Mortgage Industry News

Ruth Lee

Hand wringing aside… there is a new cottage industry in the mortgage world.  It is called “loan modification.”  Whether it is an attorney seeking to find remedy for a client wanting to stay in their home in an increasingly hostile economic environment or a something-for-nothing hope peddler seeking to siphon off the remaining cash from a strapped homeowner,  the term “loan modification” has replaced “pay option ARM” as the product du jour.

What is a loan modification?

A loan modification is a permanent change in one or more terms of the loan.

The Political Pull of the Loan Modification

Since the inception of the crisis, Congress, the media, consumer groups and pundits have laid a very simple solution out for mortgage loans…. MODIFY.   That seems simple right…. If the terms of the loan are onerous, predatory or no longer sustainable in a depreciating real estate market then ink up that contract and modify those terms.  On the other side, the clouds will part, the sun will come out and the lender will bask in the glory of …. Wait… did you say permanently?

Many see no problem with this…but perhaps there is a nifty analogy we can run with…one that strikes close to home.

“Hey, Dad… can you come to the dealership with me… I want to buy a new car.”

“Sure, son… back in the day, my first car was only $500….

“Wow Dad… who would have thought that I could afford a new Hummer working down at Circuit City!  Thanks for letting me borrow the money; you know I am good for it…that assistant manager position is as good as mine!”

“Well son, the good part is that you can help me out with that great interest rate, and gas is cheap and they have an amazing resale value…this was a good investment for you…”

“Dad, I am sorry that I haven’t paid you in six months, you aren’t going to believe how much gas costs me… I can’t afford to pay the insurance…and the value of SUVs has gone through the floor… And Circuit City is considering downsizing because no one can afford to buy new HDTVs paying $4 a gallon for gas.”

“Son, everyone goes through a rough time… but you need to figure out how to keep your Hummer on the road.  Without it, you will have no way of getting around, it is your only piece of credit… and how will you get a new job without a car?  In addition, that money is part of what your mother and I put aside for our retirement… you made a commitment to pay it back. I don’t want to have to repo the car and sell it, but you aren’t giving me a lot of choice.”

“Well Dad, I think I have it figured out… I know that you and Mom gave me your hard earned money, and I know that I promised to pay our agreed interest rate, but I have a solution that saves us both… I won’t pay you any of the back money I owe you… and I want you to cut that interest rate in half and I am only going to pay you back about 70% of what I borrowed.  That way, I can keep my car on the road and you don’t lose everything, so I won’t have to move in and sleep in the guest room you made into Mom’s sewing room.   In return, when I sell the Hummer… I will give you half of whatever I get in profit!

BUT:

• Your mortgage lender is not your Dad.
• Your mortgage lender is a “for-profit” enterprise.
• Your mortgage lender is comprised of thousands of Dads and their 401Ks, their IRAs, their pensions… all of whom are trying to not have to move into their kid’s sewing room as they watch their savings dwindle.
• Most mortgage lenders do not operate in the “from the goodness of their hearts” strategy of capitalism.

The HOPE for Homeowners plan “encouraged” lenders to mark down their loans to 90% of whatever market value “out of the goodness of their heart.”  The notion that the “invisible hand” will guide them to cooperate out of their own self-interest was publicly debunked by Mr. Free Market himself, Alan Greenspan.  For a chuckle, this is the riveting marketing pull that they clubbed together to incent banks to participate:

Why would my current lender accept taking less money?

Mortgage lenders across America are taking a terrible hit on their financial books since they have more foreclosures than they can handle.  Each foreclosure they have has to be sold in the market place.  When a foreclosure is placed on the market by a bank, the bank has to pay the listing agent and buyer’s agent up to 6% commission. This amount of money is an additional sum lost on top of what the house is currently worth.Home prices have continued to decline as more and more foreclosure properties are placed into the retail real estate marketplace. Lenders carry the holding costs as well as many other costs while waiting for the property to be sold. The cost can be enormous.  It is more cost effective for many lenders to accept the terms offered by the FHA program.

Wow…does it smell in here?  Are you serious… you want a bank to essentially forgive debt to avoid paying a realtor?  No tax incentive, no deferred income incentive, nothing… just the “out of the goodness of your heart if the numbers happen to work” marketing plan for a path to saving the country, better yet the world, from certain economic collapse?

THE DEVIL IS IN THE DETAILS

While brilliant minds were conjuring up notions of a crest of goodwill and pre-emptive strikes on evil “do-nothing” originating banks and servicers bent on obstructing this wave of modifications, they forgot the whole “practical” application part.  There is no mustache twirling mortgagee poised over the homeowner tied to the train tracks… mortgage loans are owned by everyone… and I mean everyone.  Every mutual fund, bank, pension, 401K, IRA, annuity etc… was heavily invested in MBSs.  The servicer owned the rights to collect checks and disburse escrow account funds, not the right to arbitrarily “mark down” the value of an asset they don’t even own.

Even for banks that actually own their own portfolio mortgage loans, it is like asking someone to sell at the bottom of the market, putting on a cheesy grin and saying “thanks for taking one for the team.”

THE LAW OF UNINTENDED CONSEQUENCES

Tell me who hasn’t had this thought… IF I can reduce the value of my mortgage by even 5% or more AND have my interest rate reduced by NOT making the payment for 90 days… UM… WHY WOULDN’T I DO THAT???  Oh, because my credit might suffer?  Um… that would be great if there were any money to borrow or if I could sell my home for a new one – which, oh by the way, would be impossible considering there are 18 other homes in my neighborhood for sale – including the one with the amazing fence and pool that is appraised $20K below my bottom line.

