loan modification


As I’ve mentioned more than once, I’m no Economics genius. So I was pleasantly surprised to read the October 12th NY Times article by Martin S Feldstein, a Harvard professor of Economics and former chairman of the Council of Economic Advisors. It appears that Professor Feldstein and I agree that the only way to stop the drop in home values is by principal reduction.

The professor points out that for most Americans, their homes are their primary source of wealth. Since the housing bubble burst in 2006, Americans have lost $9 trillion or 40% of their wealth. This sharp decline in wealth means less consumer spending, fewer jobs and a stalled economic recovery.

Today, nearly 15 million homeowners owe more than their homes are worth and of this group about half of the mortgages exceed the value by more than 30%. The professor maintains that housing prices continue to fall because millions of homeowners are defaulting on their mortgages and the sale of the foreclosed properties drive down prices. Because most mortgages are non recourse loans, underwater borrowers have a strong incentive to simply walk away.

Professor Feldstein suggests that instead of throwing tax dollars at ineffective programs aimed at reducing interest rates, the government should address the real problem which is that the amount of the mortgage debt exceeds the value of the home.

Here is a summary of his idea: The government would reduce mortgage principal to 110% of the home value. The cost for doing this would be split between the government and the banks. This would help about 11 million of the 15 million underwater homes at a cost of under $350 billion. Considering the millions of mortgages held by Fannie and Freddie, the government would in essence be paying itself.

This would of course be a voluntary program. In exchange for the principal write-down, the borrower would agree that the new mortgage was a full recourse loan and the government could go after other assets if he defaulted on the loan.

I think it sounds fair, as everyone makes a sacrifice and we put the brakes on strategic default. It is a huge one-time cost, but continuing to allow housing prices to fall could risk another, even more costly recession. And speaking for my short sale clients, I know that most would have gladly signed up for a principal reduction if it meant saving their home.

What do you think?

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If I’ve sounded a bit like a broken record over the last 10 months, it’s because I strongly believe that principal reductions are an import key to ending the housing crisis.  People who are struggling to make payments on an upside down mortgage are more likely to avoid default if they are paying on a mortgage based on 2011 home values.  Fewer defaults mean more stable values and ultimately an end to the real estate crash.  And apparently some of the banks now agree.

According to the Wall Street Journal, Bank of America is finally bringing principal reduction modifications to the bargaining table.  For months now, B of A and the nation’s other four largest servicers have been in discussion with state and federal officials in an attempt to settle charges of inappropriate activities in connection with foreclosure proceedings.  Investigations last September revealed that several servicers used illegal affidavits and faulty paperwork in their foreclosure practices, and the banks are now hoping to settle and avoid any further liability.

The state attorneys general have pushed for principal reduction as part of the settlement, but until recently the banks have refused.  The private negotiations have been going on for months, and the June 15th target for resolution has come and gone.  As a means of kicking the discussion into high gear, B of A has now offered principal reductions as a bargaining chip, and the other banks are expected to follow.

Of course, Bank of America is not offering principal reductions because they actually care about keeping people in their homes, but rather because they hope to make the problems caused by sloppy and illegal foreclosure practices go away.  But in any case, the end result could be the answer to the prayers of many homeowners facing default.

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For those of us in the industry, it hardly comes as any surprise that Bank of America has failed to help thousands of Americans receive a permanent loan modification through the Home Affordable Modification Program (HAMP).  And it now looks like they might have some explaining to do:  A judge has denied the bank’s request to dismiss a case involving tens of thousands of homeowners who claim they were refused help through the HAMP program.

As you remember, HAMP uses federal funds to help struggling homeowners.   Under the program, Bank of America is required to provide foreclosure alternatives and permanent loan modifications to eligible homeowners.

However, according to Steve Berman, managing partner of Hagens Berman, the firm representing the homeowners. Bank of America has refused to permanently modify the loans of thousands of borrowers, even after successfully completing a Trial Period Plan (TPP).  “The vast majority tell us the same thing: Bank of America claims to have lost their paperwork, failed to return phone calls, made false claims about the status of their loan and even taken actions toward foreclosure without informing homeowners of their options,”  said Berman.

