What does this mean? Well, it supposedly means that First Federal is doing a “better job” with its loan modification program than the mortgage industry average. 

However, this is not an apples-to-apples comparison. The vast majority of the loan modifications in the national average are homeowners who are already behind on their mortgage payments.

The article states: “We contacted borrowers before they were delinquent,” explains Babette Heimbuch.

Publishing statistics on loan modifications that were done for borrowers who were current on their loans- not behind on their payments- and trying to position yourself favorably by comparing them to the national statistics that include ALL borrowers- is laughable.

Nevertheless, the industry as a whole is not doing enough to ensure the long-term sustainability of loan modifications. And, as I’ve mentioned in other posts, they can’t.

You can leave your fate to “chance,” and you know how bad the odds are, or you can get someone involved to help you to slant the playing field in your favor. Fortunately, you get to choose.

The purpose of this is ostensibly to check income and ensure that fraud wasn’t committed in obtaining the loan.

I believe that there is an ulterior motive behind this plan. And that is, to collect taxes. If a homeowner has not filed taxes and a 4506T is submitted and there is no return, how hard would it be for the IRS to have a system in place to alert them to this matter?

There is no evidence that I can point to which would corroborate this. It’s just a hunch.

But when you have a president who’s presided over skyrocketing spending in his first 90 days, on top of the runaway budgets of the last 8 years, somebody- no, EVERYBODY- is going to have to pay their “fair share.” This program could serve as a great “round-up,” much like the sting operations where they lure criminals with contests promising cash and prizes.

The other reason why this theory would make sense is that some of the major lenders are forcing ALL borrowers who want foreclosure prevention assistance to be pre-screened for this program. Never mind that you could eliminate many of these people in two minutes or less. Granted, you could make the case that the mortgage servicers are doing this because they want to maximize the amount of dollars they can suck out of this program.

On the other hand, it allows the IRS to gather, or at least review, a lot of data without investing much time to harvest it.

This line of reasoning seems both logical and intuitively on-target.  So, let’s apply the same thinking to the loan servicing industry.

In my avoid foreclosure series, one of the things that I focus on is that loan servicers are pretty lax in their standard of care when it comes to handling loans in default, and properties headed to foreclosure.

One of the fundamental reasons for this sloppiness, in my opinion, is that the loan servicer has very little to lose if a property goes to foreclosure. The monthly servicing fee on any one given loan is a very small portion of the monthly payment. If your measly little loan is worth somewhere between $65-200/month to a servicer, exactly how motivated do you expect them to be to give you a loan modification and help you to avoid foreclosure?

Add to that the fact that they’ve got tens to hundreds of thousands of loans to service, and it’s clear why a servicer might prefer to see you go, rather than help you to keep your home. And, your loan is eating up resources, so they’re probably losing money on your file. Add to that the fact that they have to advance to the investor the payments you haven’t made, they’ll probably recoup those costs more quickly by foreclosing than completing a loan modification.

So, I’m having difficulty seeing why this lack of skin in the game theory isn’t being applied to servicers. Recently, Calculated Risk had a story on Banks Sell Some REOs in Bulk below Market Prices. It seems that some servicers have let a few homes go for significantly less than “fair market value,” whatever that means in today’s climate. Apparently, some investors have been buying these REO homes and then flipping them without having to improve the properties.

For many years, the problem with the handling of REO’s is that the lenders were asking retail prices for homes that were in awful condition. Miraculously, they were often getting these prices. Instead of selling the properties to competent professionals who would buy them at reasonable cost and make the necessary improvements, they were foisting them on retail buyers. Many of these homeowners-to-be were financially unsophisticated, with weak credit scores and more mechanical skill than capital. They’d buy these homes with the easy financing that was available at the time, and later find themselves woefully short of cash to make the needed repairs. This eventually led to a glut of repairs in really awful shape, which were increasingly difficult to unload.

Now, the pendulum has swung in the opposite direction in some cases. Faced with bloated inventories, these homes are being packaged and sold in bulk. Occasionally, a home is re-sold for significantly less than its retail value. Well folks, when you buy in bulk, you’d best have a few gems in there, or it’s not worth making the purchase.

