BANKS MAY BE GIVING IT AWAY SOON…finally! But be careful. If it is too good to be true, it generally is. There are very strict rules you should adhere to when getting a mortgage modification. For those of you not wanting to read the rest of this post, check out the YouTube version by clicking HERE.
Mortgage modifications are finally in the limelight because that is the only way out of the nation’s default and foreclosure crisis. All of a sudden, several politicians and banks have a ‘plan’ most of which will be doomed to fail from the onset. That is unless they adhere to a strict set of guidelines and essentially use modifications to undo all of the damage that was done through mortgage loan program leverage and artificial affordability over the past six years.
At Mr Mortgage and The Mortgage Lender Implode-O-Meter, we endorse Green Credit Solutions or GetGreenCredit.com. They are pioneers in this space and reports on positive outcomes I get out of there daily astound me. Before you accept a pre-packaged government or bank proposed mortgage modification that is likely not the best deal you can get, you need to get a second opinion. Green Credit will give you a free up front consultation on your specific case, so it is worthwhile to check it out. There are other reputable modification firms out there but there are a lot of frauds – be careful.
I have been telling you for a year that the only way through this mess is to re-underwrite every single loan made between 2003-2007, especially anything that is not a full-doc 30-year fixed not underwater vs. value. Currently, there are roughly $7 trillion in loans still on the book made during the years in question. Even borrowers with 750 scores who put 20% down and got a a 30-year fixed are walking due to excessive allowable debt-to-income ratios at the time the loan was made and negative equity, as values are down as much as 75% in some of the harder hit areas in the bubble states.
For all of you who ‘did nothing wrong and are being punished’, I sympathize. Unless an effective, large scale mod effort at all banks is implemented and well-received by borrowers, housing will have a decade of pain ahead that will hit you hard as well. All that a loan mod effort does is expedite revaluation and de-leveraging process so we can move on. The leverage has to be drained from the residential real estate market or the economy will not recover. If the trillions given to banks and everyone else would have been spent here in the first place, the problem would never have become this bad in the first place. You will pay for all this one way or another. Paying to de-lever borrowers and expedite the real estate revaluation process will trickle back to you to a much greater degree than any other program I have heard yet.
Mortgage modifications come in all shapes and sizes. But it is my opinion that unless the borrower is re-qualified on a market-rate 30-year fixed rate loan with a debt-to-income (DTI) ratio of 28/36 and their loan amount dropped accordingly, it has a high likelihood of failure. Remember, what makes most of the loans originated in the past six years so shaky other than exotic features such as stated income, interest only and high-CLTV is the high allowable DTI ratios. Most ‘Prime’ loan programs allowed up to a 50% DTI ratio meaning half of the borrowers GROSS income is going out every month in debt. Many added a second mortgage, cars, boats and lots of other consumer debt pushing DTI’s much higher.
Re-underwriting and reducing principal balances according to what a person actually earns undoes the past five years. At 28/36, the borrower becomes de-leveraged, is able to maintain a decent lifestyle, save money, will pay down principal and ultimately own their home one day. 28/36 is time-tested whereas 50% DTI was a product of the leverage and asset bubble years. At 28/36, if home values drop borrowers are less likely to walk away because they are not totally leveraged to their house and able to save money.
There are millions of ‘Prime’ borrowers in the nation and in a town near you, fully leveraged and not saving a penny as all of their after tax income and more is going out to pay down loans on depreciating assets.
This is all fine and dandy when your home value is going up $100k a year. But when asset values plummet the fastest way to de-lever is to lose the largest expense, which is the underwater house. All that they have to do is make the decision to rent a similar home for half the monthly amount and they get their life back. Once they make that decision they can live in their home for free for a year during the foreclosure process.
The banks and servicers finally understand all of this now that they have seen first hand that the Subprime implosion has jumped tracks to higher paper grades. Sheila Bair at FDIC finally understands this after seeing IndyMac’s portfolio up close and personal over the past six months. Now, they are all trying to get ahead of the future implosions through proactive loan modifications. A proactive modification is simply the bank reaching out to you offering you a solution. Whether that solution is the right one for you specifically is the tough question, that I suggest you seek professional help answering.
