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Jeff

Welcome to Loan Mod Purgatory — please take a number.

According to an article that appeared in CNNMoney on Monday, May 18, lenders are overwhelmed by a flood of applications; mortgage investors are threatening to sue loan servicers for modifying loans, and unemployment is the newest threat to stabilizing the housing market.  This article comes on the heels of an announcement on Friday, May 15 by the Obama administration, announcing a new, standardized process and incentives for short sales and “deed-in-lieu” transfers of ownership.   The newest initiative is aimed at homeowners who cannot get loan modifications. These newest actions follow by two weeks the Government’s announcement that it would provide incentives to lenders holding second liens to reduce interest rates and/or release second mortgages.

Anyone involved in the loan mod process would have to acknowledge that the entire process is bogged down.  CNNMoney noted that even though it has been three months (to the day) since President Obama announced the Housing Affordability and Stability Plan (February 18, 2009), and Guidelines were issued on March 4, many (if not most) loan servicers have been slow to get up to speed to respond to the requests.  Borrowers frustrated by the lack of clear guidance and inconsistent advice are tempted by robo-call operations offering to “help” homeowners for hefty fees.  Ironically, it turns out that investor contracts arising from the securitization and sale of the loans, which was part of the problem in the first place, are restricting which loans can be modified and how.   Congress is working on a bill to provide a “safe harbor” to allow loan servicers to use the Federal mortgage relief programs, but some investor groups are lobbying hard against passage.  It is no secret that many loan servicers are using the “investor contracts” as excuses not to make prompt and effective modifications.  Unfortunately, the borrower has no way of knowing whether or not the excuse is valid.  One gets the same feeling one gets when the car salesman returns from the back room to report the General Manager’s “last, best and final” offer, but you never even see the guy behind the curtain.

Compounding the problem and undercutting efforts to stabilize the mortgage crisis, many lenders have yet to sign up for the Federal program.  According to CNNMOney, 14 of the mortgage service companies, including Bank of America, Citgroup, J.P.Morgan Chase & Co., and Wells Fargo.  Others claim to be implementing their own versions, and still others are evaluating the program.  At the application level, each lender and loan servicer appears to have their own processing requirements.  Some permit the borrower to send the required documentation electronically, while others insist the documents be sent by fax.  One loan agent told me their fax room was a complete mess, with different applications getting mixed up with others like a crazy game of 52-card pickup.  Another loan agent told me they had no way to confirm receipt of the electronic transmission of the application documents.  Still another e-mailed me within 24 hours to confirm receipt, followed up 5 days later with a request for a missing piece of information, and provided an estimated time of review and affirmed that the foreclosure status was being suspended pending review of the loan mod application.  Simply stated, there is no uniformity or standarization.

As I’ve reported before, the fact that some of the lenders and loan servicers are only now just beginning to implement the Guidelines first released on March 4, and others are still “evaluating” the program, calls into serious question any claims or reports of successful loan modifications.  Sixty percent (60%) of all reported “loan mods” approved in the first three Quarters of 2008 resulted in mortgage payments that were the same or higher than prior to the modification.   I saw one “approved” loan modification that reduced the monthly payment by 27 cents!  And that lender insisted the borrower was foolish to reject it!  This type of chaos and confusion will only serve to further destabilize the process; create additional opportunities for fraud; and worst of all, erode any sense of confidence that the Federal program might otherwise have a chance to work.

In addition to the impact of rising unemployment cited by the CNNMoney article, there is another growing threat to the Federal effort to stabilize the situation — credit card debt.  Broke, facing unemployment, and no longer able to tap their home equity for relatively inexpensive funds to make up the difference, many homeowners have tapped the most costly source of revenue remaining — their credit cards.  Unfortunately, the card companies, who reset the loan rates faster than you can say “charge it,” have started charging cardholders the highest possible default rates of 29.99%.  Behind the wave of home foreclosures working their way through the so-called “trial periods” and voluntary moratoriums is a second wave of crushing credit card debt.

Sadly, the situation is bound to get worse before it gets better.  Unless and until the loan servicers get clearance from the investors, or simply clear directions from their managment, and free up the backlog of applications, the confusion and frustrations will continue to mount.  One problem is that no one knows what will work, and therefore everything is approached with the same level of risk aversion.  It would be a great service if the U.S. Department of the Treasury could simply select a statistically significant cross-section of different types of loans, fund the modificaion, and see what would really work to increase the probability of success.  Hindsight, of course, will teach us all many lessons.  The question is whether we can wait long enough.