For those completely aghast at this prospect, I suggest you pick up a copy of Thomas Sowell’s “Basic Economics” and read the section on the value of middlemen. While it’s popular to bash middlemen who take a cut of potential profits, holding out for the last dollar on every single piece of inventory is inefficient and would likely cost more in the end to collect than letting a few good ones go with the bad ones. And believe me, there are a LOT of bad ones in every bunch. 

The actions of some servicers that I’ve seen border on a violation of fiduciary duty. And some have clearly crossed the line. The crux of the matter, in my opinion, is the low margin in this business, leaving servicers with very little interest in any one given loan.

The excuse that some lenders offer is that, “We’re swamped.” or “We service X million loans.” This sounds to me like, “We’re big, so we suck.” Of course, out of the other side of their mouths, they’re promoting their size as an asset to potential borrowers who are in search of a home loan.

On the other hand, I recently dealt with a “Mom and Pop” shop that seemed hell-bent on foreclosure, looking for any excuse possible to take away the home, rather than offer a loan modification to a borrower who would have been a slam dunk at any major servicer.

Of course, this particular investor had very little “skin in the game” themselves, having just acquired the note for what was likely pennies on the dollar. Funny what a game changer “skin” is in the area of loan modifications for those who want to avoid foreclosure.

Now, both Housing Wire and DS News are reporting like this:

“The ratio of repayment plans to modifications for prime borrowers during January was 2.23 percent — up from 1.95 percent in December — while for subprime borrowers that ratio was 0.53 percent — unchanged from December’s data.”

Do you know what that means? I thought it was the purview of the federal government to obfuscate the numbers, so they didn’t have to tell the truth. After all, they’re pretty good at under-reporting unemployment, and they’ve eliminated reporting on a key inflationary indicator for the money supply.

When you report numbers in this manner, it makes it just a little more challenging to track what’s being done, and it’s easier to make your organization look good… deservedly, or not.

Other interesting tidbits…

Slightly more than 17 percent of all modifications are being made to mortgages owned by Fannie Mae and Freddie Mac.

According to James Lockhart of the newly-found FHFA, “Fannie Mae and Freddie Mac own or guarantee almost 31 million mortgages, about 58% of all single family mortgages.”

So if Fannie and Freddie accound for 58% of all mortgages, and prime delinquencies have been exceeding sub-prime since last summer, then you’re getting SCREWED if you had good credit when you got your loan. Fannie and Freddie should be accounting for at least half of all loan modifications, based on their market share, yet they’re only accounting for 17 percent?

Mr. Lockhart claims that Fannie/Freddie loans account for only 20% of all seriously delinquent mortgages. My personal experience differs. I’m seeing a substantially higher percentage of borrowers who are trying to prevent foreclosure on agency loans.

Furthermore, if you dug a little deeper, you’d find that the difference between the previous mortgage payment and the modified mortgage payment would be much smaller for the GSE loans.

According to DS News, “about three percent of all modifications are being made to mortgages owned by Ginne Mae.”

Back in olden times (the late 90’s), FHA loans accounted for about 6% of the market share. Their market share has been on the rise in the last few years, so it looks to me like they could be doing a little bit more, as well. The Wiki on GNMA says that the 2003 statement claims that they insure 30 million loans.

Either one of two things is happening: either NOBODY calls HOPE NOW if they have a government-backed loan, or the government is not walking its talk when it comes to loan modification. Call me cynical, I think it’s the latter.

Whatever their numbers, our averages are TROUNCING the results you would get by going directly to your lender, by filing bankruptcy, or using “Hope” Now. If you need help, go here: http://foreclosureresolutioncenter.com.

So what the dear congressman is REALLY saying is that he wants private investors to face bankruptcy cramdowns, while government-backed loans will face no such challenge.

As I mentioned in a previous post on Fannie Mae’s loan modification hypocrisy, the government is doing FAR less than the private investors in offering delinquent homeowners options to prevent foreclosure (if you know what you’re doing, of course).