Chase released the following loan mod news today, which the market celebrated. What they didn’t tell you is a program like this could take years to get through. The FDIC has already started a proactive loan mod inititiave by sending 20k solicitations to IndyMac borrowers and only 3500 responded. That is likely because of the pervasive fraud that is not isolated to IndyMac. Chase will likely run into similar challenges.
IndyMac has gone so far as to include securitized loans, which is something that will make all mortgage securities originated during the bubble years less attractive to investors.
“Initially, the program was applied only to mortgages either owned by IndyMac Federal or serviced under IndyMac Federal’s pre-existing securitization agreements, which provided sufficient flexibility,” she (Bair) said in prepared remarks to the Senate Committee on Banking, Housing and Urban Affairs. “However, with their agreement, we are now applying the program to many delinquent loans owned by Freddie Mac, Fannie Mae, and other investors.”
It is uncertain what the Chase program entails but typically the banks only offer what’s best for them and not you for the long run. I am assuming this program is to rid themselves of WaMu’s Pay Option ARMs and Subprime loans before they implode. Remember, they already wrote these loans down substantially when they acquired WaMu so giving borrowers a 35% principal reduction for example, could actually turn out to be a profitable move. Principal balance reductions are generally tough to squeeze out of banks because it involves the bank taking a direct credit hit.
The fact is unless banks re-underwrite each loan to a strict guidelines of 28/36 debt-to-income ratios the programs will not work. If they just offer some 5-year interest only teaser rate that is the most popular loan modification currently, they just kick the can down the road and set the borrower up for disaster than. Giving a short-term teaser bailout also incents others to do whatever possible, including becoming delinquent, to get something.
If you know what you are doing you may be able to get a great deal out of any proactive loan modification offer because you hold the cards. If not, call Green Credit and let them work this out for you:
By Elizabeth Hester
Oct. 31 (Bloomberg) — JPMorgan Chase & Co., the largest U.S. bank by market value, plans to modify terms on $110 billion of mortgages and forgo foreclosure proceedings on all real-estate loans while the changes are implemented in the next 90 days.
The offer extends to customers of Washington Mutual Inc., the savings and loan JPMorgan agreed to buy last month, the New York-based bank said today in a statement. Loan modifications may include interest-rate or principal reductions. The bank said it will establish 24 regional counseling centers to provide face-to- face help in areas with high delinquency rates.
“We felt it is our responsibility to provide additional help to homeowners during these challenging times,” said Charlie Scharf, chief executive officer of retail financial services at JPMorgan Chase. “We will work with families who want to save their homes but are struggling to make their payments.”
Sheila Bair, head of the FDIC, got the loan modification wave going when she announced a ‘plan’ last week to modify three million mortgages. Of course, her idea involves a restructuring that won’t cost the banks any money meaning the program will likely not work. It likley involves a teaser rate and silent second, which only kicks the can down the road and keeps the borrower highly leveraged. Her sudden move to mass modifications likely comes from her up close and personal experience with the IndyMac portfolio, which scared her to death and made it very evident that nothing is what she thought it was.
Oct 29th, 2008 by Moe Bedard
The FDIC and the US treasury are contemplating using around $50 billion from the recently passed bailout of the financial industry bailout to guarantee about $500 billion in mortgages. The “tentative” plan could include loan modifications that would lower interest rates for a five-year period according to Bloomberg.
The program would be run by Sheila Bair and the Federal Deposit Insurance Corp. and could potentially guarantee around 3 million home mortgages. The plan had been scheduled to be announced Wednesday but was delayed because the details were still being finalized.
The new plan would dwarf past attempts by the administration to curb foreclosures and will be the most aggressive effort yet to limit further damage to Main Street. A loan modification plan that Sheila Bair, Chairwoman for the FDIC has been advocating for over a year and she may just get her wish.
The program, which could potentially help several million homeowners either refinance or modify their current mortgages into affordable loans, would require lenders to restructure mortgages based on a borrower’s ability to repay. The plan is said to give homeowners 5 years of fixed, lower monthly payments before they can reset again.
