HAMP Loan Modifications – Preventing Foreclosures, Or Causing Them?

As I once heard brilliant financial guru Steve Forbes say (paraphrase) “. . . we had a chance to fix the mortgage crisis back in ’07;  if we had just let it crash, it would have been painful, but we would have recovered in 6 months.”  A free economy tends to correct itself, but it’s just not the nature of government(s) to leave things alone.  That’s why we have to endure this mess for years instead of months, and why we have new government programs every time another one fails.  Whatever it takes to prevent economy from it’s natural course: stretch the band, kick the can down the road, etc.

Since 2008, when foreclosures finally got the nation’s attention, congress and the administration has been trying everything they can think of to keep the economy off its inevitable course.  So every few months we get another program:  TARP, Cash-For-Clunkers, HAFA, etc.  Not only are none of these programs working, they seem to be making the problem worse, and like all government programs are easy targets for fraud.

It gets even more frightening when you can’t tell if the fraud is intentional.  Case in point is HAMP, the Home Affordable Modification Program.  The evidence is pretty clear that one way or another, most loan mods fail.  So along comes the government (again) with another program trying to revive a dead animal.  Is it intended to assist borrowers, or abuse them?

“What people entering the HAMP modification process don’t understand, until they are out on the street, is that it wasn’t designed to limit foreclosures; it was intended to expedite them”  (Geroge W. Mantor, RISMedia 8/17/2010).

Sound incredible?  Check out these two links:

(1)  More And Better Predatory Loan Servicing Fraud.

(2)  Are Loan Modifications Causing Foreclosures?

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The Principal Solution to Strategic Walk-Aways

There’s been a lot of discussion on the subject of Strategic Default over the last year or so, with no shortage of passionate viewpoints.  It’s a favorite topic in all forms of media.  The last time we posted an article on this subject (Feb ’10) it created a virtual firestorm of response.

Ethical and legal arguments aside, it’s always been our opinion that the most practical solution to this issue is for lenders to reduce principal loan amounts.  If you can make payments on a $350K loan but the home is only worth $200K, then does it make sense for your lender to reduce your principal to match the fair market value of your home?  Yes, and here’s why:

  1. If you don’t have a “hardship,” you only have two options: take your lumps or walk away.  You don’t qualify for a loan modification or a short sale.
  2. You likely chose your home for the lifestyle it offered, rather than as an investmentYou would be content to stay if you didn’t feel like the value was a total loss.
  3. Lenders (and their investors) prefer performing loans to non-performing loans, and it’s well-documented how costly walk-away defaults are for lenders.
  4. Governments like performing loans, too, but their solutions aren’t working.

A principal reduction modification could even be an equity-share agreement.  The borrower agrees to share any equity growth with the lender at the time of sale.   It’s a no-lose proposition.  Sound improbable?  Well, it’s already happening.

Photographer: Frank C. Müller
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A close friend very recently received such an offer.  It came in an overnight express package directly from the lender, a major bank, with a no-strings offer to reduce the principal loan balance by a substantial amount.  After a lot of “must be a scam” follow-up, it turned out to be legit. Now the loan balance is lower than, or near market value.  The borrower can consider new options: stay and make improvements, or even sell without a loss.

The property in question had lost over 35% value since purchase, and was worth considerably less than the loan balance.  The payments were much higher than comparable rent.  Numerous attempts at loan modification failed because there was no hardship.  The borrower could still easily afford the payments, and loved the house, but was seriously considering walking away.  Seemed like a sound business decision.  Nonetheless, they continued to stick it out.  After about a year, a new lender acquired the loan, and almost immediately they offered the principal reduction.

Some suggest that there is no such thing as “doing the right thing.” Compared to what?  Nevertheless, my friend was rewarded for being faithful and credible.  Everybody wins.  No legal consequences, no ethical dilemma, lifestyle intact, the loan doesn’t default and the bank doesn’t have to dig the occupants out.

There are some prerequisites to qualify for this offer.   I can’t verify this, but from what I understand you have to be current with your payments and it applies only for purchase money, not cash-out refi’s.

This is definitely more the exception than the rule, at least so far, but I expect we’ll see more of this.  There is hope for those you who are hanging in there, and there is still some good old-fashioned common sense afoot in the land of “I, me-me, mine.”