Again, for all the finger-pointing that our federal legislators (I’m no longer calling them leaders) are doing, the problem is facing them in the mirror.

He went on to say, “If we don’t include it [mortgage cramdowns], we’ll be stuck in the same mess we’re in today.”

There are no details included in the story to justify his position. Obviously, he is either ignorant of, or actively ignoring, the bankruptcy failure statistics. It’s generally accepted in the bankruptcy community that only one-third of Chapter 13 filers reaches a discharge.

That’s a 66% FAILURE rate!

Perhaps this is yet another “kick the can down the road” strategy, designed to further draw out the decline in real estate prices.

Another factor: Durbin receives more campaign contributions from lawyers and law firms than any other source. With a 33% success rate, it’s clear that the Chapter 13 system mainly benefits the lawyers who “practice” (?) this type of law… and the candidates whom they support.

My prediction: if this bill is passed and is signed into law, the failure rate for Chapter 13 filers will INCREASE. The mortgage cramdown only sticks if you make all of your plan payments and reach a discharge. Three parties will benefit: mortgage servicers, bankruptcy attorneys, and those who shill for them (Durbin would be a good example).

This approach will only serve to magnify losses for mortgage investors and give false hope to homeowners trying to prevent foreclosure.

The plan is supposed to provide immediate help to homeowners are “right on the edge of foreclosure” and help in “raising home values that have been plummeting.”

Like most others, I am not privy to the details of said plan. However, I repeatedly hear people saying that “housing is the crux of the problem.”

My response is that housing is a REFLECTION of the underlying problems in our economy. Previously, subprime loans and adjustable-rate mortgages caused what I call the “first wave” of the foreclosure crisis.

Currently, falling real wages and rising unemployment are contributing more to this “second wave” of the foreclosure problem.

During the first wave, the calls were predominantly from homeowners who simply couldn’t afford their re-set payment, and could not refinance into a lower cost mortgage. Typically, this was a result of the tightening mortage market and/or the fact that they hadn’t really improved their credit score during the term of their teaser rates.

. Over the last 6-8 months, I am increasingly hearing from homeowners who have experienced an extreme decline in income. More and more, this is becoming “the story” for homeowners in default.

I’ve said on a number of occasions that the mortgage industry has consistently been 18-24 months behind the curve in responding to changing conditions.

The federal government’s solution du jour is “streamlined modifications,” championed by FDIC Chair Sheila Bair. I recently spoke to a former IndyMac employee who still keeps in touch with his old colleagues. I asked him, “How’s the recidivism rate on those streamlined mods?”

“Not good,” he said.

“Worse than the fall-through rate on traditional mods?”

“Yes,” he replied emphatically .

He asked me what my opinion is, and I told him that I expect a failure rate of 75-80% on streamlined mods.

Many people don’t even qualify. They don’t just automatically lower your payment to 38%. If that 38% is not substantial enough to justify lowering the payment, the investor is going to foreclose. So you can’t expect to to qualify for a streamline loan modification if you’ve had your income cut in half.

And even if they do allow you to keep the home on those terms, 38% is about HALF of your take-home pay, in most cases.

There’s been hints that they may lower the front-end ratio to 31%. Regardless, the first point on this topic still stands.

 I’m shocked, and a little dismayed, at just how many homeowners really believe that the federal government is going to bail them out. Every measure thus far has fallen flat. The TARP program is a disaster. The loan modification approach is a bust. Many knowledgeable people believe this stimulus bill is a joke. We’ll see on Wednesday whether Obama’s foreclosure rescue plan follows suit.

The homeowners who call me typically have real problems, a legitimate hardship and are dealing with issues that require a little more attention than simply logging financials and passing them on to the lenders. When homeowners like this contact HOPE NOW, they’re often more than a little “peeved” at the results they get from that organization.

HOPE NOW published its December numbers and announced that for the first time since July of 2007, loan modifications accounted for more than half of all workouts. In an age when getting a loan modification is easier than at any time in human history, they’re beating their chest about beating coin-flip odds.

The other interesting piece of information:

                             ONLY 37 percent of prime borrowers who received workouts 
                                            completed a loan modification.