Help for HELOCs and Second Mortgages

On April 28, the Obama Administration announced additional details on the Second Lien Program, in an effort to provide help for homeowners with both a First and Second Mortgage on their property.  It is estimated that up to 50 percent of at-risk mortgages have second liens.  (Of the number of people who have contacted me for advice or assistance, the number with Second Liens is more like 98%).

The stated goals of the Second Lien Program is to provide relief for up to 1 to 1.5 million homeowners, to reduce second mortgage payments, provide pay-for-success incentives to servicers, investors and borrowers, and develop a payment schedule to extinguish second mortgages altogether.  The Second Lien Program provides that a second lien or mortgage will automatically be modified when a First Lien is modified.  For details, go directly to the Second Lien Program Fact Sheet.

For many homeowners, this will be welcome news, if the lenders cooperate.  The Obama Administration recognizes that even if the lender holding the First Mortgage works out a modification, many homeowners continue to face the prospect of foreclosure because they cannot keep up with the Second.  For qualifying loans, the Program proposes to lower the interest rate on amortized loans down to 1 percent, and for interest-only loans, down to 2 percent, both for an interim period of five years.  Participating servicers will be required to forbear principal on the Second lien in the same proportion as any principal forbearance on the First lien.  There is an option for extinguishing principal under a published schedule.  Various incentives for lenders, servicers and investors are included.

Many individuals who initially contacted their lenders when the Hope for Homeowners (HFH) program was announced in 2008 and received less than satisfactory results will be pleased to know that the Obama Administration has also announced a new plan to include the HFH in the Making home Affordable program.  Even if you were turned down or otherwise dissatisfied with an initial attempt to modify your mortgage, you should be aware that the rules changed on March 4 when the Obama Administration released new Guidelines, and again on April 28 with the announcement of the Second Lien Program.

Schizophrenic Approach to Loan Mods

Will the Real Federal Mortgage Relief program please stand up?

Two stories in today’s financial media tell two different stories:  “Banks Ramp Up Foreclosures,” and “Up to $9.9 Billion to Modify Mortgages.”  (WSJ).  The first article details how many lenders have simply abandoned their voluntary moratorium on foreclosures and have gone ahead where borrower were delinquent.  The second details how the Administration has reached agreements with six lenders, including Chase Home Finance (J.P. Morgan Chase & Co.); Wells Fargo & Co.; GMAC Mortgage Inc.; CitiMortgage (Citi Group); Select Portfolio Servicing; and Saxon Mortgage Services, Inc., to provide up to $9.9 Billion in mortgage modification assistance in line with the Guidelines released on March 4, 2009.  As noted in the article, many of these lenders have been taking applications and hopefully will now be able to process them.  According to the Guidelines, any loan modification agreement reached under the new terms must go through a 90-day trial period before the lender will be entitled to the incentive funding being made available.  The article noted that the Administration hopes to work out similar agreements with other lenders.  Noticeably absent from this first list of lenders is Countrywide.

So, where does this leave the situation?  If some banks are ramping up foreclosure sales at the same time as others are getting ready to receive large amounts of federal funding to modify or even refinance their loans, it won’t surprise me to see homeowners receiving two very different notices in the mail, given the propensity for the lending institutions to have a right hand and a left hand that do not know what the other is doing.  In my recent efforts to assist some homeowners with loan modifications, I have not heard much to give me much confidence that the process will be under control anytime soon.

As I have stated before, the most important step for a homeowner to take is to contact their lender if they feel they need to be considered for a loan modification or refinance.  Eligibility criteria is available at www.financialstability.gov, but I continue to urge any homeowner who is struggling to make ends meet to see if their lender will process an application, even if the lender will not be eligible for incentives under the Administration’s program.  Be prepared to submit a letter explaining your hardship, and documentation of your income and expenses, including W-2s, tax returns, pay stubs, bank statements, etc.

