Mortgage modification help on the way? Maybe in New York.

The New York Times reports that NYC and unions are pressing banks to modify mortgages.

Hoping to succeed where Washington has largely failed, New York City’s comptroller, John C. Liu, and six large unions plan to begin a campaign on Wednesday to press the biggest banks to do more to prevent foreclosures in the New York area.

We have complained before on these pages about lender reluctance to modify mortgages in spite of the borrower's good payment history.

Mr. Liu said the group would send Citigroup, JPMorgan Chase, Bank of America and Wells Fargo, among others, a letter that criticizes them for dragging their feet on modifying mortgages that are underwater or delinquent, and that urges them to do “everything possible” to avert foreclosures.

Just how will they pressure the banks? How about moving "pension funds" and other union money? That might work.

Don't expect anything to happen quickly. But this is a good first step.

Read the full article New York Presses Banks on Foreclosures

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Tips for getting a mortgage loan modification

Writing on Bankrate.com, Marcie Geffner lays out the best ways to get a mortgage loan modification.

There are three major points:
Getting a loan modification is difficult, but not impossible.
Homeowners need to submit full documentation and be persistent.
A housing counselor can explain the modification rules and terms.

Getting a mortgage loan modification might seem like a quest only a mythic hero could achieve. After all, the ranks of those who've lost homes in foreclosure dwarf the number of homeowners who've received mortgage help.

The seemingly mysterious nature of who qualifies for a loan modification is legendary among housing counselors. But these experts say there are ways homeowners can better their chances.

Following are housing counselors' tips for getting a mortgage loan modification:

Complete the package. Homeowners need to submit paycheck stubs, a hardship letter, a budget and any other documents the loan servicer wants. If even one document is missing or outdated, the entire file will drop to the bottom of the pile.

Ask questions. Make sure you know exactly what to provide to servicers. Servicers often request two paycheck stubs on the assumption that two paychecks represent one month's income. But a homeowner who is paid weekly, bimonthly or monthly may have to submit more or fewer paycheck documents. Similar misunderstandings about other documents can be equally problematic.

Stay in touch. Homeowners should call the servicer at least once a week and check on the status of his or her request. Ask whether the file is complete. Review the documents. Explain any special or changed circumstances.

Be persistent.

On the other side of the table, representatives of loan servicers also offer tips for homeowners seeking a modification. They include:

Loan modifications come in "lots of flavors" and not everyone is qualified for the federal government's Home Affordable Modification Program.

Label your documents. To survive that storm of paperwork, homeowners should submit a complete package, put their names and loan numbers on every document and call to confirm that all the pages were received.

Release your tax return. Homeowners are required to not only submit income documents, but also sign IRS Form 4506-T, which allows the servicer to access the homeowner's federal tax returns.

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What a Surprise- "Banks aren't modifying loans" says Treasury

Something many of our readers are familiar with is now news at the New York Times. "U.S. Will Push Mortgage Firms to Reduce More Loan Payments" is the headline of today's story. It continues,

The Obama administration on Monday plans to announce a campaign to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence mounts that a $75 billion taxpayer-financed effort aimed at stemming foreclosures is foundering.

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”

To those who have been frustrated dealing with mortgage companies, such as Wells Fargo, in requesting a modification or approval of a short sale, for that matter, this may come as welcome relief.

Will Treasury be effective? Doubtful, my personal experience on behalf of a client dealing with Wells Fargo indicates that Wells is blaming Freddie Mac for the hold-up in approvals. Unless the ultimate investor is pressured, don't expect any relief; you just can't embarrass these guys.

Read the full article.

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Short Sale, Foreclosure, or Deed in Lieu: Which is Best for the Borrower?

Writing in Realty Times, Bob Hunt, a director of the National Association of Realtors, and Realtor in his own right, addresses the "benefit" to the borrower between a short sale, foreclosure, or deed in lieu transaction. It's an important article, here it is in full:

Short Sale, Foreclosure, or Deed in Lieu: Which is Best for the Borrower?

