Despite the Government’s best efforts and greatest intentions the wave of foreclosures continues to increase. The borrowers that are now defaulting on their mortgages and not qualifying for loan modifications are no longer people with subprime loans and bad credit rating. The fastest growing demographic in foreclosures are prime borrowers with prime loans that have lost their jobs and cannot afford any kind of deal on their mortgage.
This is a tragedy for the millions of families that face losing their homes. However there is a flip side to the crisis in the housing market. The flip side is that the foreclosure market is doing great. More and more buyers with cash in their pockets are looking for bargains among the millions of homes that are going through a foreclosure.
Many have the idea that the only homes that are on the foreclosure market are located in crime-ridden areas and are run down shacks. This is simply not true, during economic crisis like the one we are now going through all kinds of homes can be found, from beachfront luxury homes to shacks in the ghetto.
There is another myth a serious buyer must forget about as soon as possible. You are not going to find a great property selling at pennies on the dollar. Sometimes you can find amazing deals but this is probably because there are other circumstances that reduce the value of the home besides being on the foreclosure market.
However, you can get some great deals and discounts. A typical discount is probably around 5% less than the market value, although you can sometimes pay up to 30% or 40% less.
If you are savvy enough, this could only be the beginning of your savings. If you buy the property from the lender you could ask/demand for some of the buying costs to be waivered. If you ask nicely you might even get a discount on the interest rate or a break on the down payment.
Buying a home, whether on the foreclosure market or not, is a huge investment for most of us. It is therefore worth us spending some time doing our research and due diligence before we spend tens or even hundreds of thousands of dollars.
The foreclosure ball begins to roll when a borrowers falls behind on mortgage payments. A homeowner that loves his home will try his best to keep his home, making some payments, looking for a loan modification, or any other measure he can. However, if the home still forecloses the chances are that maintenance has not been carried out for some time on the home. Include the costs of bring maintenance up-to-date in your investment research.
What this might include will depend on the property. Some just need some gentle manicuring, while others have underlying structural damage that is prohibitively expensive to fix. It is true that homes in need of some tender lover and care will come at a discount, but it is important to make sure you can afford the cost of providing it.
If loan modifications are not an option and you want to avoid foreclosure or bankruptcy a short sale of your home might be a good option. The key when you are undergoing a bad financial situation is like with every emergency and try to think clearly without letting raw emotions take over. You must analyze the situation and work out what is the best option for you. Although it is a good idea to hire an experienced lawyer in real estate issues, nobody can do all the thinking for you, you have a unique understanding of your situation and more importantly you will be the one that will suffer or enjoy the consequences of your decisions.
A short sale is the sale of your home at a price lower than the purchasing price. It is an option to be considered if you do not qualify for a loan modification, due to a lack of income or when you own a home that is worth less than what you owe on the mortgage.
Obviously the key player in a short sale is the lender. The lender is, after all, the party that may have to take any losses that occur by short selling the house. However, in some short sale agreements the buyer can be made responsible for the difference between the price of the short sale and the balance of the mortgage. Needless to say that is not the ideal type of mortgage for you, the homeowner.
There are three possible outcomes a lender may agree to when negotiating a short sale. The key concept you negotiate in a short sale is what will happen with the deficiency balance or the difference between price of the short sale and the pending balance on the loan.
The first option a lender may try for is to lay the deficiency balance on the lap of the homeowner once the short sale has been carried out. Needless to say homeowners do not often profit all that much from this kind of short sale.
A second option is for the homeowner to sign a promissory note to the lender for the deficiency balance. This means that the homeowner will have to pay whatever agreed in the promissory note if the there is a deficiency balance after the short sale. However if the deficiency balance is larger than what the homeowner agreed to pay in the promissory note the lender will absorb the difference.
The third option is the one you need to aim for if you are the homeowner. In this case the lender agrees to cancel the entire deficiency balance, or difference between the short sale and the pending balance on the mortgage. As you probably guessed lenders are not waiting in line to offer this kind of deal, you will have to work hard for it.
The most important part of negotiating a short sale is to convince the lender that it is in their best interest to accept a short sale. To do this you must a) prove you cannot afford the mortgage due to a valid hardship and do not have the assets to pay for the mortgage and b) present your home as a business opportunity for the bank.
In order to do all that, you are going to have to submit a whole lot of paperwork to your lender. This will include:
A) A hardship letter that explains why you are in financial trouble and explains how you do not have the income or savings to pay for the mortgage.
B) Proof for all the claims you make in your hardship letter. This will include proof of unemployment or of your current pay if you are still working. You will also need to prove what income you have through bank statements and tax returns. The lender will no doubt ask you if you have access to pension funds, stocks or some other type of investment. You will have to provide a written statement that answers these questions and explains why they are not accessible.
