Effective Immediately – No Refi’s For Borrowers with Modified Loans

Posted on January 12th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

1/5/09 – EFFECTIVE IMMEDIATELY – Modified Loans are Ineligible For Fannie/Freddie Refi’s, while FHA MAY Be Eligible.

I have not verified this with the GSE’s personally. I have second-hand verification from the GSE’s and first-hand verification from three national Fannie/Freddie seller-servicers in the past week.

In an interesting move that GMAC announced early last week to select correspondents, they will not be accepting any Fannie/Freddie refi’s that have been previously modified/restructured. In my experience, most mods result in one of more of their definitions of ‘restructured.’

A restructured loan or short payoff is a mortgage loan in which the terms of the original transaction have been changed, resulting in either absolute forgiveness of debt or restructuring the debt through either a modification of the original loan or origination of a new loan that results in:

  • Forgiveness of a portion of principal and/or interest on either the first or second mortgage;
  • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness;
  • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage; or
  • Conversion of any portion of the original mortgage debt from secured to unsecured debt

At first I thought this was a GMAC specific event, but in their note they specifically say “Fannie Mae and Freddie Mac will not purchase or accept delivery of a restructured loan refinance. Therefore, all restructured loans are ineligible for conforming loan financing.”

All Sorts of Consequences

This has all sorts of consequences for homeowners, banks, distressed loan and debt investors, broader refinancing, future loan defaults, walk-aways and foreclosures. It may even give us a glimpse of where this is all going – towards principal balance reductions as the best method of quickly forcing home owners to de-leverage. The intent is to make them free to go sell, buy, refi, save and shop.

As soon as I received this announcement, I immediately inquired with two other large-named Fannie/Freddie seller/servicers last week as to their position. They both told me that they are discouraging originating and underwriting modified loans and that they will only approve modifications in certain instances. They are both planning to make formal announcements shortly.

The word I received second-hand regarding the GSE’s stance is that they will buy these loans as part of large bulk packages from very solvent seller-servicers as part of ‘the greater good.’ This does not matter, however. Knowing that the GSE’s frown upon modified loans, originators will not write these loans out of fear that they could get stuck with them. The last thing they want is to have their pipelines peppered with modified loans and little way of identifying them for bulk sale. The banks will just use the GSE’s ‘greater good’ purchases as a way of dumping toxic loans already in the system.

The GSE’s are now treating loan modifications as toxic, just like they treat a recent bankruptcy or foreclosure. This is happening, of course, as they push their new loan mod initiative that they say will ‘help’ millions of home owners. I would hate to see what they could do if they were out to get you. FHA may insure these borrowers only under certain circumstances, and at extreme risk to the lender’s FHA scorecard (SEE FHA EXAMPLE BELOW). With a 50%+ post-mod recidivism rate being reported, it is not surprising this is happening.

‘Mods in a Box’

As I have written many times before, the ‘mods in a box’ from FDIC and the GSE’s keep borrowers over-leveraged, underwater, renters for life. This is because of the way they are structured with teaser rates, lengthened terms, deferred principal and interest and large balloons. This move from the GSE adds to the pain.  Now, for every loan mod that is done, a homeowner is taken out of the housing and US economic equation for a long time. This is especially bad for those in otherwise good shape with equity in their homes and good credit who only got a loan mod to assist with a large reset etc.  This is just another group in addition to the negative-equity crowd (the majority in the bubble states), who can’t benefit from low rates.

This could also be a big blow to the booming loan modification sector. When home owners are told they have very little choice for financing in the future if they accept the mod, they may think more than twice about it. With few ‘post-mod’ options available, walking away and renting may become a much better solution than being trapped upside down in a home with no hopes of future financing. Remember, many mortgage mods are sold as a way of ‘getting straight’ for a year or two, waiting for the housing market to ‘come back’ and then refinancing into a low-rate prime loan.

Adding insult to injury, most mods also come with pro-lender non-recourse provisions, which keep the borrower from getting rid of the mortgage debt through foreclosure. Add to this that the borrower loses the right to sue the originating lender for predatory lending violations.

