It is no secret that the Obama administration has a lot vested in the success of the Loan Modification Program, also called the Home Affordable Modification Program (H.A.M.P). In order to help the program along the government has provided a long list of incentives, bonuses and other methods in order to encourage lenders and banks to do their part in making the program work.
First it was financial incentives in the form of cash payments for every completed loan modification of up to $4,000 over three years. This didn’t have the result they hoped for so the administration started naming and shaming tactics where underperforming banks or lenders were published on a list of the worst loan modifiers in the industry while the better performing banks were prized with kudos and positive publicity for “helping troubled homeowners”.
Recently the government has also added to the prize generous capital risk-weightings for banks that perform well with their loan modification application to completion rates.
Those tactics didn’t really lift the program off the floor, of the 750,000 applicants that have entered the loan modification program three month trial only 31,000 have to date actually received a permanent modification to their loan.
This is why the administration started to show its meaner side. Banks and lenders that did not support the cause have been threatened with fines, increased government scrutiny and recently even lawsuits.
Blown Mortgage readers will remember the lawsuit Ohio Attorney General Richard Cordray filed against New York based Barclays Capital Real Estate, doing business as HomeEq Servicing.
The lawsuit details that HomeEq / Barclays has been accused of issuing unfair loan modification agreements and providing inadequate and incompetent customer service to Ohioans who were at risk to losing their homes to foreclosures. HomeEq is accused of forcing troubled homeowners to sign one sided agreements that were unfair and deceptive. Homeowners were required, for instance, to realease HomeEq of all liabilities (which you can’t really do), pay extra fees (not supposed to that either) and waive their own right to defense (not a very popular measure with the Attorney General).
In addition to this Barclays was accused of breaking Ohio’s Consumer Sales Practices Act (CSPA) through their unsatisfactory customer service by not returning calls or responding to enquiries.
The question is this the real reason Ohio Attorney General is suing Barclays. I would say no. If you read carefully the statement of Mr. Cordray it is clear that the main complaint is “unfair” and “indadequate” customer service with loan modifications. Cordray is further reported to say:
There has been ample time for loan servicers to strengthen their efforts and start making a significant difference in preventing home foreclosures,” Cordray said. “Unfortunately, many servicers have instead repeatedly chosen to aggravate the crisis through noncompliance and excuses. As I see it, for every excuse, hundreds of families become more vulnerable to losing their homes. In Ohio, we have zero tolerance for any more excuses.”
If you check the latest servicers loan modification performance lists you will quickly see that HomeEq was way down there with 657 trial loan modifications and zero completed permanent loan modifications.
It doesn’t take a leap of imagination to see that the Obama administration has decided to start suing underperforming servicers and has started with a British company that has recently entered the industry. Targeting a foreign company could be seen as a warning shot to big banks like JP Morgan and Wells Fargo that have a measly conversion rate of 3 to 4 percent on their loan modifications.
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The Loan Modification Program is not exactly 2009 success story. Out of the 750,000 trial loan modifications around 31,000 have become permanent, not great odds even if you are a betting man (or woman).
What makes things worse is that in order to manage such a volume of trial loan modifications for HAMP (Home Affordable Modification Program) servicers are employed to do the paperwork and provide advice for the borrower. However some of these servicers have been known to provide bad advice, ask for illegal contracts to be signed and other examples of malpractice.
Keeping away from bad egg servicers is important if you are to be successful in your loan modification. This article will provide some pointers on what to look for to set apart the good from the bad and the ugly of HAMP servicers.
Unfortunately bad HAMP servicers are a uncomfortable reality. Just this week Ohio Attorney General Richard Cordray filed a lawsuit against Barclays Capitol Real Estate working as HomeEq Servicing.
Why was Barclays sued? Although the complaints filed against Barclays are still to be proven and we all like to think we are innocent until proven otherwise, it will prove a good example for the point this article is making. Which is, choose your HAMP servicer wisely.
HomeEq was accused of:
1) Violating Ohio’s Consumer Sales Practices Act (CSPA) through incompetent and inefficient service. More specifically HomeEq failed to return customer calls or reply to inquiries, lost borrowers paperwork and more importantly failed to provide timely and affordable loss mitigation options to their customers.
2) Not reacting to repeated warnings by the Attorney’s office. According to the Attorney General Richard Cordray, ample time has been provided to servicers in Ohio and elsewhere to change their ways and stop their negligent behavior.
HomeEq services more than 10,000 subprime loans in Ohio alone, becoming a HAMP participant in August. HomeE q is not exactly overachieving in the loan mod department being one of the lowest performing servicers.