If only the President’s foreclosure-prevention plan worked as well as “cash for clunkers”. But it hasn’t. When the Administration announced the Making Homes Affordable plan in February of 2009, officials said they hoped it would help 4 million distressed homeowners to stay in their homes. As of this writing (8/2/09), the Administration has acknowledged that there are only 200,000 trial loan modifications under way.

Clearly, lenders have been reluctant to modify loans. (Moreover, there are good reasons for their reluctance according to a recent study by the Boston Federal Reserve.) Also, many borrowers have turned out to be ineligible for the programs or – because they are so far ‘under water’ – uninterested. Whatever the cause, the result is the same: a distressed borrower typically needs to choose between (1) a short sale (where the lender agrees to take less than the amount owed) in which, among other things, a commission (paid by the lender) is generated. (2) a foreclosure, or (3) a deed in lieu of foreclosure (where the borrower ‘gives back’ the property to the lender without a foreclosure proceeding). Which is better for the borrower?

Many real estate agents will say and advertise that a short sale is clearly preferable. In support of this view, two claims are usually asserted. (1) A short sale is less damaging to the borrower’s credit than a foreclosure. (2) A short sale provides the borrower with a shorter ‘waiting period’ until the borrower will be able to purchase a home again.

It is important to note that these are two different claims. For example, in a period of time a borrower could become eligible for a purchase loan under Fannie Mae/Freddie Mac guidelines, but he or she might still not have sufficient credit or income to qualify for the loan.

While many say that a short sale is less damaging to one’s credit than is a foreclosure, documenting that claim is another story. This writer has looked hard, but can’t find any verification from Fair Issac (the developer of the FICO scoring system) or any of the major credit providers. That is probably no surprise, because their systems are proprietary. Nonetheless, one wonders what might be the source of the claim.

On the other hand, people who apparently should know deny that there is any difference. Greta Guest of the Free Press (Freep.com) quotes John Ulzheimer, president of consumer education for Atlanta-based Credit.com. Ulzheimer spent seven years at Fair Issac. “The credit bureau sees those all as equal,” Ulzheimer said. “They are all essentially in the eyes of FICO a major delinquency.” Elizabeth Razzi wrote in the Washington Post (July 20, 2008), “A foreclosure and short sale inflict equal damage to your FICO score, according to Fair Issac…” though she provides no specific citation.

Moving on from the credit score issue, there is the question of being again eligible to buy. More precisely, it is a question of when, in the future, the defaulting borrower could get a loan that would be purchased by Fannie Mae or Freddie Mac. The issue is dealt with in Fannie Mae Announcement 08-16, released June 25, 2008.

When it comes to foreclosures and deeds in lieu of foreclosure, the policy distinguishes between events that were precipitated by extenuating circumstances (e.g. job loss, major illness) and those that were not (e.g. financial mismanagement). If you’ve had a foreclosure without extenuating circumstances, you can’t purchase with a Fannie Mae – backed loan for five years. However, if there were extenuating circumstances, it drops to three years. Suppose you chose the deed in lieu of foreclosure option. If there were no extenuating circumstances, the period would be four years, but with such circumstances, it drops to two. Fannie Mae doesn’t draw the distinction when it comes to short sales: the period is two years, the same as doing a deed in lieu with extenuating circumstances.

May 15, 2009, the Treasury Department issued an update to the Making Home Affordable plan. Among other things, it provides for financial incentives (e.g. a $1,500 moving allowance) to distressed borrowers who meet the general eligibility requirements for a loan modification and who will engage in an approved short sale or who will give a deed in lieu of foreclosure. Distressed and underwater borrowers face a minefield of options for resolving their problems. Not the least of their problems is the vast amount of misinformation floating around. They need to step very carefully.

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FDIC's Bair weighs in on financial regulation

Sheila C. Bair, chairman of the FDIC, has an Op-ed in the New York Times supporting President Obama's call for a new regulatory network for banks and other financial providers.

"THE Obama administration has proposed sweeping changes to our financial regulatory system. I am an active supporter of the key pillars of reform, including the creation of a consumer financial protection agency and the administration’s plan to consolidate the supervision of federally chartered financial institutions in a new national bank supervisor. This consolidation would improve the efficiency of federally chartered institutions while not undercutting our dual system of state and federally chartered banks."