C) You need to provide an up-to-date valuation on your home. This you can carry out with a broker’s appraisal and by providing analysis of closed deals or active listings of similar properties in your neighborhood.
D) Authorization to the lender to release information on you and the property.
It is a good idea to prepare this paperwork with care and hire a good real estate attorney. The good news is that if you play it well you can include the price of the lawyer in the proceedings costs covered by the lender.
Negotiating a Loan Modification with your lender is not an easy task. We invariably feel we are at a disadvantage when dealing with a large corporation or wealthy investor. However, you might have more tools at your disposal than you think. This article looks into the power of forensic loan audits and how they can be used to create extra leverage for our loan modification application, or as the title states: to speak softly with a big stick.
The idea behind using a forensic mortgage loan document audit is to get lenders on your side, albeit with a little arm twisting. A forensic mortgage loan audit checks your loan documentation for any federal or state violations or errors. Evidence shows that most loan mortgages have significant violations. Once violations have been documented they can be used to take a lender to court and in some cases get the loan cancelled.
How do you carry out a forensic loan audit?
First, you need data to work with. You need all your loan documents. The process starts with a Qualified Written Request, a QWR. This is a formal request for copies of your loan documents. Your lender is required by law to produce these documents and pronto. The documents that are requested include:
- An Initial Loan Application and Final Loan Application.
- Deed of Trust
- Truth in Lending Statements
- Good Faith Estimates
- Copy of Loan Payment History
- Grant Deeds
- Title Report
- Itemization of Amount Financed
- All fees incurred, escrow account disbursements and details on how payments were calculated.
The list goes on and should be as thorough as possible. The more documents you revise the more chances you have to find a violation in procedure.
Second, an audit must be carried out on your loan. There are many mistakes and violations that can be discovered by a forensic audit. These include violations to the Truth in Lending Act (TILA), usury violations, misleading disclosures, overstated home values, predatory lending, and lack of good faith estimate compliance, to mention just a few.
How does this help? If I violation is discovered, however serious you get leverage with your lender. If for instance you are overcharged, even by a small amount, or the annual percentage rate (APR) is a fraction higher than what you were told, your lender could be in breach of the Truth in Lending Act. This will make your lender feel much more motivated to giving you a beneficial loan modification.
Carrying out a forensic loan audit is not a simple task. Unless you have experience in loan modifications and Real Estate law you are probably better off contracting the services of a lawyer. This will of course cost money, but the return on your investment could be well worth it if it helps you get the loan modification you need.
HAMP’s loan modification program seems to be finally speeding up its conversion rate from trial loan modifications to converted modifications. However, the 4 million troubled homeowners targeted by the program are not even close to receiving the help they need.
The debate continues on exactly how much responsibility the Government has towards troubled homeowners. Should they simply shoulder their responsibility, lose their home and start from scratch?
One, obviously upset, commentator had this to say about the issue:
How many people seeking home loan modifications used their home as their own personal ATM’S? How many people who are seeking loan modifications bought homes using an interest only ARM, and purchased a home they could not afford? How many people “fudged” their mortgage apps in order to qualify? I have no sympathy for them. I do feel sorry for those who were really victims of poor mortgages, and job loss. I think more people made poor personal choices and want others to bear the responsibility for their poor financial choices.(Quoted from a comment on the RGJ.com, Reno Gazette Journal online edition 31/1/2010)
This opinion is by no means unique. Many, especially those that didn’t buy a home because they felt they couldn’t afford it, feel people are being unfairly shielded from their own bad financial decisions.
However , the distress and misery the current credit crisis has created does make most of us feel the Government has some responsibility to stabilize the situation just as it did when the banks were the ones that needed bailing out.
Sadly, even those that do receive some kind of “financial help” on their mortgage are often just taken advantage of. The media is full of cases of troubled homeowners that qualify for a loan modification just to see their monthly mortgage payments are more expensive and they are deeper in debt and deeper underwater on their mortgage.
The Government has issued some new guidelines that put more pressure on servicers and lenders to reduce monthly payments by extending the loan term to 30 years and dropping the interest rate to current low levels of 2%-3% for a fixed 30 year loan. Unfortunately, servicers were often simply picking up the months the borrowers were behind on and loading them on the mortgage, without actually modifying the loans in any useful way for the homeowner.
The lessons we can learn from these situations are important although often of little value for the homeowners that are suffering the consequences of poor financial judgment and unfair lenders.
Lesson 1.) Do not spend your life savings paying a loan modification company to manage your application. If you do decide to hire such a company check their credentials and find out their history.
