CEO and president of National Loan Auditors in Walnut Creek, Calif. "Most of these settle. This brings the settlement offer to the table a little bit faster. It’s not to say a lender would have not been brought to the table without the audit, it just seems to fast-track it a little bit as the lender knows you are being handled by an attorney and there are illegalities being claimed on the loan."

So, what do you get for your dollars and efforts?

If the object of the forensic loan review and, perhaps, lawsuit, is a loan modification, then this is a very attainable goal. If you instead believe the mortgage should be totally rescinded, then you need to consider what that means.

What it absolutely does NOT mean is that you that simply wash your hands of the loan and walk away as if it never happened. What it does mean is that the consumer gets to buy back the loan. In short, the borrower has to be able to repay the amount that was borrowed.

If the property is now valued at less than the original mortgage amount, which is more than likely the case, it is extremely difficult to find a new lender that will finance a replacement mortgage, which would give the homeowner enough capital to repay the original loan.

As Blass observes, most homeowners want a loan modification that will let them remain in the house where they currently live — "they don’t actually want the loan rescinded." For good reason.

Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."


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