Not surprisingly HomeEq feels the complaint is groundless and that they are commited to quality customer service and to work with financially distressed borrowers… bla,bla, bla.
What signs identify Roque Hamp Servicers?
There are many, too many to number but some big ones stand out.
- For instance if your mortgage servicers asks you to sign one sided agreements that obviously are biased toward the lender the alarm bells you are hearing are not imaginary.
- Upfront fees. It is illegal to ask for fees for servicers that have not been supplied.
- If you are asked to waive your right to defense by a HAMP servicer, run, they are trying to take your for a ride.
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Obama’s Loan Modification Program is a nice idea with good intentions. A superficial look at the program, what it does and how it does it, would make you think it might or even should work. However the reality is different, unfortunately only a very small number of borrowers are benefiting from this program. This article will explain what the Loan Modification Program tries to do, what are the facts and figures of the last year and why the program is not working.
The Loan Modification Program was created by the Obama administration in 2008. The idea was to help out homeowners that were having trouble paying their mortgages to modify their loans to more affordable monthly payments.
The program aimed to reduce the payments by three main methods:
a) Reducing the interest rate of the mortgages to as low as 3%.
b) If reducing the interest is not enough then banks could extend the tenure or term of the loan to 40 years.
c) If that didn’t solve the problem then the lender would be encouraged to reduce the principal amount of the loan.
If you ask me that sounds pretty good, reducing interest rates, lowering the principal of the loan, even extending the tenure of a loan is acceptable if it stops you from losing your home. The idea was also that banks and lenders would benefit from this program because it would be cheaper for them to modify the loan than the alternative, foreclosure. Foreclosures are expensive for lenders and a loan modification that allowed an otherwise delinquent borrower to faithfully pay his mortgage does make sense.
Fewer foreclosures would stabilize communities, stop prices from dropping and save entire neighborhoods from slowly dying.
Unfortunately none of the above is actually working. Or is it? The Loan Modification Program did meet its short term goal of 500,000 trial loan modifications some months ago. That does sound kind of good, right?
However, of the 760,000 borrowers that have currently signed up only 31,000 have qualified for a permanent loan modification.
To illustrate, Bank of America, one of the U.S leading banks has only completed 98 loan modifications from the160,000 that have applied. That success rate is so low you need four decimal points to even see it on a calculator.
Why are things not working? Well for starters, borrowers are not paying their side of the bargain and often don’t make the three month trial payments. Banks also complain that although borrowers apply they do not fill in the necessary paperwork.
Of course the borrowers’ side is rather different, they claim they never speak twice with the same person and they are sent on a goose chase with conflicting and confusing instructions that are changed as the process goes along.
This brings us to the last reason loan modifications are not working, banks. Banks often simply don’t care if loan modifications happen or not because it is not worth their money. The incentives provided by the government are in many cases a joke compared to the losses involved in reducing interest rates and loan principals. Think like a bank. If you play along and help your clients to get a loan modification you might get $4,000 after 3 years. Great news. How does that compare with the tens of thousands of dollars you are going to lose in the long run? Exactly.
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This is our last week in the Short Guide to Loan Modification series. Look out for the links to official websites and resource packages at the end of the article.
Third Step. Tell the lender, giving you a loan modification is worth their effort.
Lenders are not charitable organizations. They lend for a profit not out of kindness. However if you can convince them that giving you a break is in their interest, that you are worth more as a borrower with a modified loan than as a foreclosure you are half way there. Explain the reason you are struggling to pay, illness, untimely death and losing your job are the reasons most likely to work.
Fourth Step. Put it in writing.
Send a written request for a loan modification. Make it short and to the point, one page should be enough, provide all the information you compiled in the earlier steps, why you need the loan modification, why it is a good investment for the bank, etc… Send all correspondence with your lender through certificate mail with return receipt requested, there are too many horror stories of lost forms.
Fifth Step. Call your lender.
Good idea to start with your loan servicer, the place you bought your mortgage from. Write down the name of everyone you talk to. Only talk to people who can help you and make decisions on your mortgage like officers in the mitigation department of your loan servicer. It is a good idea to send you letter with all your information to the person you have talked to over the phone.
Sixth Step. Be patient, follow up.
Unfortunately loan modifications can take as long as nine months (sometimes more) after you file in your application. So make a pain of yourself and follow up on the progress of your modification with calls, emails and faxes. Don’t underestimate the power of persistence, some officers might work faster just not to have to talk to you again on the phone.
Seventh Step. Get Help from the Professionals.