Bair then outlines the advantages of the Obama plan over other plans that have called for a single regulatory agency.

What concerns me is that Bair has been wrong before, most notably about the mortgage modification debacle. And when she says, "this is not about protecting turf. This is about protecting consumers and the safety of our financial system," my first urge is to run for the hills.

Read the full article, The Case Against a Super-Regulator.

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NY Times- Fees deter loan modification effort

The New York Times reports on the impact that servicing fees have on a lender's willingness to modify a mortgage or otherwise assist a homeowner facing foreclosure.

Although the White House is calling on lenders to assist borrowers,

"industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans."

What's going on?

Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

It's not a pleasant self- portrait that the mortgage industry is painting. But it goes hand in hand with the comments we get from potential borrowers that they can't modify their loans or get a new mortgage to replace the old when market values have declined. No one ever accused the mortgage industry of being altruistic, but good business sometimes requires that you protect your customer base, too.

One thing seems to be clear-- until home values begin to rise and people go back to work, we're go to see more mortgage defaults.

Read the full article Lucrative Fees May Deter Efforts to Alter Loans

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NY Times- Subprime brokers resurface as fixers

We've previously commented on the presence of folks in the mortgage market who bore some responsibility for the current mortgage crisis. (See Where's there a buck to be made and Would you buy a used loan from these guys?)

Now the Times reports,

From the ninth floor of a downtown office building on Wilshire Boulevard, Jack Soussana delivered staggering numbers of mortgages to homeowners during the real estate boom, amassing a fortune.

By Mr. Soussana’s own account, his customers fared less happily. He specialized in the exotic mortgages that have proved most prone to sliding into foreclosure, leaving many now scrambling to save their homes.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

Where does it end? That's the same question being raised by actions of the Federal Trade Commission as it brings charges against Mr. Soussana's company, FedMod.

The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers.

Other companies are being targeted by the FTC. Read more in Subprime Brokers Resurface as Dubious Loan Fixers.

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Mortgage Modification Program a Bust - Ask this homeowner

The New York Times reports on what we have been reporting all along--the Obama administration's mortgage modification programs are not working. In Promised Help Is Elusive for Some Homeowners the Times relates the story of Arizona homeowner, Eileen Ulery, and her efforts to modify her mortgage. Her problem? She's current on her payments.

Yes, she was teetering toward delinquency. She was among millions of homeowners rapidly sliding toward danger for whom the Obama administration had devised an aid program — some already in foreclosure proceedings, others headed that way as they ran out of means to make their payments. But unlike those in imminent peril of losing their homes, Ms. Ulery had never missed a payment.

“I don’t know who this bailout is helping,” she said. “We’ve given these banks all this money and they’re not doing what they say they’redoing. Something’s not working right. They keep saying they’re doing all this, but we don’t see it down here at this level.”

More than three months after the Obama administration outlined a new program aimed at rescuing millions of distressed homeowners by compensating banks that modify mortgages, Ms. Ulery’s experience illustrates the mixture of confusion, frustration and limited assistance that now reigns.

Good luck to Ms. Ulery and the thousands of other homeowners just like her as they attempt to weather the financial storm. In fact, good luck to us all.

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Defaults after mortgage modification worse than expected?

The Wall Street Journal addresses mortgage modifications and earlier predictions about high redefault rates. In fact, according to WSJ, "some redefault rates may reach 75%."

A central tenet of Washington economic policy for the past three years has been that the key to ending the recession is stopping mortgage foreclosures, whatever the cost. Well, another new study shows that mortgage-servicing companies are having a terrible time of it, not least because the mortgages are continuing to sour at a rate nearly as fast as they can be modified.

Yesterday's Journal reports that Fitch Ratings looked at mortgages bundled into securities between 2005 and 2007 and managed by some 30 mortgage companies. Fitch found that a conservative projection was that between 65% and 75% of modified subprime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. This is an even worse result than previous reports by federal regulators. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

The reasons for the high redefault rate aren't surprising. Many of the borrowers never could afford these homes in the first place, yet the political pressure has been strong to modify loans even for these borrowers. As home prices continue to fall in some markets, borrowers remain underwater and many of them simply walk away from the home and thus redefault.