Lesson 2.) Never pay for any services before they have been carried out. This is not only illegal in most states it is also rather stupid. Would you pay a day worker on a farm before he started?
Lesson 3.) Contact the HAMP free counseling services before you are committed to a loan. Even if you later decide to go a different route you will at least have one opinion you can use as a benchmark. Contact a lawyer and ask him what your options are. Is there any way to fight the legality of the loan? Do you have any leverage on your bank?
Lesson 4.) Loan Modifications are not the holy grail of mortgage woes, they are not for everyone and they don’t always improve your mortgage payments all that much. Even though it will severely affect your credit score foreclosures and short sales are often a way to have a fresh start and are sometimes more practical than hanging on to a sinking mortgage. They are, obviously, not an ideal option but sometimes they are best of two evils.
Forensic Loan Auditing is a fancy way of describing a thorough revision of the documents you signed when applying for your loan. This includes the accuracy of the math in the interest rates and payments schedule, the legality of the terms of the loan and any proof that you were misled in some way.
Why is Forensic Loan Auditing useful?
Forensic Loan Auditing is useful because if your mortgage did not comply with the Federal Guidelines for lenders at the time of signing there is a chance your mortgage was illegal, or at the very least non-complying. This can cause your mortgage to be void and your loan to be wiped out. Admittedly this does not happen all that often, but you can see why servicers and lenders take a Forensic Loan Audit very seriously.
If you took out your mortgage a few years ago, before the current financial crisis, it is likely your loan fails Federal Guidelines on some level. In boom years, like those we had three or four years ago, banks and servicers are very relaxed with their interpretation of Government guidelines. This is especially the case with laws relating to RESPA, TILA or the infamous section 32.
How To Carry Out A Forensic Loan Audit?
There are two ways, the easy but expensive option and the difficult but cheap route. It all, of course, depends if you do it yourself or employ a professional.
Because of the number of loans in trouble forensic loan auditing is becoming a booming industry. However, don’t be quick to believe those that say you can’t d it on your own?
This is what you will need to do:
1) Check the date you signed your loan documents.
2) Check the Federal Loan Guidelines for that period.
3) Compare them with the terms you accepted and the documentation you signed.
The responsibility for any illegal procedures falls on the lender and/or servicer that are required to follow current law, so if you find any discrepancies it could provide you with extra leverage against your bank when asking for a loan modification or even make the loan void if serious mistakes were made.
Lawyers will of course happily do all the work for you, and are likely to do a much better job. However they don’t come cheap. Some loan modification companies include forensic loan auditing as part of their service. Nevertheless make sure you check the costs of using a loan modification company because the Government has provided free counseling companies that are just as good if not better than any paid service provider.
Forensic Loan Auditing is not the Holy Grail of Homeowners but can be a useful tool for certain loans in providing leverage against unhelpful banks and in rare cases even cancel the debt on your mortgage.
Last Friday Treasury revealed the latest data on HAMP, the Administration’s major foreclosure prevention program. The data has been sold as evidence of the significant progress made from pressuring mortgage servicers. Are loan modifications finally becoming the solution for the mortgage crisis as the Government has always claimed?
Let’s have a look at the figures.
Around 900,000 homeowners have entered the program with a trial loan modification. 66,465 homeowners have received permanent modifications as of December 31st. That’s where the good news lies, November’s figures for permanent loan modifications were half that, at 31,382. This progress is being reported by Treasury as a “significant acceleration of the rate at which borrowers are being approved”. Hard to argue with that when the numbers doubled in a month, but is it enough?
Let’s have a closer look at the figures and the program as a whole.
The program is designed to allow homeowners to enter a three month trial loan modification, during which they are supposed to provide lenders with all the documentation required for a permanent modification. However trials are stretching for much longer. Servicers blame homeowners being slow at handing in paperwork; homeowners blame servicer of losing paperwork and making mistakes. Treasury’s response to this mess has been to allow for longer trial periods, up to 5 months. However mortgage servicers have kept homeowners in what is being called “trial purgatory” for up to nine months.
This seems to be one of the big issues the HAMP program faces, a complete gridlock of loan modification trials. Have a look at these figures:
In October Treasury reported that 487,081 trial modifications had been started. Three months later not even 24% of those trial modifications had been resolved one way or the other. Let’s put this another way 76% of the current trial loan modifications are in limbo. Treasury has pointed out that 46,000 homeowners have been approved for a permanent loan modification but are yet to sign the paperwork that will make it final. Even if this were true it would still mean that 66% are still waiting for a verdict on their loan modification.