If you are not satisfied with how you are being treated contact the OCC. The OCC regulates all national banks. You can find a complaint form at www.occ.treas.gov/customer.htm
If you are having trouble working through any of the previous steps, like contacting your mitigation department, visit HOPENOW.org or call 888.995.HOPE and they will help you out.
You can also visit www.hug.gov for help in finding free certified housing counselors and www.loansafe.org for troubled borrower’s resources.
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Loan Modifications are not providing the help American homeowners need. Of the millions of troubled borrowers only a small percentage qualify for a loan modification trial and most of the lucky ones get stranded in the way.
This article will provide you with a list of simple steps that will increase your chances of getting a permanent loan modification.
The number one reason why loan modifications don’t work.
Before we get into the practicalities of how to find your way through the maze of loan modifications it is worth spending a few words on the top reason why loan modifications are not working: They Don’t Address the Real Problem.
The real problem is unemployment and the Credit Crisis.
The fastest growing demographic for loan modification are prime mortgages. These are good mortgages, bought by borrowers with high credit scores that can’t pay their mortgage because of the increasing rate in unemployment. Unemployed borrowers struggle to get a loan modification because you can only qualify if you can prove you have nine months of unemployment benefits lined up. Most unemployed borrowers are unlikely to fulfill this requirement.
The other big reason loan modifications might not work for you is that your mortgage might be the least of your credit problems, you might be overstretched on your car loan, credit card loan, and other personal loans. Many commentators feel the government is trying to deal with a Mortgage Crisis when what they should be dealing with is the broader Credit Crisis.
First Step. Get the Information You Need.
Visit the government’s official website at www.makinghomeaffordable.gov . There you can find:
1) The current sponsored program the Government is touting.
2) Useful forms to help you compile the information you need to supply to lenders.
3) Find the closest government paid advisor that can provide you with personalized guidance.
Second Step. Decide what you can pay, and be realistic about it.
There is such a thing as a BAD LOAN MODIFICATION. After months of wasted time and resources some borrowers end up with a loan modification they still can’t pay.
You need to figure out what you can truly afford to pay on your mortgage every month. The government guideline is 31% of your monthly income but that might not work for you. Get some real figures together. How much do you spend on housing costs? What is your income, or average income if you’re self employed or work on commission. Put all this on paper, your lender will want a look at it.
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Obama’s loan modification program can be seen as a failure, if you focus on the millions upon millions that are benefiting, or as a modest success with over 650,000 borrowers on trials and 375,000 on the fast track to getting permanent modifications by January 2010.
As reported earlier the government is in the process of sending special task forces to win over, bully or cajole, depending on your point of view, the big lenders that decide how well the loan modification program goes.
The big question is why are loan modifications not working better with all the money, over $75 billion, being thrown at it. This article will look at some of the main problems that are creating the loan modification minefield borrowers are currently suffering.
Problem 1. Lack of information
Government firms like Freddie and Fannie are contracting the services of outside companies to go house to house providing accurate information on how to go about getting a loan modification.
This is a reply to lenders complaining that the main reason loan modifications are slow is that borrowers are really bad at filling in forms and providing the information required. Of course, the media is littered with counterexamples of model borrowers that provided all the information and battled with the conflicting instructions that lenders requested.
Problem 2. There is a lot of people that need Loan Modifications.
Around 7.5 million households in the U.S alone are delinquent on their mortgage payments. 25 percent of all borrowers are underwater in their mortgage, owning a home that is worth less than what the mortgage is worth.
Those figures are huge, to deal just with the paperwork, information and mechanics of dealing with so many people on a subject that so few of us understand is a big job that even if all the players wanted Loan Modifications to work it would be hard to do faster.
Problem 3. Banks are nearly as lost as the rest of us.
The simple truth is that even when lenders want to modify a loan it is not a smooth road because they are not used to dealing with this volume of modifications. Banks are already understaffed due to the recession and their mitigation departments are in no better shape. Add to this under-information about government programs, lost paperwork, changing fax and telephone numbers and you start to see why it is so difficult to process a loan modification.
Problem 4.The NPV test
The NPV test stands for Net present value. This test compares the money a loan is likely to generate if it is modified (and the borrower keeps the house and pays the mortgage at the modified rate) and what it is likely to generate if the modification is not carried out. The logic behind this test is not bad. Making loan modifications a profitable exercise for banks is good news, if you make it profitable your chances of making it happen grow exponentially.
However the actual formula to calculate the Net present value is according to many commentators unrealistic and allows lenders to shelve loans they should modify.
Problem 4. Banks often benefit from delinquency.
Banks often are not the actual lenders behind a loan but take on the job of loan servicers. Loan servicers collect payments and deal with borrowers but don’t own the mortgage. Loan servicers profit from delinquent borrowers and the late fees and higher interest rates they generate.