EATING CAKE

So while thousands suffer… there is little HOPE to go around.  The program will have the same effect as voluntary immunizations…never available for the ones that need it the most.   We can also have the TOOTH FAIRY LOTTERY and the Sally Struthers SAVE A HOMEOWNER campaign, but until banks have incentive (perhaps tied to the freaking $700 BILLION that the taxpayers just gave them) to modify, there is no reason to expect that they will with any kind of urgency or success.

Home prices hit their lowest point in more than two decades in Q4 2008 according to recent reports, indicating that the price backlash from the incredible price inflations of the early 2000s are not yet over. From the Washington Times:

Home prices across the nation were 18.2 percent lower on average in the fourth quarter of 2008, compared with year-earlier levels, as foreclosure rates jumped to record highs last year.

The price decline during 2008 was by far the biggest drop since the Standard & Poor’s/Case-Shiller national home price index was first published 21 years ago. Separately, Zillow.com, a Web site that tracks real estate prices, estimated recently that the collective plunge in U.S. home values last year totaled $3.3 trillion. And there appears to be little relief in sight, both for home prices and foreclosures, experts said.

“With the number of homes for sale at an all-time high, housing prices will continue declining for quite a while, and quite a bit more,” said Patrick Newport, U.S. economist at IHS Global Insight. “Indeed, just as house prices overshot on the way up, they are likely to undershoot on the way down because of the inventory overhang.”

Read the full article “Real Estate’s Descent.” Foreclosure rates are staying strong as well, according to RealtyTrac, which recently reported that foreclosure activity in January was 18 percent higher than in January 2008. To try and address these issues again, Congress is currenly debating a proposed piece of legislation allowing bankruptcy judges to modify mortgages on primary residences. The Congressional Budget Office expects bankruptcies to rise significantly as a result of this bill which, although possibly staying the foreclosure rate somewhat, will simply pass consumer financial difficulties on to other sources. Is this solving the problem? From the Washington Post:

“More than one million distressed homeowners could benefit from filing for bankruptcy under proposed legislation allowing bankruptcy judges to modify mortgages on primary residences, according to the Congressional Budget Office.

“The CBO estimated that of the million, about 350,000 homeowners would take advantage of the proposed change by filing for bankruptcy during the next 10 years. But the report said, “The number of additional bankruptcy filings that would occur under the bill is, however, very uncertain.”

“The House is expected to take up a housing package Thursday that would include a provision allowing bankruptcy judges to modify such mortgages, including lowering the principal owed on loans. The change is fiercely opposed by the financial services industry, which complains that it would drive up their losses and force mortgage rate increases.”  (”Bankruptcy Filings Would Rise Under Mortgage Bill, CBO Says“)

The CBO’s website has provided a full rundown of current stimulus proposals here. The House Financial Services Committee is also holding hearings this week to examine TARP oversight (A Review of TARP Oversight, Accountability and Transparency for U.S. Taxpayers) and loan modifications (Loan Modifications: Are Mortgage Servicers Assisting Borrowers with Unaffordable Mortgages?). Are any of these measures really going to affect real change in the current mortgage crisis, or is the old guarde still firmly in place? Are all of these measures simply band-aids that may keep the industry afloat for a little longer? More commentary on that coming soon.

Mary Kladde

60% of loan modifications are back in default within 90 days of modification inception. This is a published statistic.  Why is this?  Have the statisticians figured it out the answer yet?

Maybe, just maybe…this is a theory…but I was thinking….When modifications are made, the lenders should re-qualify the borrowers, check for fraud, and run compliance?

What does this mean?

It means…pull their credit…verify their income…complete a fraud check… complete a compliance check.  Make sure the borrower’s can actually make the modification payments and the property is in a good position.  Are we doing this when modifications are made?

I know there dozens, maybe hundreds, of small loan modification cottage businesses that have sprung up all over the country to meet this need.  But, are they really serving the borrower?  Or is it a bunch of brokers, that have converted their businesses during these challenging times?  And, is it the borrower who can’t afford it getting stuck with the bill again?

Why aren’t the lenders being more proactive? Taking the bull by the horns.  Maybe if they did, CRAMDOWNS wouldn’t be on the table today?

In a one-two punch for industry prognosticators, self-styled experts and finger pointers, loan modifications are not performing well.  Recently styled as the cure du jour for economic recovery, the news is not promising;  however, before these teaspoon deep thinkers run for the next “sure bet” for salvation, it is important to remember that the facts aren’t all in and the data is skewed – we are only talking three months of data.  I have no evidence suggesting that modifications ARE, in fact, the answer…just a sober recognition that policy should be long term in scope rather than some “will o’ the wind” reaction to mere weeks of data.  (/cough Paulsen and Bernanke.)

In the first real assay of loan mod performance during the first quarter of 2008, over a third of all modified loans were delinquent again within first three months and over half within six months.   That is truly bad performance.  It means that these borrowers are RE-defaulting on their loans after a work-out has been reached often within weeks of completing the transaction.  But does that mean that loan mods are a waste of time?  The only real answer is maybe.

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Here is an addition to my previous post:

Coakley: Foreclosure Relief Program Has Failed
By Matthew L. Brown
Worcester Business Journal Staff Writer
09/17/08

State Attorney General Martha Coakley has submitted testimony to the U.S. House Financial Services Committee blasting what she calls the mortgage industry’s lack of action on loan modifications.

Coakley is scheduled to testify before the committee, which is chaired by U.S. Rep. Barney Frank, D-Mass., tomorrow regarding the state’s investigation into auction-rate securities fraud.

In the testimony submitted to the committee, Coakley argues that the spiking number of home loan foreclosures in Massachusetts is “due in large measure to unsound and predatory lending practices.”

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