A quick word about the many so-called “loan mod specialists” claiming they will save you from foreclosure — for a fee.  The California Department of Real Estate and the California State Bar have issued ethics alerts concerning the ground rules for brokers and lawyers to charge fees for assisting homeowners.  Many services that use robot calling devices claim to be working for law firms or claim an association with an attorney in order to justify charging fees in advance.  Many of these companies are operating illegally and in violation of the Rules of Professional Conduct that govern the practice of law in California.  For a detailed but concise statement of the applicable rules, see the State Bar’s release at http://calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf.  As a homeowner, you are free to contact your lender on your own.  If you desire professional assistance, contact a licensed Real Estate Broker that has been cleared and listed by the State DRE, or contact a licensed attorney directly.

Good News on Loan Mods – OCC/OTS direct lower payments

A report released on April 3 concludes the obvious:  a study shows that loan modifications that reduced monthly payments had a lower rate of redefaults.  The good news is that the Office of the Comptroller of the Currency and the Office of Thrift Supervision directed the banks and thrifts that provide data for the Mortgage Metrics report to assess their criteria for loan modifications woudl result in affordable and sustainable modifications.  The OCC and OTC included loan modifications already made in 2008 in their direction.

The study confirmed what had been widely reported earlier — a high percentage of borrowers with approved loan modifications had fallen behind or defauted.  What had not been reported was that almost 60% of the loan modifications approved in 2008 resulted in either no change to the borrower’s monthly payments, or an actual increase.  Reasons for this included the fact that in many cases, the lender merely froze the rate on an adjustable loan (ARM), and in some cases recapitalized the past-due amounts, resulting in a higher monthly payment.  These modifications achieved the goal of avoiding foreclosure, but not for sustained periods.  According to the report, loan servicers said their flexibility to reduce payments was constrained by servicing agreements with government-sponsored entities and private investors that restricted the type and amount of loan modification permitted.  Recent changes in both government and private servicing standards should provide greater flexibility to loan servicers.

The report covered mortgages serviced by nine large banks and four thrifts that constitute two-thirds of all outstanding mortgages in the United States.  One interesting revelation was that the biggest percentage jump in serious delinquencies was in prime mortgages, which account for nearly two-thirds of all mortgages serviced by the reporting institutions.  Delinquencies in this lowest loan risk category more than doubled in the fourth quarter of 2008!  The subprime mortgage category continued to have the highest level of delinquencies.  Possible reasons for the re-default rates included the worsening economy, excessive borrower leverage, or poor initial underwriting.

Real estate investors, business entrepreneurs and homeowners recognize that the most critical element of a sustainable transaction is cash flow.  Modifying loan servicing standards to allow lenders to make loan modifications that work with a borrower’s cash flow will go a long way to avoid redefaults and foreclosures.  The report provides strong support for the Administration’s loan modification program, which is primarily based on lowering monthly payments in order to achieve sustainable modifications.  Since the OCC/OTS report reflects servicers for about two-thirds of the nation’s outstanding mortgages, we can only hope the message gets out quickly!