Many go as far as saying the loan modification trials are simply a trap loan servicers use to get three more monthly payments from borrowers that are beyond help and would not pay otherwise.
The problems that borrowers face when trying to work out their loan modification are pretty scary, our next post will deal on how we can face these problems and increase our chances of loan modification success.
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When looking at a crisis it often pays to see what got you there if you are to learn anything from it. The current mortgage and credit crisis was either unavoidable or a surprise depending who you ask. Loan Modifications are now being sold as the solution to the crisis as if changing the interest rate, tenure or principal of loans were the heart of the problem. But what is at the heart of this worldwide crisis?
History tells us that depressions, recessions and crisis are as part of the free market economy as free trade and private enterprise. Take this example; in 1908 a financial crisis spread panic “in every part of the globe. It was as if a volcano had burst forth in New York, causing a tidal wave that swept with disastrous power over every nation on the globe”, as reported in the The Wall Street Journal.
In 1929 there was a Great Depression, earlier there was the Long Depression (1873), a Panic in 1837 which has been described as “an American financial crisis, built on a speculative real estate market.
Any of that sound familiar? If it didn’t it soon will. But how did the current mortgage crisis occur? To answer that we need to go back a little over a quarter of a century.
Since the Reagan Administration in 1980 America has been pioneered globalization of free trade. This opened the U.S market to new products and investment unparalleled in any other economy. America’s entrepreneurial spirit combined with political freedom and a trend of economic deregulation fuelled a rapid expansion in new types of investments that also spurred an increase in international finance and commerce.
Unfortunately America’s growth came to rely on debt. The economy needed more consumers that could only buy on credit. The largest debt and purchase for many was their own home. Credit was easily available so buying wasn’t a problem; this fueled home prices in particular.The result was a housing boom that created the feeling that prices could only rise.
In 2007, as we know, the housing boom finally collapsed showing the fragile structure that had held it up behind the glossy veneer. Loans had been provided to families that couldn’t afford them, especially if the economy weakened. Most had purchased homes they couldn’t really afford. As housing prices fell, homeowners could no longer sell their homes to pay their mortgages. These bad loans were the foundation of an international web of speculation on mortgage securities and financial contracts which were toppled by the housing collapse.
The catastrophe revealed weaknesses in the U.S economy. Savings had been outpaced by spending and reckless consumption. Financial regulators underestimated the risk and fell into a dangerous state of complacency that led them to forget the lessons learnt from previous crisis.
So will loan modifications solve the problem of millions of households that risk losing their home? Some might take advantage for them but most will have to look for alternative solutions. Ultimately we will all have to relearn the lesson that we need to save more than we spend to keep our head above water.
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The big news in town is that the American economy is growing. As Obama reported on Monday “Our economy is growing again for the first time in more than a year”. This is good news for a president that has been hard hit by the economy and whose dream public approval ratings have dropped with the economy. However Obama added: “ We cannot sit back and be satisfied given the extraordinarily high unemployment levels that we have seen”.
The U.S unemployment levels are currently at a 26 year high of 10.2 percent. This percentage reflects a 10.2 percent of people that can and want to work that are currently unemployed. For other industrialized countries like France, Germany, Spain or Norway that level is not good but is far from terrible. For countries like France 10.2 is actually close to business as usual. Of course these countries have a completely different economy that allows for or even creates high unemployment levels. The U.S however is not ready or willing to withstand such levels and needs to change for any lasting improvement to occur with mortgages or the economy as a whole.
The current growth in the economy is according to Obama (and his many economy advisors) a result of cost-cutting across the board that has generated a surge in U.S productivity. Unfortunately this increase has not led to hiring, business seemed to be happy to sit on the rise of productivity for now.
The question is if this surge will continue and help the U.S mortgage crisis. Over 1 in 7 homeowners is foreclosing on his home or over 30 days behind on payments. This number will only increase if unemployment does not start to drop.
The latest demographic to join the fascinating statistics of foreclosures is not the typical subprime borrower with bad credit and worse loans. The demographic that is pushing the foreclosures rates is people with great credit scores and prime mortgages that have lost their unemployment. Tackling this issue will be difference between truly jumpstarting the economy or the dying candle that shines the brightest before fading out.
The mortgage crisis, the larger credit crisis and the economy in recession as a whole have crippled the government’s tax revenue. This makes traditional tax rich popular solutions harder and harder to justify and it may no longer be available for the government in their efforts of re-starting the economy.
Cheaper methods are now being looked at. Tax breaks and other incentives are being considered for companies that increase their payrolls. These might prove effective, however if you are in a position to take advantage of the tax incentives now on offer this might be the time to take advantage while they are still available.