Consumers are blaming big banks for creating this loan modification limbo and the figures seem to support that claim. The big four banks, Bank of America, JPMorgan Chase, CitiMortgage and Wells Fargo represent more than 60% of the 3.4 million mortgages eligible for the HAMP program. The best of the bunch Wells Fargo has only completed 13% of its eligible loan modifications. The rest are doing much worse. Bank of America the largest mortgage provider by far is performing the worst, converting only 3% of their 1 million eligible mortgages into permanent modifications.
No matter how Band of America tries to window decorate these figures advertising they have surpassed the 200,000 trial modifications barrier, this is all rather pathetic. We are not even saying they should convert more trials into permanent loan modifications but at least put homeowners out of their misery and tell them what the outcome is, one way or another.
Loan Modifications and Home Refinancing are been talked about so much they are becoming the most used financial buzzwords by homeowners nationwide. This doesn’t mean people understand the differences or the financial consequences of either of them.
This article seeks to look into the pros and cons of Loan Modification and Mortgage Refinancing and to provide clear guidance to when it is best to modify your existing mortgage or to refinance it altogether.
Let’s start with some basic definitions for Loan Modification and Mortgage Refinancing so we are on the same page on what we mean by these terms.
Loan Modifications.
Loan modifications are used as a tool to lower the monthly payments of troubled homeowners. The whole purpose is to help people that are struggling to pay their mortgage by either lowering their interest rates, extending the term of the loan or in some cases reduce the principal balance of the loan.
You do not need to have equity on your home to apply for a loan modification, the government is actually subsidizing loan modifications through the HAMP program so that more homeowners can qualify.
Mortgage Refinancing.
Mortgage refinancing is a way for borrowers to get a better deal on their mortgage. You effectively pay off the current mortgage and negotiate a new mortgage with better conditions. This can mean lower monthly payments, lower interest rates, a shorter loan term, which reduces the cost of the loan, or a safer interest rate type (fixed, variable, ARM)
You can refinance with your existing lender or with a new lender. You do not need to be in financial difficulties to apply for a mortgage refinance. You will generally need to have some equity on your home for a lender to agree to refinance your home and be able to afford the new monthly payments which will not be necessarily be lower.
Which is the best for you?
This is a question only you can answer, because it completely depends on your personal circumstances. Here is how you work out which is the best option for you:
1) Do you have equity on your home?
Or put another way is the current value of your home lower or higher than the pending balance of your mortgage.
If you have negative equity, or owe more than the house is worth, then you are really going to struggle to refinance your home unless you are willing to pay ridiculously high interest rates, extend the term of your loan or/and increase the cost of your monthly payments. You don’t have to be a finance guru to know that is not what you want. If you are in negative equity nine times out of ten you are better of getting a loan modification, which in its current form was pretty much designed to help out borrowers in your situation.
However if you are fortunate enough to have a decent equity on your home you are very likely to find a lender that is willing to refinance your mortgage with a better deal; especially if you bought your mortgage a few years ago when interest rates were higher.
2) Are you worried about your credit score?
Loan modifications affect your credit score whatever your lender has told you. Refinancing your mortgage does not affect your credit score negatively, it might even improve it. It is true the government has created a new “label” for people that apply for loan modifications which in theory will not affect your credit score but the truth is that it will; if not right now it will in the near future. Banks and lenders are wary, quite understandably, of customers that ask for breaks on a loan agreement, and that is what you are doing when you ask for a loan modification.
Nevertheless if you are struggling to make it to the end of the month and have little or no equity your goal is to save your home and your credit rating is probably the least of your worries. Get a loan modification.
3) Does it reduce your interest rates?
This is the big question. Whichever road you take, Loan Modification or Mortgage Refinance you need to make sure your interest rates have dropped or you principal loan balance has been reduced, the latter is very unlikely I’m afraid. If your interest rates are not lower any savings on your monthly payments are going to cost you in the long run, look for a better alternative.
To illustrate, refinancing your mortgage could cost you anything from 0% to 3% of the balance of your mortgage but if you negotiate a lower interest rate, preferably a lower fixed interest rate, then you could recoup your costs in three to six months. If your interest rates have not dropped you are just giving your money away to the bank.
Loan Modifications under the HAMP program started slowly, and continued to plod along, now they are still providing completion rates that are unsatisfactory, if you want to word it nicely. Pathetic, would probably be a better description.
However, the Obama Administration has worked hard to put pressure on the banks and servicers that manage home mortgages and have the purse strings on loan modifications. What was the result? The number of temporary loan modifications that have been made permanent doubled to 66,465 and 46,056 three month trial mortgage modifications have been approved and only await the borrower’s signature for completion, according to the Treasury Department.
These completion rates are still low, but as of November 30th 2009 completed loan modifications stagnated at 31,382 a doubling of loan modifications is an accomplishment that deserves some attention, and why not, some much awaited positive reporting.