Real Estate Investing – Getting Started

It is not surprising that we are seeing larger audiences at real estate investing programs.  People are looking for ABS investments – Anything But Stocks – after watching their 401(k) plans drop 40% in value.  Housing prices have plummeted, and rates are historically low.  It’s a great time to invest in real estate.  But how does one get started?
The task can seem confusing.  There are so many variables, the decision process can be overwhelming.  First, there are several different ways to invest in real estate:  buying rental property, purchasing tax liens, options, and notes, even hard money lending and investing in REITs.  There are different types of real estate:  single family homes, condominiums, apartment complexes, commercial properties, and raw land.  And there are different strategies for maximizing profit:  flipping, “buy and hold,” leveraging, wholesale contracts.  For the new investor, it almost seems like you have to learn a new language:  “ROI,” “REO,” “flip,” “cash-on-cash,” “CAP rate,” “OPM,” “PITI,” “asset protection,” “LLC,” “TIC,” “triple Net,” “CAME,” “cash flow,” and so on.  Going to the library or bookstore won’t necessarily help – there are literally dozens of books on the subject – which one do you choose?
There is simply not enough room in this blog to do justice to the entire scope of information necessary to explain real estate investing, but a few key points are worth mentioning.  For more information, I strongly recommend that the new investor attend real estate investment seminars, talk to other investors, and yes, read the books and articles on real estate investing.  Most importantly, I urge the new investor to choose a small, low-risk investment and try it for a short duration. You will truly learn more “by doing” than what anyone else can ever hope to teach you!  You will also learn more about your tolerance for risk!
First Step:  Make a Plan.  The first and most important step is to consider both your personal and your financial objectives, and develop a plan based on these two factors.  You can do this while you are reading some books and attending seminars.  Just be sure to make a Plan before you write your first check!  For example, your personal goal may be to focus on raising your family, taking more vacation time, and getting more involved in community activities.  Your financial objective may be to earn enough through a combination of salary and investments to support your chosen lifestyle, and set aside enough for a retirement at a specified age.  Your financial objective should support your personal objective, not the other way around.
From this important step, you can start to determine how real estate investing can help you achieve your goals.  You need to consider how big (or small) a project you want to tackle, so that you can achieve your financial objectives without sacrificing your personal goals.  You also need to consider how involved in the process you intend to be – it’s the difference between “involved” and “committed.”  Think “Ham and Eggs.”  The chicken is “involved;” the pig is “committed.”  New investors who become Landlords quickly start to learn a lot more about plumbing, eviction procedures, and dumpsters than they ever thought they would.  One of reasons many people choose not to become Landlords is because they don’t want to be dealing with “toilets, tenants, and trash.”  It can be time-consuming, frustrating, and if you don’t manage it properly, the investment project can take over your life!   (Hint:  Hire a good Property Manager!)
There are basically three ways the investor makes money by investing in real estate.  The first – and some would argue the most important – is cash flow.  The formula is simple:  Income minus Expenses = Cash Flow.  Income from rents or leases need to be enough to cover your costs, which include your mortgage payments, taxes, insurance, maintenance and management fees.  The second way that the investor makes money investing in real estate is through appreciation – assuming that the property value increases over time.  An increase in value combined with the amount you are able to pay down the mortgage results in “equity,” which is simply a measure of the difference between the value of what the property is worth and what you owe on it.  The third way that an investor makes money investing in real estate is through depreciation – a pro-rated tax deduction that you use to offset a portion of the income over time.
Most real estate investors focus on the first two factors:  cash flow and appreciation.  As it turns out, you generally get one or the other – not both.  In areas where housing prices tend to climb steadily over time, purchasing at any price will result in a gain in value just by holding onto it for a long enough period, provided that the cash flow is not too negative.  It’s a relatively simple math problem, provided you factor in the tax considerations.  (Hint:  Learn to do some math and get a good tax advisor on your team!)  In some housing areas around the country, especially where there is good job growth, rents will be strong enough to generate positive cash flow.  Even if the value of the property does not increase all that rapidly, an investor can realize regular income from cash flow.  (Hint:  if the amount of rent is equal to or greater than one percent of the purchase price, it generally will have a positive cash flow.)
For a quick primer on some of the other factors you should consider before investing in real estate, I recommend that you read my article “The Five ‘P’s of Prudent Real Estate Investing.”  I also suggest that you find a real estate investment group or association in your area.  Many of these groups provide a wealth of information, advice and networking opportunities.  You will meet others like yourself, as well as experienced investors willing to share their knowledge and tips.  (Hint:  Be careful – everyone is different.  What works for one person may not work for another.  Listen and learn.)  Some investment groups provide bus tours of investment properties in your area, and teach you how to make simple investments.  Still others allow you to pool your money into investments, if that is what you would prefer to do.  Mostly, these groups give you the unique opportunity to meet and talk with experienced investors, learn about investment opportunities, and connect you with the key people who can help you:  lenders, brokers, financial planners, attorneys, tax specialists, and accountants.
Getting started in investing in real estate is really all about getting started.  Thinking about getting started won’t accomplish anything.  Take action.  Go to the library and check out two or three books on real estate investing.  (Hint:  Focus on learning the terminology; ignore the editorializing.  Many authors tend to promote the “one best way” to make money – there is no “one best way.”  And, Big Hint:  most of these books were written before the very recent housing crisis and market crash in 2008.)
One final piece of advice:  Invest, don’t spend, your money.  If your ultimate plan is to make money investing in real estate, invest in real estate.  There are several promoters who make a fortune selling seminars, software programs, CDs, books, and even cruises and board games about investing in real estate.  Some of these are excellent for learning about real estate investing, but choose wisely.  Some people spend all of their money into programs about real estate, rather than invest in real estate itself.  Ask yourself:  will the seminar, books, or materials teach me how to make more money than the cost of the program (including the cost of your time)?  Now, you’re starting to think like an investor!  Get started!