Wachovia also has a program in place but theirs involves that you refi the loan off of their books. They will allot a certain amount of money to your case to buy down your principal and/or interest rate, but they force you to sign a silent second mortgage note for the injected amount called a ‘spend’. This is a major problem with the program and is why I feel it will ultimately fail. Borrowers are not interested in staying over their heads in debt, which is what Wachovia’s plan essentially does. Once again, if you have a Wachovia loan then you know they want to deal so go for it. If you don’t feel comfortable get professional advise from a mortgage modification specialist:
Oct 8th, 2008
There are significant problems with The Spend, however. Most obviously, they are artificially supporting house prices by giving borrowers extremely low interest rates such as a 2% 30-year fixed and a zero interest rate second. In addition, what if values are not at the bottom? The ‘negative equity effect’ is real and if values continue to tumble what’s to say that the borrower will not just walk at a later date. A good number of these may even turn into rentals because with a 2% fixed and zero% second, the property may cash flow.
The thought process is that if the borrower can afford their payments, especially on a 30-year fixed, it does not matter what the value of the home does – they will stay and make their payments. Well, this has obviously been proven wrong, as we are seeing Prime and Jumbo Prime default in greater numbers as values fall. On the other hand with house prices down so far in the areas in which this program is going into effect, there is a much better chance that this fundamental will play out going forward.
But then there is still the silent second hanging over their head and the fact that home owner is underwater by that large of an amount. This makes borrower repayment patterns totally unpredictable across all paper grades. This also makes typically life circumstances such as job loss or illness almost a guaranteed default. If you have equity in your property, you have wiggle room.
One thing is for sure, The Spend is worlds better that the recent BofA/Countrywide settlement scam, in which the AG sold hundreds of thousands of borrowers down the river at a ridiculously low price. Remember gang, once you do something with respect to a mortgage modification or refinance, you lose your rights to come after the lender for predatory lending violations and forced rescission/modification.
Bank of America/Countrywide have been ‘working’ with borrowers for quite some time, but their solutions stink. I wrote about a specific incident I heard about first hand on Sept 3rd. Be very careful accepting a 2% interest only loan for 5-years without a principal reduction even though that may immediately solve your cash flow problem. This is nothing more than an exotic loan that will blow up on you in 5-years. I highly doubt home prices will ‘come back’ in five years – if they stabilize at lower prices than we see today, we will all be very lucky. This is a perfect example of a terrible mortgage mod. Click the link below to the full story. It is a good one:
Sept 3, 2008
Meet The New Game in Loss Mitigation – Put it off for 5-years with 2% rates and 200% LTV workouts; make the borrower sign away their life waiving all future claims; then tell the shareholders it is ‘performing’. In 5-years this will bury the borrower beyond all recognition and force them into bankruptcy, but until then ‘problem solved’.
Even servicing companies are getting into the action. Below is a short-refi offer if you refinance and get your loan off of their books. Below is an actual letter sent by Select Portfolio Servicing, A Credit Suisse company. They are offering a principal balance reduction of roughly 11% plus up to a 2% closing cost incentive if you can refi quickly. This may be a great deal for many. This is the best I have seen yet. Although 11% still may not be enough principal balance reduction for most in the bubble states, this gives you leverage to twist their arm for more.
The problem with this program is its not tailored to each borrower, rather a mass solution where they picked a principal reduction based upon current valuation. The reduction and new loan amount must be a function of what the borrower really earns at 28/36% debt-to-income ratios or the home owner remains over-leveraged and as house prices continue to fall, they will default:
Archive For Mr Mortgage’s Personal Opinions/Research
- WaMu Ex-Employee Speaks Out – How It Really Was (0)
Posted on November 2, 2008 10:10 PM
- JPM Chase – Major Mortgage Loan Default Spike (13)
Posted on October 31, 2008 3:51 PM
- TARP – ‘Troubled ASSET RELIEF Program’? Are Banks the ‘Troubled Asset’? (12)
Posted on October 31, 2008 10:19 AM
- Defaults More Tied to Loan Type Than Borrower Grade (0)
Posted on October 30, 2008 10:17 AM
- Prime Borrower ‘HELP’ Requests Surge (18)
Posted on October 30, 2008 9:36 AM
- NO SPIN Sept New Home Sales Report – Sales LOWER (29)
Posted on October 27, 2008 1:46 PM
- NO SPIN – Existing Home Sales DOWN 9.6% From Aug…Not Good (49)
Posted on October 24, 2008 10:29 AM