What is also encouraging is that areas that were hit the hardest by the drop in home prices, like California, are leading the way in the loan modification revival. California, for instance completed 13,353 permanent modifications in one month and 158,935 await approval.
That is the good news; however it is very early to get too excited. The current number of trial modifications is just under 700,000 which compared with 66,465 completed loan modifications illustrates the amount of work that is still required to make a dent in the mortgage crisis.
Just last year there were 2.8 million foreclosures, and the number of foreclosures in December rose by 14% which shows how the modest progress we are reporting is really a proverbial drop in the ocean.
The administration understand too well the complaints the public are making against the HAMP program and no doubt share some of the frustration of troubled borrowers, amazingly they remain optimistic and claim they are on track to meeting the goal of 3 to 4 million modifications by 2012. Apparently 2012 will not only be the end of a Mayan calendar cycle but also a turn in the American mortgage industry cycle also.
To be fair, there are other indicators that allow for some optimism. According to the Treasury Department one in four troubled homeowners had received a permanent or trial loan modification. Also, big banks like JPMorgan, Chase & Co. and Citigroup which previously had lagged behind in modifications are leading the way with loan modification rates of over 33%. On the negative side, Bank of America, the biggest playing in the park, dragged their corporate feet with a 19% permanent modification rate. But even this negative rate comes sugar coated as Bank of America started 34,000 new trial loan modifications in December 2009.
Loan Modification consultants have being saying it for a long time; the best loan modifications are those that reduce the balance of the loan. This might seem obvious; of course borrowers are going to prefer loan modifications that reduce the amount they owe. What is not so obvious is that these types of loan modifications may be the best kind for lenders too.
Loan Modifications can use a variety of tools and measures to reduce the monthly payments of a mortgage. Reducing monthly payments is considered to be the main objective of a loan modification, as a way of giving troubled borrowers a break so they can continue to pay their mortgage. This can be done by:
1) Reducing the interest rate of the mortgage, either temporarily or permanently.
2) Extending the term of the loan, which means giving the borrower longer to pay the loan back.
3) Rolling interest payments to the end of the loan, this reduces monthly payments but creates a huge payment at the end of the loan.
4) Principal reductions of the loan balance. Here the bank or lender “forgives” or writes off a portion of the loan.
The Obama Administration does not control which measures lenders use on loan modifications and they certainly don’t require lenders to cut mortgage principals, what’s more, until recently principal reductions seemed unthinkable, a nice idea but not very practical. It must be said that forgiving debts is a nice thing for friends to do, but it doesn’t sound like a good way for lenders to do business.
However, recent reports are showing that principal reductions could be a key factor in creating cost efficient loan modifications for both lenders and borrowers. One of these reports was published by the Lender Processing Services June 2009 Mortgage Monitor and concluded that re-defaults on loan modifications with a principal reduction element fare much better than those based exclusively on interest rate reductions. The report states that “the success rate for loss mitigation-related loan modification hovers in the 30-40% range, with a higher success rate for loan modifications involving a reduction in unpaid balance.
The success rates of loan modifications with principal reductions is so much better than with other methods that lenders are beginning to listen to the data and increasing their principal reductions on mortgages of troubled borrowers.
You might still ask yourself why banks or lenders would be willing to cut unpaid loan balances instead of using other apparently cheaper measures. The key, we hinted at above, are foreclosures. Foreclosures are expensive for lenders, selling in a buyers’ market and the costs associated with selling a property are not cheap. Having said that any kind of loan modification carried out to avoid foreclosure is expensive for lenders whether they reduce interest rates, extend the term of the loan or reduce the principal balance, what makes it even worse is when borrowers re-default on their loans after the loan modification. Because foreclosure re-defaults are much lower on loan modifications with principal reductions, lenders are starting to think they might be cheaper in the long run, which is good news for the fortunate few that actually qualify for a loan modification.
Loan Modification Foreclosure Prevention Companies Looking For Affiliate Sale Representatives
Jan 11
Loan Modifications are big business. People are willing to pay large sums of money to modify their mortgages to monthly payments they can afford. Many companies are willing to supply financial knowhow and procedures to smooth the process towards a loan modification.
These companies advertise as experts that understand all the ins and outs of the loan modification world. They claim to speed up the procedure and know all the right answers a layperson could not possibly do on their own. In order to attract customers loan modification agencies like 1ST Foreclosure Prevention are opening affiliate programs. These affiliate programs offer incentives and bonuses to sales representatives that attract new customers in the same way that insurance or car salespeople take a cut from a sale.