I’d bet that their recidivism rate is also higher than the industry average.

I’m certain that this number has a lot to do with the fact that the GSE, FHA and VA loans are less inclined to offer loan modifications than sub-prime.

Despite this resistance, a 37% loan modification rate is absolutely deplorable. I suggest that the main reason that the loan modification rate is so low is because they’re working for the lenders, not the borrowers.

Based on my interactions with people associated with HOPE NOW, and the experience I have in dealing with homeowners who were not helped by the organization, here are my observations:

1- HOPE NOW is basically running a mail-forwarding service. If you’d prefer to call them, they’ll forward your info to your lender if you’d like. That’s about it, though.

2- While they may call their telephone operators “counselors,” don’t expect any counseling. I suppose it depends on how you define the word “counseling.” If you mean, “administer advice to assist you in reaching your best outcomes,” you’re barking up the wrong tree [See point #3].

3- Because they’re originated and funded by the mortgage industry, they’re working on behalf of the lenders. Therefore, they offer little of value beyond what you could get by contacting your lender directly.

4- They’re best at solving “small” problems. If you’ve had a slight mishap but your financial situation is back to normal, it may be easier to work through them than directly through your lender.

5- Once they’ve submitted your information, don’t expect them to do any follow-up afterwards.

6- Once they’ve submitted your information, you’ll most likely go back to dealing directly with your lender.

7- If you’re looking for someone to act on YOUR behalf, to help you obtain the best terms possible, or to help you deal with financial difficulties, you’d best look elsewhere.

HOPE NOW advertises itself as some sort of outreach program, perhaps you’ve seen their ads, “Nothing is worse than doing nothing.” Some who’ve called HOPE NOW might disagree.

HOPE NOW fills a valuable role: they provide secretarial resources for the mortgage servicers. And they provide this service to the lenders at a very low cost. 

If this helps some borrowers to avoid falling through the cracks of a poorly-executed loss mitigation system, there is a lot of value in that function.

But for homeowners looking for an advocate who will serve their best interests, HOPE NOW is not the answer.

Hey… what do you want for free?

If you understand that you get what you pay for and are looking for someone to work with you on YOUR behalf and not your lender’s, go here for a better solution to avoid foreclosure.

This is the very poster that young kids were getting in exchange for helping people to register to vote, and work for the Obama campaign.

Colbert asked him if he’d made a lot of money on the poster and he indicated that he hadn’t but that, “I benefit in other ways,” one of which was that Obama was elected president.

Here’s the irony: Obama outspent McCain by 3-to-1 or more, yet the artist who created the very symbol that’s synonymous with his campaign was paid little to nothing.

I do respect his choice. My question: Is this indicative of what’s to come? While I’m sure there will be many who will commend the artist for his contribution, I can assure you that others made fortunes as a result of this campaign. Will this level of sacrifice be held up as a shining example of what will be expected of others? I am of the belief that someone who contributes value should be compensated. I would have rather seen him create a foundation and let HIM decide how that money was spent if he didn’t want to accept personal compensation. This model seems in line with the “from each according to his ability, to each according to his need” philosophy. 

Shepard Fairey also is the man who created the “Obey” giant, which Colbert asked him about. He replied that people often follow the past of least resistance and that they often do what they’re told to do, rather than think through their choices. He created this icon to encourage people to decide whether they should do what they’re told to do and “Obey” or if they should do what they decide is right for them.

He said, “This country was founded on dissent, and when people don’t dissent when they need to, things go wrong [like they did in the last 8 years].”

I agree wholeheartedly with his premise for this campaign.

Here’s the supreme irony of the Shepard Fairey story: A man who firmly believes in dissent helped to elect the man who may expand government’s influence more than any other president in the history of this country.

Fortunately, Shepard Fairey was able to decide for himself how he wanted to be compensated. Sadly, many of his countrymen may soon be unable to do the same.

Obey, indeed.

This is one of the reasons I ask potential clients what their home is worth. It’s important to make a clear-headed decision on these matters. And taking into account the LTV is an important part of the decision making process when you’re trying to prevent foreclosure.