Loan Modification Program Summary and Eligibility Tool

Important:  This brief summary is provided as a quick guide only; a link to the official details and an online eligibility assessment tool provided by the U.S. Dept. of the Treasury is provided below.

UPDATE:  On March 5, the House passed the “cramdown” legislation, which would allow Bankruptcy Judges to modify the mortgage on a owner-occupied home, provided the homeowner first made a good faith effort to complete a loan modification with the lender.  The measure now goes to the Senate where it is expected to encounter stiff opposition from lenders.  See Washington Post article.

As promised, the U.S. Dept. of the Treasury released the Homeowner Affordability and Stability Plan (HASP) Guidelines on March 4, 2009, to take effect immediately.  There are two basic components of the Making Home Affordable plan:  refinancing and modification.  Most of this discussion will focus on the Home Affordable Modification Program, but first a quick comment about eligibility for the refinance component.

To be eligible for the Home Affordable Refinance program, the property must be owner-occupied, the borrower must establish they have income to support the new mortgage debt, and the amount of the first mortgage cannot exceed 105% of the current market value of the property.  Junior lienholders must agree to subordinate, borrowers may not take cash out, and borrowers who are delinquent will not qualify.  Details for the new refinance options for existing Fannie Mae Loans are set forth in FannieMae Announcement 09-04, released March 4, 2009.

To be eligible for the Home Affordable Modification program (HMP), the property must be owner-occupied, not vacant or abandoned, the current mortgage payment must be more than 31% of the borrower’s gross monthly income, and the borrower must have experienced a significant change in income or expenses to the point where the current payment is no longer affordable.  The borrower need not be delinquent, but they must be at risk of “imminent default.”  Jumbo conforming loans up to $729,750 are eligible for the HMP.  Participating servicers are required to follow specific steps in the Guidelines to attempt to reduce the monthly mortgage payment to as close to 31% Debt-to-Income (DTI) ratio as possible.

The modification process, referred to as a “Waterfall” process, starts with a determination of Monthly Gross Income, then validation of total First Mortgage Debt — monthly PITIA.  Servicers are then required to capitalize all arrearages, and target achieving a DTI of 31% by incrementally reducing interest rates down to a minimum of 2% for a five-year period.  (After that, the rate will increase by no more than 1% per year until it reaches the Interest Rate Cap.)  The next stage in the “Waterfall” process is to extend the term up to 40 years, starting with the date of the modification.  If this is insufficient to achieve a DTI of 31%, the servicer is expected to forebear principal, to be due upon maturity date, sale of the property, or upon payoff of the interest-bearing balance.  No interest will accrue on the forbearance amount.  Under no circumstances may the modified balance due be lower than the current market value of the property.

No principal reductions are required under the HMP, but lenders may, at their option, elect to reduce principal if necessary to achieve a 31% DTI.  The program will reimburse servicers for a portion of the cost of a principal reduction.  Each borrower will undergo a 90-day trial period.  No incentives may be paid until the 90-day trial period has been completed.  Lenders may not charge the borrower any fees or charges for this modification process.  Junior lien holders will be required to subordinate to the modified loan, and the HMP provides an incentive payment up to $1,000 to pay off junior lien holders, and an additional $500 incentive payment for efforts to extinguish  second liens.

If, after going through the process, it is determined that modification is not an option, the Guidelines suggest that all loss mitigation options be considered, including any possible refinancing options available outside of the program, and if homeownership retention is not possible, program counselors should discuss short sales and deeds in lieu of foreclosure as ways to help the borrower transition to more affordable housing.  Incentives for participating services are available for alternative approaches, and borrowers may be eligible for relocation expenses to effectuate short sales and deeds-in-lieu of foreclosure.  The ultimate objective is to minimize the impact of vacant and abandoned properties on local communities.

Foreclosure actions will be suspended during the process.  Therefore, it is important that any person facing foreclosure initiate all steps necessary to start the process immediately.  Persons in this situation are advised to contact their lender, and to call the Homeowner’s HOPE Hotline at 888-995-HOPE.  To find out if you may be eligible for a refinance or loan modification under the Program, you can go online determine whether or not you are eligible.  This self-assessment tool is made available by the U.S. Dept. of the Treasury at www.financialstability.gov.