In the lawsuit, Berman seeks to prove that Bank of America “intentionally postpones homeowners’ requests to modify mortgages, depriving borrowers of federal bailout funds that could save them from foreclosure.”

“The bank ends up reaping the financial benefits provided by taxpayer dollars financing TARP-funds and also collects higher fees and interest rates associated with stressed home loans,” Berman added.

The case will be limited to homeowners who entered a TPP, but were denied a permanent modification.  Judge Rya Zobel also ruled that homeowners in nine state, including California could pursue claims in their states where consumer protection laws are stronger. 

So if you’re a homeowner in the middle of trying to get a HAMPmodification form B of A, the outlook is not encouraging.  The federal government has cut-off HAMPfunds to Bank of America until they make improvements in how they administer the program, which could mean more foreclosures and short sales on the horizon for Bank of America borrowers.

A recent study by analytics company CoreLogic reported that nearly 25% of all mortgage borrowers owe more than their home is worth.  The aggregate amount of negative equity in the U.S. was a whopping $750 billion at the end of last year.   This lost equity prevents homeowners from refinancing or moving, and according to the report, is the “dominant factor” driving the real estate market.

If you’re among the millions who are paying each month for negative equity, you probably have some questions about your options.  To help address this issue, I’m offering a FREE workshop here in San Diego covering the following:

  • Should I wait for home values to increase?  What is the future of San Diego real estate?
  • What about a loan modification?  What programs are available, how do I qualify, and how many loan modifications are actually approved?
  • If I can’t afford my payments, what are my options?
  • What is involved in the foreclosure process?  How long can I stay in my home? How will it affect my credit?
  • Will filing Bankruptcy save my home?
  • What is a strategic default?  What are the risks?
  • What is a Deed in Lieu of Foreclosure?
  • Is a short sale better than foreclosure?  What is the process? What is a HAFA short sale?
  • What about deficiency judgments and 1099s?  When can I qualify to buy again?

Saturday, June 25th  10:00 – 11:30 a.m. 

San Diego County Library, 4S Ranch

10433 Reserve Dr, San Diego, CA 92127

There is no fee or obligation for attendance, but space is limited.  Advance registration is required.  Homeowners will receive comprehensive workshop materials.

Call 1-888-464-1820 x104 to Register Today

As mentioned previously, I’m not an accountant or lawyer and you should always consult the appropriate professional before making any major decision about your home.

 

On May 24th, The New York Times ran an article in their Opinion section that revealed a nasty, little-known truth about loan servicing that I find outrageous.

As most homeowners know, your mortgage is probably not owned or serviced by the bank or company from whom you originally borrowed.  Not only was your loan probably sold in the secondary market, but it is likely that it is serviced by an entirely different company than the bank or company you actually owe. 

Loan servicing refers to the tasks associated with collecting your monthly payment, paying the investor, and often times, managing payments for insurance and property taxes.  These servicers are also responsible for sending out notices associated with delinquencies, collection activities, and if needed managing defaults.  In return, the servicer is paid a percentage of the principal amount owed, usually 12.5 – 50 basis points (1bp = 0.01%).  Additionally, the flat servicing fee may be augmented with a variety of incentives, all designed to create additional cash flow from each loan on the books.  The total value of these fees and incentives are noted on the servicer’s balance sheet as MSRs – Mortgage Servicing Rights.

Now here is the kicker:  Banks make more from the fees and charges associated with managing a defaulted loan and foreclosure than they can make on a loan modification!  Surprised?  No wonder so few modifications are approved; the servicers have their MSRs to protect! 

The only winners in this game are the servicers.  Not only do the homeowners seeking a modification lose, but so do the banks and investors who will foot the high cost of foreclosures and carrying REOs. 

Luckily, there are others that find this behavior unacceptable.  Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced Senate bills to establish standards for the loan servicing industry.  The proposed laws and regulations are designed to prevent banks from putting their financial interests above those of everyone else.

Here are 3 suggested new rules: 

1)      Homeowners would be evaluated for loan modification before ANY foreclosure activity, or related fee is initiated.