We’ve grown accustomed, over the last few decades, to having LTV’s that are less than 100%. For years, it’s been assumed that “everyone” had some equity, and it was rare to owe more than your house was worth (at least when you considered the overinflated appraisals that were being issued for the last 8-10 years). But nowadays, many people owe more than their home is worth.

According to an extraordinary article by John Lounsbury, this situation is going to get worse. He says, “It has been estimated that 19 million mortgagees will owe more than their house is worth by 2010. This is 50% of all mortgages.”

This should not surprise anyone, as the general trend is downward, and people are finally waking up to the fact that spending half of your GROSS income on your housing payment is idiotic. Frankly, even the the ratios that Fannie Mae now finds acceptable are absurd.

It’s clear to me that many, many Americans are completely rethinking their spending- what’s worthwhile, what’s not. No asset class or market segment is immune to this mindset.

However, despite popular opinion, many homeowners are much more likely to want to prevent foreclosure and keep their homes, even when they know that they owe more than the home is worth. My experience is contrary to the mythical “ruthless homeowner” who consciously decides to stop making mortgage payments because he’s upside down on his mortgage, rides out a foreclosure and sends “jingle mail” to his lender.

My expectation is that housing still has another 20% to fall from where it stands today.

So, if that’s my key assumption, then why does it make any sense to try to prevent foreclosure and keep your home?

Great question. Here’s my theory.

In my experience, the mortgage industry has an extremely feeble hold on the pulse of the market. I have seen that pretty consistently, the mortgage industry is 18-24 months “behind the curve” when responding to changes in market conditions. Today, they’re “solving” problems that ideally would have been acted upon a year and a half ago.

The level of denial amongst mortgage investors is equal to that of the very homeowners who are trying to prevent foreclosure. I spoke to a very well-connected former GSE official and I was shocked at the fact that while he had a good command over current facts and figures, and had pretty lousy expectations for the economy going forward, his ideas for how to address the problem were completely ignorant of falling housing prices. While he was cognizant of the current situation, his “solution” to the problem of recidivism flew in the face of the facts.

So it’s going to take some time before the mortgage industry really deals with the problem of handling underwater assets. Right now, they’re focusing on how to keep homeowners in homes (to some degree), and deciding on which homeowners to boot out right now.

What they’re really doing is kicking the can down the road. At some point, when the homeowner wants to move, dies, takes a job transfer, can’t afford the less unaffordable, “streamlined” loan modification payment (redefaults?), the day of reckoning will arrive and they’re going to have to figure out how to handle these losses. Because losses will be taken, one way or another.

My expectation is this: in another 24 months, the mortgage lenders will come up with some way of dealing with this issue. It’s not that they’ll want to; they’ll be forced to accommodate reality. To a large degree, they already are, as they’re taking on a fair amount of short sales right now.

“Moral hazard” or not, they’re going to have to make provisions for the homeowner who’s current on payments, but will not pay off the loan in full with a market-value sale. And if they’re going to require the sellers who’ve met their monthly obligations to “pony up” and cover the difference or sign some sort of unsecured note, they’re going to have a hell of a lot of homeowners who just default several months before their move, make no attempt to sell the home, and let the REO division handle it.

The increased losses of that approach will bend the lenders’ philosophy to a more pragmatic solution.

With that in mind, if you owe more than your home is worth but you’d still like to prevent foreclosure and keep the home, here is my advice:

1- Determine how much your home would REALLY sell for in this market

2- Knock off another 20%

3- If you’re comfortable with that- and you buy into my theory- then have your financials reviewed by someone who works in this industry BEFORE you approach your lender

4- Have your loss mitigation package prepared, and begin the loan modification review process

If you really enjoy your home and you intend to stay there long-term, just realize that you’re not going to be seeing any price appreciation for quite some time. Now is the time to begin focusing on paying down your debt, re-structuring your financials, and building up cash reserves… not riding the real estate bull.