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The Ethical Dilemma of Strategic Walk-Aways

Owners that can actually make their loan payments, but choose to walk away, accounted for 1 in 4, or 25% of all foreclosures as of June 2009.   That was over six months ago, and the numbers have probably gone up since the initial studies (these data can be easily verified via a quick Google search).  Strategic default is an ethical dilemma, and the discussion is burning up cyberspace. On one hand, there is a moral obligation to honor your contract.  If you owe more than your house is worth, one way or other you gambled on your equity and came up short.  Maybe you bought at the top of the market, or took out an equity line of credit and bought some stuff; a car or TV, or maybe even another house.  Regardless, it’s not your lender’s fault that your property value went down.  After all, if your property went up in value you wouldn’t turn around and give the bank extra, right?  If you buy gold, and it loses value, you don’t get your money back, you wait it out. If you loan money to a friend, and he loses it all, you would still expect him to pay you back, especially if he can afford it.  The value of a promise doesn’t flex due to circumstances, or whether you are the giver or the receiver.  If you can make your house payments, it’s the right thing to do. On the other hand, are the banks responsible for some of this mess?  Should they share the burden? Didn’t they sort of tease us into all these high-risk loans and credit cards?  In the first few years of the Y2K decade, the FED, major lenders, and real estate professionals convinced us that everybody in America could buy a home.  They made you feel foolish if you didn’t.  It was like manifest destiny,your birthright, your duty. You could get a home loan if you had a pulse.  You could qualify just because you said so, no matter if you could actually afford one. Lenders didn’t seem to care if you were truthful in your loan application.  Certainly they knew they were making questionable loans, gambling on equity just like us.  Aren’t the financial institutions culpable, too?  Didn’t they practically beg us into this? The survival of our economy depends on everybody doing the right thing.  Imagine the consequences if all borrowers that owe more than their house is worth but can afford the payments choose to walk away, or if all the lenders call in all the notes on properties that won’t appraise for the full amount.

So, who gets the free morality pass?  Who gets to choose what’s fair? Is personal credibility negotiable?   Is the golden rule irrelevant?  Do we just step off when times get tough? Is this the new American paradigm? Not surprisingly, real estate professionals are leading the charge in advising people to walk away.   Not ironically, real estate professionals were leading the charge 4-6 years ago advising people take on these same loans.  Whatever it takes to earn a fee.  Maybe it’s time for an industry gut check.

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What Is The FED?, Part Two, or The Wolf Is In The Henhouse

The Federal Reserve Board controls the Federal Reserve system: an elaborate depository chain which guarantees the value of money, determines the cost of money, and controls the flow of money.  Natural economy is based on supply and demand of goods and services.  Contrarily, the American economy is based on the supply and demand of money, controlled entirely by the FED.  Basically, the FED, a private organization; autonomous and accountable to no one, controls and manipulates the American economy.

Why?  Profit.  Private profit.  As long as money is moving, or changing hands, bankers make a profit. When the money stops moving, they get busy and reverse the flow.  The money starts moving the other way, and the FED still makes a profit.

This sequence is known as inflation.  Inflation is not natural, rather it is a result of manipulation.  There was no real, sustained inflation in US history until the FED was established in the early 20th century, but it has been out of control ever since.

Inflation, deflation, it doesn’t matter, as long as the money keeps moving.  That’s the whole point of the Federal Reserve System. Our government doesn’t determine economic policy; it only reacts to it.

To review our earlier post from July 09, the FED loans money to the Federal Government, at an interest rate that the FED controls, paid by your income tax.  This is a debt that will never be paid. You, the taxpayer are hopelessly trapped.  The government keeps borrowing more money, and the national debt just spreads out and expands, and the dollar grows ever weaker.

The Federal Reserve can print money when they need it, simply declare to it have value, then charge interest on it, and it works because we believe them.  It’s basically endorsed counterfeiting.

The Federal Reserve is the faceless puppet master behind the default crisis.   Now they have maneuvered themselves into control of some of the larger private banks, too. More on that later, in the meantime, keep an eye on your credit card statements and read them carefully.

For more information about the history of US Banking and the Federal Reserve, check out this informative website: End the FED!

You Can Make Your Short Sale Work

Until recently, it’s been nearly impossible to make a short sale work (at least in Silicon Valley), but that’s about to change.  Your chances of success are improving.