2)      Lender analysis used to approve or reject loan modifications would be standardized and public.

3)      Should a lender fail to offer a modification when analysis indicates that one is warranted the lender would be blocked from proceeding with foreclosure.

Whether it is the result of a Senate Bill, or actions by the new Consumer Financial Protection Bureau, someone needs to rein-in the greed of the loan servicing industry and give borrowers a much-needed break.

During a town hall meeting last Thursday inWashington,D.C. the President took a comment from a woman in the audience who explained that her loan modification expires in January, 2012.   Despite having excellent credit, she can’t refinance because she owes more than the house is worth.  Without a new loan mod, or principal reduction she will not be able to make her payments and could lose her home.

The President agreed that the banks need to take a more aggressive role in protecting homeowners.  He commented to the banks, “We were there for you when you got in trouble, then you’ve got to be there for the American people when they’re having a tough time.”  (I think he just forgot to add the part about the banks creating this problem in the first place.)

“We want to see if we can get longer-term loan modifications. And in some cases, principle reduction, which will be good for the person who owns the home, but it’ll also be good for the banks over the long term,” President Obama said.  “You know what,” Obama continued, “speaking to the banks…you’re going to be better off if somebody’s still paying on their mortgage than if they get foreclosed on and you end up not only having to go through all those legal processes, but you also end up…selling the home at a fire sale price.”

Excuse me, but isn’t that stating the obvious?  Is there anything new here?  Under the current government Home Affordable Modification Program (HAMP), borrowers may receive a modification that is valid for 5 years, and under some non-HAMP programs the modification period is as short as 2 years.  But then what?  Like the woman in the town hall meeting who was fortunate enough to even get a loan mod, what happens when it expires? 

President Obama concluded by adding that his administration is working with banks to expand loan modifications.  “We’re going to be talking to the banks. And I mean, on a regular basis,” he said.

Well, I bet that has the banks shaking in their boots!  “Talking on a regular basis”, what does that mean and how is that going to change anything?  If we are ever going to see an end to the real estate depression that continues to drag down our economy we need an effective plan, not lip-service.  Someone needs to lean on the banks to make permanent, meaningful modifications that include (as I’ve been saying for over a year), principal reduction.  Come on Mr. President….you’ve shown you’ve got the muscle.  Let’s see some action!

For most people, buying a home is the largest purchase we ever make, and chances are it was largely an emotional decision.   There was something about the view, the trees, or the kitchen appliances; something spoke to us and we were ready to buy.  Over time, that emotional attachment increases as we put our personal stamp on the house and make it our home.  No wonder that the idea of losing a home through foreclosure can be emotionally shattering.

Grieving for the loss of a home and what it means to you and your family can be very upsetting.  Too often however, I see people avoid dealing with the reality of their financial situation simply because it is too painful to even contemplate.  These are the folks that ignore the letters and phone calls from their lenders and just pray that somehow it all goes away or that they win the lottery.

If any of this touches a nerve, it might be time to take a hard look at your situation.   Try to put aside the memories of holidays in your home, and ask yourself a few simple questions:

  1. Are you behind on your mortgage payments?  What about your property taxes, insurance and HOA dues?  Are you allowing maintenance items to accumulate because you can’t afford to fix things?
  2. Has your bank notified you and provided options to help?  Have you received a Notice of Default?
  3. Do you owe more than your house is currently worth?  Is the negative equity greater than 20%?
  4. Has your household income dropped in the last two years?  Are you dipping into your savings or other assets to make ends meet?  Do you doubt that your income will improve in the next 3-6 months?

If you answered “Yes” to one or more of these questions, it’s time to take action.  As difficult as it might be to face the reality of your situation, it is far less emotionally stressful to act now while you still have options and are still in control.  As soon as you miss a mortgage payment, the clock starts ticking on a countdown to foreclosure.  Wait too long to act and your options disappear.

If you live in San Diego County and are ready to discuss all the various options available, please give me a call for a no-obligation, confidential consultation.

Marti Kilby

Broker Associate, REALTOR

DRELicense # 01474222

619-846-9249

marti@kilby.com

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