This study has to come as a blow to the Federal Deposit Insurance Corporation, which has invested a great deal of political capital in the modification thesis. It also means that to the extent that public money has guaranteed any of these loan modifications, the taxpayer will be an even bigger loser. Banks don't like to foreclose on borrowers, so the best public policy was always voluntary renegotiation. As for the housing market, the quickest way to begin a recovery is to more quickly let prices find a bottom. On the evidence so far, the mortgage modification fervor has been a giant political exercise with little impact on housing prices.

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Piggy Back Seconds Blocking Modifications?

At our catbird seat in Northern New Jersey we have heard of many homeowners who have been frustrated in their refinance attempts by low appraisal values and other wrinkles, such as lender's instructing borrowers to go into default before applying for a modification.

The Obama Administration's attempts at freeing up refinance money just do not seem to be working. For instance, a New Jersey homeowner buys near the top of the market, has been making on-time payments, and is looking for a lower rate. Along comes the government's HARP program and a loan limit of 105% of appraisal value. If you bought a house for $300,000, put down $30,000, and your property is now worth $225,000, the arithmetic is simple--under HARP you qualify for a loan of $236,250.00. That's a far cry from the $270,000 =/- you are trying to refi.

What if you have a piggy back second mortgage from your closing? Kenneth R. Harney's Washington Report: Second Liens and Piggyback Loans discusses the issue.

Second liens and “piggyback” loans have been big impediments to successful
mortgage modifications for thousands of financially-stressed home owners. Now
the Obama administration has a new program to deal with the problem.

Under a plan outlined last week, the Treasury department will soon begin offering cash incentives and subsidies to lenders who lower troubled home owners' monthly payments on second mortgages and credit lines, or simply write them off their books.

How will this work?

• Treasury will enter into agreements with second lien holders to reduce interest rates to just one percent on fully-amortizing seconds and to two percent for interest-only seconds, for the next five years.
• Treasury will pay cooperating lenders $500 for each second lien they modify, plus $250 a year for each year the home owners stay current on payments. Alternatively, lenders may be offered a lump-sum cash payment from the government to cancel the second-lien debt altogether.
• Whenever first mortgage holders cut a borrower's principal balances by a percentage of the loan amount, second lien holders will be required to reduce balances owed by a similar percentage.

Will it work in markets such as New Jersey? Only time will tell. Read the full article here.

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Second-Home Blues in a time of Recession

Where's the help for second-home owners during these times? Is the government abandoning those who bought vacation properties during the 1990s? These are the questions raised and discussed in "Help for second-home owners" written by Marilyn Kennedy Meila at Bankrate.com.

When we overindulged in real estate earlier this decade, we took generous helpings of seconds.

Now the problem for many with too much debt on their plate is how to deal with the mortgage on a second home.

When buyers purchase a home that's not their primary residence and ask lenders to qualify them based on expected rental receipts, it's counted as an investment property. If, though, borrowers plan to pay the mortgage out of their own pocket and use the property for their own enjoyment, it's a vacation home.

That's an important distinction because there's "some dispute about whether or not the recently announced government effort allows owners of bona fide vacation homes and some types of rental units to seek a refinance."

Meila discusses what she sees as the four options when dealing with a second home. They are:

• Refinancing
• Selling short
• Working out a modification
• Declaring bankruptcy

To read the complete article, go here.

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Washington Report: Outlines of Stimulus Plan by Kenneth R. Harney

Realty Times contributor Kenneth R. Harney outlines the stimulus plan as it affects lenders and borrowers. The 3 key points

1. 3 to 4 million borrowers whose loans are owned by Fannie Mae or Freddie Mac will be eligible for rapid refinancings if equity is inadequate under normal guidelines. "Many of these owners will get new fixed, long-term rates in the low five percent range, improving their chances of staying out of default and foreclosure."


2. "An aggressive $75 billion outreach effort to keep millions of debt-laden, seriously delinquent owners out of foreclosure." Participating lenders and servicers will receive co-payments from the government that will reduce the monthly maximum housing expense from 38 % to 31 %.