The first thing you need is a professional advocate, an experienced negotiator with an impressive track record of successful short sales.  Of course you have to do your homework before selecting an advocate, because there are a lot of imposters and scams lurking.  But with all the resources on the internet, you can do all the research you need.

We recommend hiring an experienced attorney who specializes in short sales and loan modifications.  They have established relationships with the banks, can negotiate favorable terms, speed up the process and keep your costs down.  It’s a lot more affordable than you think. Obviously, if you’re in this situation you don’t have a lot of money.  A good short sale attorney knows that, and will be willing to put a little of their own skin in the game.  Again, do your homework.  You can find a seasoned pro that will keep your fee reasonable and negotiate the rest of their compensation directly from the bank.

Lenders are looking for ways to cut their losses, and a short sale is much less costly than foreclosure.  Still, they have simply been unable to process the overwhelming amount of short sale applications in a timely enough manner.

However, indications are that there is a massive effort by lenders to reorganize and hire more staff to better expedite short sale processing.  If this works (rather, when this works), there will be a lot more timely and successful short sales, and significantly fewer foreclosures.

Again, do your homework, but get an advocate.

Is There Really A Shadow REO Inventory?

A response to the recent WSJ Blog: Are Banks Holding a Shadow Inventory of Homes?

We don’t believe it.  Shadow Inventory, yesBanks holding back, not likely.  Basic market research, and our own experience as an REO brokerage tell us otherwise.

Let’s start with the series of foreclosure moratoriums between October ’08 and April ‘09.  First, major lenders and GSE’s stopped filing notices of default, then the federal government mandated it.  REO processing basically came to a halt for 6 months.  Standing inventory that was previously stagnant started to sell off quickly.  Agents used to complain about REO inventory; now we started complaining and speculating about the lack of it.  Multiple offers, buyer competition, number of listings down, number of sales up.  The market shifted for a moment and we all started theorizing: were these signs of a market recovery, were the banks holding back, etc.?

In April the wheel started to turn again as mortgage companies resumed foreclosure activity (see WSJ: Banks Ramp Up Foreclosures), hence the spike in notices of default.  The notices of trustee’s sale won’t follow for another 3-6 months.  We can’t compare these data in real time; we need to account for lag.

REO is a long process, and requires momentum.  You can’t grind to a halt and expect to restart at full speed.  It will take time to get the inventory to market: 5- 9 months to the trustee’s sale (foreclosure), another 2 to 12 months before the occupants vacate and the bank can take possession, and another month to trash out, clean up, etc.  A current notice of default might not become an REO listing for 18 months or more.  Inventory that was in process during the moratorium season is only now coming to market, and slowly.

One of our most reliable forecasting indicators is the amount of BPO activity, which mostly escapes attention.  Lenders order BPO to get a first glimpse of a property value and evaluate market strategy.  When BPO activity increases, REO activity increases.  Not coincidentally, our BPO activity was slow during the moratoriums, but has increased dramatically in the last 45 days.  We believe that there is a lot of REO inventory in process, and it will make it to market in due time.

In Silicon Valley, the current foreclosure cycle has been waxing and waning for over 24 months.  Our client lenders have been continuously adjusting, however slowly, to better accommodate the overwhelming volume of defaults.  They are increasing staff and focusing their resources on cutting loses through more efficient default servicing, and more successful loan mods and short sales.  In our opinion and from our perspective, deliberately holding back inventory so as to manipulate values would be counter-productive to cutting loses.

Lenders make loans.  They need to make a lot of loans to recover some of their enormous losses.  You can’t make loans on Shadow Inventory.

What Is The FED?, Part One, or I’ll Take Foreclosures For $200, Alex.

What Is The FED?, Part One.

When we think of “The Feds” we think of the federal government, like the guys who busted John Dillinger and Bonnie & Clyde.  So when we hear the term “the FED,” aka The Federal Reserve, it sounds like some government agency.  But that’s just a clever disguise.

The Federal Reserve Board is a private organization.  It’s like a private Central Bank that loans money to the federal government, then charge interest on it. The government borrows the principal; the American people pay the interest.  That’s why we pay income tax: interest payments on the federal debt, paid to the Federal Reserve.  It’s a trap that we can never escape.

But the government doesn’t repay the principal; they just borrow more.  Meanwhile, the interest keeps compounding, and the Federal Reserve Board can adjust the rate whenever they want, without notice.  Did we mention compound interest?