Affiliate Sales Representatives are asked to have a strong motivation and enthusiasm as well as good communication skills with the borrowers, which They are not expected to be mortgage or loan experts, that is the job of the company, the only responsibility they have is to attract the customers. The attractions for the posts are mainly the money and being able to work from home.
Things were never so good for loan modification and refinancing companies so they are all on a hiring spree. The five digit salaries loan modification companies advertise are sure to attract attention. The question is if borrowers should pay agents for loan modifications.
As usual your opinion will depend on if you stand to gain or not from the operation. Loan modification agents will argue that loan modifications are complex procedures which the average layperson is unsuited to perform and that loan modification agents offer a valuable service to borrowers that might otherwise not be able to take advantage of a loan modification.
The Obama Administration is however encouraging borrowers to turn to government sponsored loan modification advice centers for free help and are discouraging homeowners from paying for a service they can do themselves or get done for free.
Whatever you decide to do it is important to remember that loan modification agents, no matter how good they are, cannot guarantee a loan modification will be accepted, that is up to the lender. Other factors like the mortgage’s NPV test also condition the outcome of the loan modification application. This means that the agent has no way of guaranteeing success no matter how much he charges. It is important not to pay for loan modification services upfront before they are carried out.
It is also important to understand how the loan modification process works and what you are expected to supply to your lender. Loan modifications depend on two main factors: What your house is worth and what you can afford to pay. Loan modification agents will help you to fill in the loan modification paperwork in a way that does not undermine your chances of getting a loan modification.
CitiGroup is busy advertising an alternative to HAMP loan modifications. The alternative is nothing new, the refinancing of mortgages with a 30 year fixed rate mortgage. What makes this option attractive is that interest rates are currently low. Homeowners that bought their house with a high interest rate can benefit from refinancing with improved conditions.
The mortgage refinancing offered by CitiGroup includes 30 year fixed rate mortgages with interest rates as low as 5%. The benefits the international banking group advertises include lower mortgage payments, access to home equity and even a reduction in the length of the loan’s tenure.
If you qualify for a mortgage refinance your mortgage is completed and paid for by a new mortgage with new conditions. If the new conditions are an improvement from your previous loan you could enjoy substantial savings.
However that is one big IF. Refinancing has been around for a long time, some even suggest that refinancing had a hand in creating the mortgage crisis we are now experiencing. In order to refinance a mortgage the new mortgage must be large enough to pay for the previous mortgage and still provide some kind of savings to the homeowner as well as pay for the expenses incurred in the process.
Unfortunately most troubled homeowners are stuck with underwater homes that are worth less than the mortgage. CitiGroup, or any other bank, are unlikely to refinance a home that is worth much less than the current loan.
Refinancing remains a solution for homeowners that are struggling to pay their mortgage, have a high interest rate mortgage and still have some equity on their home. For the vast majority of troubled homeowners out there this is simply not an option.
However if you circumstances comply with the scenario mentioned above you would be well advised to act quickly. Interest rates could rise soon and a 30 year fixed rate mortgage at 5% is a sweet deal.
If your house is underwater then the options are very different. Your first decision must be if it is worthwhile for you to keep the house. This decision will depend on your moral view of loans, you’re your projection for the housing market is and what you can afford towards monthly mortgage payments.
HAMP loan modifications provide help for underwater borrowers but require that mortgage payments remain below 31% of the household’s income. Another requirement is that the mortgage passes the NPV (Net Present Value) test which measures the profitability for the lender of granting a loan modification. Although these are only two of the requirements for a loan modification they illustrate how difficult it is for homeowners to comply with them. Reducing mortgage payments can only be done by reducing interest rates, extending loan tenures, reducing loan balances or rolling interest payments to the end of the loans lifetime. Reducing interest rates and loan balances are not very popular with lenders while lengthening a loans tenure and paying extra interest at the end of the loan are not very good options for already struggling homeowners.
Loan Modifications have been touted as the solution to all evils brought about by the latest economic crises and as the worst idea an administration has ever had.
The administration shouts out that the whole point of Loan Modifications is to help the middle class by giving them a break on their underwater mortgages while many commentators claim that it is just one more ploy to funnel money to big bank corporations that have already received billions in bailout money.
How is it that such an apparently simple idea as modifying the interest rates, loan tenure, and if the borrower is really lucky, the loan principal, is received with such opposite feelings?
The reason is that it is a loose, loose program where neither lenders nor borrowers get what they really want. The intention was good when designing the Home Affordable Modification Program (HAMP) but just as the Communist Manifesto sounded great on paper, the reality is that in practice it simply doesn’t work.
As nobody gets what they want everybody suspects it is a ploy to steal their money so nobody makes the effort needed to make it happen. Another way to see it is that the government is not creating the incentives that would make the ploy work.