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The housing and credit crisis of 2007 showed the weaknesses of our banking system. In fact a whole international market of mortgage securities was based on bad loans that homeowners could simply not pay. Banks among other players had invested heavily in mortgage securities and other financial contracts. This hit banks hard, very hard. The U.S government reacted with financial measures that were unprecedented. First by taking control of two of the largest home mortgage firms, bailing out leading banks and a major, some would say “the major”, insurance company and that was only the beginning.
The bailout then consisted of an initial $600 billion and then $12.8 trillion pledged for loans, loan purchases and credit guarantees in an effort of stopping the freefall the economy was going through.
Even a bailout of this magnitude was not enough to help banks like Wachovia that were by now too underwater with bad loans and mortgage securities to survive. Wachovia was by no means alone in this problem various large banks were bought out.
Wachovia was bought by Wells Fargo & Co a regional bank happy to pay for the nationwide network Wachovia had.
Wells Fargo & Co. did look like a promising company as a regional bank with plenty of room to grow. However now finance commentators feel Wells Fargo & Co shares look expensive in the light mounting losses in the large pool of troubled loans it took from the Wachovia Corp takeover.
It is hard to explain why Wells Fargo & Co trades at 2.2 times its tangible book value when other top banks like JPMorgan, often considered the best, and Bank of America Corp trade at 1.9 and 1.3 times respectively.
Before the Wachovia takeover there might have been logic in adding value to Wells Fargo because of the great potential of growth it had, but it is hard to see this potential now it has the nationwide presence and is saddled with billions of dollars in bad loans both in mortgages and commercial real estate. Losses in bad loans are mounting and the question is how long can Wells Fargo absorb these losses before being toppled by them.
Analysts estimate the inherited impaired mortgages from Wachovia at $38 billion that could bring another $2.3 billion in losses and that is only one category of the bad loans Wells Fargo holds. The worst news for Wells Fargo is that they are not specially capitalized to deal with these huge losses. The ratio of tangible common equity to tangible assets is below 4 percent. Other similar banks like JPMorgan and Bank of America range from 4.5 to 4.8 percent.
It is true that hard initial losses due to bad mortgages and the cost of loan modifications are to be expected especially when Wells Fargo marked down many of Wachovia’s assets to reflect expected lifetime losses. Other banks are taking these same losses over time which you would make them look their capital levels look a little healthier.
The jury is hanging, like it is over millions of troubled homeowners, on if the current mortgage and housing crisis will be the end of Wells Fargo long climb or a bold move that grasped an opportunity in difficult times.
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Loan Modifications and Mortgage Modifications are being sold like they are going out of fashion and both the Government and private banks are reporting successes in the number of loan modifications and mortgage modifications processed.
If you are desperate to keep your home and you are finding it difficult to pay for your mortgage payments a loan modification might be the option for you. However there is a question you must ask yourself. Is a loan modification or mortgage modification worth my trouble? There are a number of negative consequences that are attached to mortgage modifications.
Among them is the risk of paying more that the mortgage is already costing you in deferred and balloon payments.
Another issue related to mortgage modifications is the possibility your credit score could be affected. It might surprise you but taking a government sponsored loan modification could lower your credit score. The reason for this is that some banks and loan providers report loan modifications as partial payment plans. These plans include programs that reduce the debt of borrowers that can’t afford to pay their loan. FICO, one of the organizations that prepare credit scores from the information financial institutions quantify partial payment plans negatively.
This could make it harder for borrowers that take on a loan modification to buy a home in the future. Of course if you are happy where you live and you just want to save your home this should not be a problem.
First-time Homebuyers Tax Credit
A completely different type of credit that people are concerned about is how the mortgage crisis will affect previous government sponsored first time homebuyers tax credit programs.
These tax credit provide a tax break, a percentage discount or sometimes a dollar to dollar deduction from tax of any mortgage related expenses.
The government is as interested in promoting home purchases as it is to stop foreclosures so these programs have been extended. However the recession is affecting the U.S budget so it is wise to get on the first time homebuyers tax credit bandwagon while there is a wagon to ride. The deadline for applying for a tax credit has been extended so that purchase agreements must be signed before May 1st and closed by July 1st.
For more information on this matter visit www.federalhousingtaxcredit.com
The same applies for other tax credit programs like the HOPE scholarship tax credit, a sister program to the HOPE loan modification program. This tax credit program provides dollar for dollar tax breaks on college tuition, fees and course materials. This program will end next year so it pays to apply early. For more information visit www.finaid.org.
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