Some will say, “Well, then you’re just renting.” And I would agree. But what’s the alternative? Rent  somewhere else? Not so fast. If you live in a home at the median value or above, just how likely are you to find a comparable property available for rent? The vast majority of homes for rent are BELOW the median value in any given area. Furthermore, what few units may be available to rent will face significantly increased demand from other foreclosure refugees. And, you’ll be constrained in any changes you may want to make to the property, subject to inspections and a much lower level of privacy and choice.

Oh, and if you think, “Well, I’ll just rent for a few years and then I’ll buy another home in a few years,” I’ve got some questions for you. How do you know? Do you expect it to be easy to obtain a loan? Credit’s been tightening for awhile now, and there’s a lot of clamoring to increase the size of required down payments. Do you have the self-discipline to save 5-10% of the purchase price in just a few years? What if they reduce the debt ratios for future borrowers, and they’ll only allow you to spend 28% of your monthly income on a mortgage payment… or even less? Then what?

Let’s do some simple math. For simplicity’s sake, let’s say that you plan to walk away from your current home, and you think you’ll be able to buy a comparable home for $100,000 in two years. That means you’ll need to save $5,000 in two years. Since savings accounts aren’t paying anything, the entire down payment will come from your contributions. $5,000 / 24 months is $208 every single month. Do you have the self-discipline to save that much each and every month? And not spend it on anything else? I think a lot of people would say, “Yes, I can.” I would say that most Americans can’t. How do I know that? Because very, very few Americans have $5,000 in the bank right now. So you’ll have to do some serious behavior modification if this is your plan. You’ll also have to hope that they don’t require more than 5% as a down payment. You’ll also have to hope that interest rates don’t rise significantly, as many are expecting.

So, if your plan is to cut your home loose and replace it later, you’re going to have to hope that a LOT of factors go your way. If just one of those factors goes against you, your plan may be foiled.

So there’s your choice. You may not like your options, but if you weigh the factors intelligently, you’re more likely to make a better long-term decision. Take all of these factors into consideration before you decide whether it’s better to cut your current home loose or prevent foreclosure and keep your home.

You need a Ph.D to come up with that solution? I’ve been suggesting for the last 18 months that the investors are delusional if they think they’re going to get adequate servicing while only paying the industry-standard, razor-thin fees to loan servicers.

However, I think you need to go further, because getting the loan modification done is only half the battle. If they truly want these loans modified, and they also want to reduce recidivism, they need to be paying third parties to make sure that these borrowers gain a solid footing during the review process, and strategic planning for the next 12 months.

If we’re just going to “do more loan mods,” then we’re still looking at less than a 50% success rate. When you consider that a foreclosure sale entails a $30-60k loss, it seems to me that you spend an extra grand to get some financial guidance for these people. Unless, of course, you think that a 40% success rate is acceptable.

The professors have also missed the mark in their comments. They claim that the servicers of securitized loans are lagging behind, while Fannie Mae and Freddie Mac are leading the way on loan modifications.

As a person who deals with defaulted loans on a daily basis, I can tell you that this is not the case. Fannie’s latest “program,” the HSA (Homesaver Advance) is an abomination… a joke of a program, that’s being used in places where modification is much more appropriate.

Furthermore, they’re awfully stingy on payment relief. I acknowledge the fact that most agency loans already have relatively good rates, but are we just looking to postpone the inevitable foreclosure, or are we looking for sustainability?

And by the way, when I talk about strategic planning for homeowners who are trying to prevent foreclosure, I’m not talking about biased guidance from the loan servicer, nor am I promoting the watered down swill that passes for “foreclosure counseling” at the not-for-profits.

I’m talking about an in-depth financial review to find every possible opportunity to improve a borrower’s monthly cash flow, as well as strategic planning for making better financial moves in the future.

While all of my clients are in default due to unforeseen circumstances, not one of them shows up with a cash flow statement that doesn’t have numerous opportunities for significant improvement.

THAT is the difference between an industry-average recidivism rate of 58% on loan modifications (in the first EIGHT months), and a 12-month average of less than 10%.

IF we are serious about preventing foreclosure, then it’s time that someone stepped up, and some money started flowing in this direction.