Borrowers Loose:
The whole Loan Modification Program is based on a three month trial period that must be “passed” before the loan mod is permanent. In order to qualify borrowers must provide proof of income, pay their monthly payments on time every month, after which they must supply more paperwork. This creates a bottleneck where a lot of applications come in, 750,000 seems to be the last count, but only a very few actually make it to permanent loan modification, around 31,000. And of the few that make it even fewer are that much better off. The reason being that when a loan is underwater, or put another way, when a borrower owes more than his house is worth, the only real long term solution is to reduce the principal. If you don’t the borrower still owes more than his house is worth and there is little incentive to pay for an investment that is upside down when the borrower could simply walk away from a sour deal and put his money elsewhere.
Lenders lose:
Many feel that the only winners in the loan modification (a.ka. HAMP) program are corporate banks. One argument explains that the whole program is designed to squeeze three extra months out of underwater borrowers that would otherwise not think about paying another month. Others feel that it is only another way to get money to banks through the incentives the program offers.
The three month trial scam does carry some credibility because it costs the bank little to reduce payments for three months and carry on with foreclosure proceedings. The cost of manning the loan modification and running the paperwork would probably be covered by receiving payments from the three month trial.
However it seems silly to think that the whole program is designed to give bonuses to banks. The government only pays a “bonus” to banks when they complete a permanent loan modification and there has only been 31,000 of them up-to-date. The maximum incentive a bank can receive for a loan modification is around $4,000 over a period of three to four years, which means that in total the government will pay in the next three to four years around $124,000,000. Compare $4,000 with the loss a bank incurs when they reduce the interest rate of a loan which climbs into the tens of thousands plus whatever principal reduction might be involved. Although it is true that foreclosures are also expensive it is not as if the government’s measly incentive is going to make a loan modification a great deal. This is why banks are not in a hurry to carry out loan modifications, in most cases it is bad business, and even when there is a small margin to be made the rate of re-default with modified loans is high and banks might just be kicking the can down the road a few blocks.
It is no secret that the Obama administration has a lot vested in the success of the Loan Modification Program, also called the Home Affordable Modification Program (H.A.M.P). In order to help the program along the government has provided a long list of incentives, bonuses and other methods in order to encourage lenders and banks to do their part in making the program work.
First it was financial incentives in the form of cash payments for every completed loan modification of up to $4,000 over three years. This didn’t have the result they hoped for so the administration started naming and shaming tactics where underperforming banks or lenders were published on a list of the worst loan modifiers in the industry while the better performing banks were prized with kudos and positive publicity for “helping troubled homeowners”.
Recently the government has also added to the prize generous capital risk-weightings for banks that perform well with their loan modification application to completion rates.
Those tactics didn’t really lift the program off the floor, of the 750,000 applicants that have entered the loan modification program three month trial only 31,000 have to date actually received a permanent modification to their loan.
This is why the administration started to show its meaner side. Banks and lenders that did not support the cause have been threatened with fines, increased government scrutiny and recently even lawsuits.
Blown Mortgage readers will remember the lawsuit Ohio Attorney General Richard Cordray filed against New York based Barclays Capital Real Estate, doing business as HomeEq Servicing.
The lawsuit details that HomeEq / Barclays has been accused of issuing unfair loan modification agreements and providing inadequate and incompetent customer service to Ohioans who were at risk to losing their homes to foreclosures. HomeEq is accused of forcing troubled homeowners to sign one sided agreements that were unfair and deceptive. Homeowners were required, for instance, to realease HomeEq of all liabilities (which you can’t really do), pay extra fees (not supposed to that either) and waive their own right to defense (not a very popular measure with the Attorney General).
In addition to this Barclays was accused of breaking Ohio’s Consumer Sales Practices Act (CSPA) through their unsatisfactory customer service by not returning calls or responding to enquiries.
The question is this the real reason Ohio Attorney General is suing Barclays. I would say no. If you read carefully the statement of Mr. Cordray it is clear that the main complaint is “unfair” and “indadequate” customer service with loan modifications. Cordray is further reported to say:
There has been ample time for loan servicers to strengthen their efforts and start making a significant difference in preventing home foreclosures,” Cordray said. “Unfortunately, many servicers have instead repeatedly chosen to aggravate the crisis through noncompliance and excuses. As I see it, for every excuse, hundreds of families become more vulnerable to losing their homes. In Ohio, we have zero tolerance for any more excuses.”
If you check the latest servicers loan modification performance lists you will quickly see that HomeEq was way down there with 657 trial loan modifications and zero completed permanent loan modifications.