3. Fannie Mae and Freddie Mac "will each receive $200 billion of additional injections of capital from the government, and the Treasury will continue to purchase their mortgage backed securities to keep interest rates low for all borrowers."


Says Harney,

It will be weeks and months before we begin to see just how effective the Obama housing relief effort is in stabilizing prices and preventing foreclosures.

Read the full report here.




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A Plea - Don't Allow Mortgage Cramdown

One of the proposals before Congress is to allow Bankruptcy Court judges to "cram down" first mortgages on residential real estate. Some believe this is good for the nation, others do not.

Today's Wall Street Journal features an op-ed by Todd J. Zywicki, "Don't Let Judges Tear Up Mortgage Contracts." Allowing a cram down "would be a profound mistake," he writes.

• Mortgage modification provides a windfall for some homeowners but "the ripple effects could further roil America's consumer credit markets."
• "In the first place, mortgage costs will rise."
• "Allowing mortgage modification in bankruptcy also could unleash a torrent of bankruptcies." "A surge in new bankruptcy filings, brought about by a judge's power to modify mortgages, could destabilize the market for all other types of consumer credit."

"There are other problems. A bankruptcy judge's power to reset interest rates and strip down principal to the value of the property sets up a dynamic that will fail to help many needy homeowners, and also reward bankruptcy abuse.

"Consider that the pending legislation requires the judge to set the interest rate at the prime rate plus "a reasonable premium for risk." Question: What is a reasonable risk premium for an already risky sub-prime borrower who has filed for bankruptcy and is getting the equivalent of a new loan with nothing down?"

We would have to agree that Mr. Zywicki's thoughts make sense. Are we willing to throw more homeowners into bankruptcy in order to test the waters of a mortgage cram down?

Read the full article here.

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Mortgage Modifications a Bust?

We have previously written about the failure of mortgage modification programs in the current economic crisis. See our post of December 10, 2008, Foreclosure Follies: A rebuttal to the FDIC modification plan. In our post we pointed out that the FDIC's prediction of a 15% or so failure rate when loans are modified was too low. Now, the Comptroller of the Currency is weighing in with a 50% figure. See, Second time no charm for homeowners appearing through the Washington Post wire service.

To answer the question why so many modified loans are failing is not easy. Could it be

• Loss of job?
• The type of modification, e.g. is the rate lowered or is the arrearage merely spread out?
• A feeling of helplessness when the home is worth less than the mortgage?

Some are concerned that a focus on re-default rates could discourage loan modifications. "That data just makes me wonder what kind of modifications those national banks and thrifts are doing. Were they sustainable?" said Mark Pearce, North Carolina's deputy commissioner of banks and a member of the State
Foreclosure Prevention Working Group.

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Mortgage Modification May Not be a Cure-all

Realty Times carries an article by Broderick Perkins – "Is A Mortgage Modification For You?"

"Home loan modifications are designed to save homeownership, but they've also created a new mortgage maze pitted with "buyer bewares."

While the demand for modifications is increasing due to federal, state and local foreclosure and bailout efforts, Perkins writes, "Caught in the lurch, homeowners are finding it tough to know when a modification will work and how to best obtain one."

What is a mortgage modification?

A home loan modification, granted only upon the existing lender's approval, permanently reworks some of the terms of an existing mortgage in order to make the loan more affordable to the homeowner.

The strategy is typically designed for homeowners struggling to pay their mortgage, not for those who can pay their mortgage or are eligible for a refinanced loan

Will a modification work for a borrower? Maybe not if:

• The modified loan comes with payments you still can't afford.
• Your current interest rate is already low and there's no room for the lender to lower it further.
• You can make the new payments, but the mortgage balance is greater than the value of your home and you don't plan on staying put long enough to reverse the loan-to-value imbalance.
• You have not already missed payments on your mortgage or can't show financial hardship due, say, to job loss, pay decrease, illness or interest rate increase.
• You have other properties, investments or assets that could be liquidated to cover your mortgage debt.
• A short sale (The lender forgives a portion of the debt owed if you can find a buyer), bankruptcy, auction sale, refinance or other approach, short of a foreclosure, is a better option.

Read more here.

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