This deal is rigged, sort of like an interest-only, monthly adjustable, reverse amortized loan, built to fail.  The American economy is like a home loan in default.  The government is the landlord and the taxpayers are the tenants. The landlord owes more than the house is worth and is using the tenants’ rent to try to make the interest-only payments, but is falling behind.

Sound familiar?  If this was a home loan, it would trigger a notice of default, followed by a trustee’s sale and foreclosure.  The tenants would get locked out by the sheriff, quite to their surprise (just paid their rent) and would have no place to go.  The landlord would be nowhere to be found, having fled with the rent.

Is the government in foreclosure?  Maybe they’re asking the FED for a loan mod.  Maybe they’re just walking off with the rent.

How To Get A Loan On A Bank Owned Property

OK, so let’s say you are a first-time home buyer and home prices have finally reached a place where you can afford to buy.  You’ve got some money for a down payment, and you’ve been pre-qualified for a home loan.  Maybe you’ve even made offers on short sales that seem to go nowhere, and you’re getting frustrated waiting for something to happen.  You’ve found a foreclosure that you like.  Sure it needs a little work, but it’s in your price range and you’re not afraid of a little sweat equity.  After all you’re pretty handy with a hammer and a paint brush.

Here’s the challenge: bank owned properties typically need repair, but the seller (bank) wants an a-is offer and will neither make the repairs or pay for them.  Meanwhile, your lender (also a bank, maybe also the seller) will likely require repairs before they will make the loan.  Seems kind of self-defeating, and it is by conventional methods.

You can’t afford the repairs because you’re using all your savings for the down payment.  So what do you do?

Build the repairs into your offer.  Ask your lender or Realtor for a list of typical items that the lender will require, then go and perform a thorough visual inspection of the property.  Estimate the amount you’ll need and add it into your offer price, then ask the seller to credit you for repairs.  You have to keep it reasonable, though, say within 3-5% of the offered price.  Most bank sellers will entertain this kind of offer, and it can even work for FHA and VA loans.

The point is to ask for these concessions up front.  Once you have presented your offer, it will be nearly impossible to ask for additional concessions.  The easier you make it for the seller, the more likely they are to agree.

VA Loans On Bank-Owned Properties?

VA loans are just as likely to succeed with REO as any other conventional loan, they just take a bit more work and preparation.  They can also be competitive, but the competition is fierce for well-priced homes.  That may change some over the next few months, since we expect the available inventory to increase.  Since February the national foreclosure moratorium clogged things up, but that’s started to loosen.  So, patience and persistence will pay off.  Hang in there.

With a VA loan, try to get a termite report in advance.  The idea is to structure your offer to allow some buyer money to pay for repairs.  If you know what the cost will be, you can ask the seller for a specific credit for VA required repairs in your offer, say in lieu of a credit for closing costs, then add the amount to your offer price.  Most REO sellers will consider this an attractive offset.  If you include the report and the Section I estimate, it would be a compelling offer.  Sometimes the listing agent will have a report already, if not call in some favors and get your own.  Of course this could get spendy if you have to do it over and again.  Keep an extra watch for listings that are seasoned for 60 days or more because there will be less competition, but your VA offer should stand well among multiple offers.  Seller will almost always ask multiples for a ‘final highest and best’ counter offer, so you might get a second shot at the price.

Loan Modification? Borrower Beware!

There’s a lot of buzz about loan modification, a process where borrower and lender renegotiate the terms of a home loan so that the monthly payments are lowered.  Either the interest rate is reduced, or the repayment term is lengthened, or both.

The federal government, that is, both the administration and Congress, seem to think loan modifications are key to correcting the home loan mess.  We disagree.

In fact, our opinion is that in general, loan modification only adds to the problem.  We read recently where something like 3 out of 4 modified loans re-default within 6 months.  6 months!  What are the numbers after 12 months?  Basically, loan modifications are just extending bad debt further.  This is exaggerating the problem, not solving it.  Still, individual borrowers may get some short-term relief from a loan mod.

But be careful!  We’ve heard some horrible stories about people who still lost their home to foreclosure after paying lots of front money to “professionals” who offered to negotiate a loan mod.  They take your money, do nothing, and then they stop answering the phone.

Always interview more than one lender, ask a lot of questions, and don’t pay anything up front.