It doesn’t take a leap of imagination to see that the Obama administration has decided to start suing underperforming servicers and has started with a British company that has recently entered the industry. Targeting a foreign company could be seen as a warning shot to big banks like JP Morgan and Wells Fargo that have a measly conversion rate of 3 to 4 percent on their loan modifications.
Obama’s Loan Modification Program is a nice idea with good intentions. A superficial look at the program, what it does and how it does it, would make you think it might or even should work. However the reality is different, unfortunately only a very small number of borrowers are benefiting from this program. This article will explain what the Loan Modification Program tries to do, what are the facts and figures of the last year and why the program is not working.
The Loan Modification Program was created by the Obama administration in 2008. The idea was to help out homeowners that were having trouble paying their mortgages to modify their loans to more affordable monthly payments.
The program aimed to reduce the payments by three main methods:
a) Reducing the interest rate of the mortgages to as low as 3%.
b) If reducing the interest is not enough then banks could extend the tenure or term of the loan to 40 years.
c) If that didn’t solve the problem then the lender would be encouraged to reduce the principal amount of the loan.
If you ask me that sounds pretty good, reducing interest rates, lowering the principal of the loan, even extending the tenure of a loan is acceptable if it stops you from losing your home. The idea was also that banks and lenders would benefit from this program because it would be cheaper for them to modify the loan than the alternative, foreclosure. Foreclosures are expensive for lenders and a loan modification that allowed an otherwise delinquent borrower to faithfully pay his mortgage does make sense.
Fewer foreclosures would stabilize communities, stop prices from dropping and save entire neighborhoods from slowly dying.
Unfortunately none of the above is actually working. Or is it? The Loan Modification Program did meet its short term goal of 500,000 trial loan modifications some months ago. That does sound kind of good, right?
However, of the 760,000 borrowers that have currently signed up only 31,000 have qualified for a permanent loan modification.
To illustrate, Bank of America, one of the U.S leading banks has only completed 98 loan modifications from the160,000 that have applied. That success rate is so low you need four decimal points to even see it on a calculator.
Why are things not working? Well for starters, borrowers are not paying their side of the bargain and often don’t make the three month trial payments. Banks also complain that although borrowers apply they do not fill in the necessary paperwork.
Of course the borrowers’ side is rather different, they claim they never speak twice with the same person and they are sent on a goose chase with conflicting and confusing instructions that are changed as the process goes along.
This brings us to the last reason loan modifications are not working, banks. Banks often simply don’t care if loan modifications happen or not because it is not worth their money. The incentives provided by the government are in many cases a joke compared to the losses involved in reducing interest rates and loan principals. Think like a bank. If you play along and help your clients to get a loan modification you might get $4,000 after 3 years. Great news. How does that compare with the tens of thousands of dollars you are going to lose in the long run? Exactly.
Short Selling your home could be the win-win-win alternative to loan modifications. Loan modifications can be expensive for lenders and borrowers. Foreclosures are even more expensive costing lenders billions of dollars. According to a study carried out by the congressional Joint Economic Committee (www.jec.senate.gov) each foreclosure can cost lenders as much as $50,000. Homeowners naturally don’t appreciate foreclosures either as they often end up causing borrowers to file for bankruptcy besides losing their home.
The other players in the foreclosure game are the neighbors of the homeowners that lose their home. The empty homes that are dumped on the market bring down the prices of all the homes in the neighborhood.
Short Sales can be a win-win-win situation for the lender, borrower and everybody else.
Why?
Well short sales are not without disadvantages but they do carry three great advantages:
1) The seller gets out of the mortgage liability without having to face bankruptcy.
2) The buyer gets a home for a reduced price.
3) The lender gets rid of the house at a relatively minimal loss without having to waste money, time and energy on a foreclosure.
So what is a short sale exactly? Short sales are a process by which a home is sold quickly for a reduced price. Typically the lender agrees to “forget” the difference between the debt and the price the house is sold at. It does seem strange that a bank or private lender will be willing to sell a house at a loss and forgive the outstanding debt. However the case is that even though lenders don’t make a profit short selling can be a much better (i.e. cheaper) solution than foreclosing or even modifying a loan.
Let’s illustrate a scenario where a short sale might make sense. Imagine you own a house that is worth $100,000, you owe $120,000 on your mortgage. You approach your mortgage provider and explain you have lost your job and are unlikely to be able to find a good enough job to continue repaying your $2000 a month mortgage. The ank agrees you are unlikely to be able to pay in the future and accepts your proposal of short selling your home. You sell it at $75,000 and the bank absorbs the $50,000. Obviously the key part is to convince your bank that paying the difference of your mortgage and the price of the home is going to be cheaper or better business than foreclosure a full bankruptcy.
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