Whole Loan or MBS Owners

Banks or other entities that own whole loans or securities derived from them may learn really quickly that old vintage loans are going to stay on the balance sheet for a long time, especially if they go delinquent or default and get modified.  The liquidation or vulture investment strategy of ‘buy distressed loan, modify, label it ‘re-performing,’ then refi or sell’ may not work any longer because the buyers on the other end may not want to hold a mortgage loan in which the borrowers are trapped.

Proactive loan mods that do not re-underwrite the borrower according to what they really earn using time-tested 28/36 debt-to-income ratios, market-rate financing and principal balance reductions just kick the can down the road in the majority of cases.

Loan owners may now find it better to foreclosure quickly and sell the property at today’s prices. This sure seems more prudent to me than collecting years of monthly payments from trapped borrowers with modified mortgages and teaser rates. This is especially true if the loan owner thinks he might have to foreclose years from now when prices may have fallen by double-digit percentages. Banks may realize all of this soon enough and either curtail loan mod initiatives or start liquidating these assets at values consistent with the known risks. There is a thriving market for distressed mortgage assets, including whole loans, REO and MBS, but not at the price points most owners think their assets are worth.

Principal Balance Reductions

Do not be surprised that if over the short-term, the movement goes towards large scale principal balance reductions — partly due to this and partly due to bank-unfriendly cram down legislation that might be passed. Partly due to common sense… it is quickly becoming apparent to the banks and MBS holders what they already knew for a long time — the only way to quickly and permanently ‘fix’ the housing and mortgage markets and consumers’ balance sheets is to undo the bad years of 2003-2007. To ‘undo’ means to:

  • a) force home owner/consumer to de-leverage through mortgage principal balance reductions based upon time-tested 28/36 DTI and what the borrower really earns using market-rate financing
  • b) make it so home owners can freely refinance and sell their homes
  • c) make it so the vitally important move-up buyer comes back
  • d) significantly reduce defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present FDIC, Fannie/Freddie and bank mortgage modification plans do
  • e) allow home prices to fall to attractive multiples of rents and incomes without exotic loan programs or artificial, temporarily, government induced low mortgage rates

I am still a big fan of mortgage mods done the right way, as I have written many times.  Some borrower’s may even benefit from the FDIC’s and GSE’s ‘mods in a box.’  There are many private mortgage mod firms out there that do get great results for borrowers. But this sector may quickly turn into an unregulateable nightmare that will hurt thousands of homeowners.

FHA May Not Even be Able to Help

Lastly, most borrowers that are late or in trouble can’t even get traditional FHA financing. Below, GMAC published their rules for funding a modified loan through FHA. Note that many lenders also must have a 580 minimum credit score requirement for an FHA loan. Typically, when homeowners are having mortgage trouble, their score falls below 580.

Best, Mr. Mortgage

 

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FHA Financing Rules for Modified Mortgages

    • The rate and term refinancing of a restructured loan using FHA financing is eligible when any of the following apply:
    • Forgiveness of a portion of principal and/or interest on either the first or second mortgage;
    • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness; or;
    • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage

Restructured loans in compliance with all FHA eligibility and product guidelines may refinance using any eligible FHA product. The loan may not currently be delinquent and there can be no late payments in the last 12 months unless the Total Scorecard decision is Approve/eligible. The current mortgage lender must provide a letter stating that they will not file a deficiency judgment.

Cash out refinance transactions are not eligible if the loan being paid off is a restructured loan.

GMAC will only provide FHA financing for eligible restructured loans not currently being serviced by GMAC.

Example of an Eligible Scenario – (PRINCIPAL BALANCE WRITE DOWNS)

Example 1

Property Value 2 years ago:

$200,000

Current Property Value:

$150,000

Existing Loan Balance:

$175,000

Restructured Loan Balance:

$125,000

Current mortgage lender wrote off $50,000 of the existing loan balance restructuring the loan. Loan is eligible for FHA rate and term refinance.

This is the closest I have seen to date of a large financial institution endorsing something close to the Hope for Homeowners FHA refi program that requires banks to significantly write down the principal balance in order to qualify. The H4H program was recently changed to allow for 96.5% LTV’s vs the original 90% in hopes it will give note holders extra incentive to write-down the debt. But most lenders don’t want to originate H4H loans because modified borrowers have such a high re-default rate, it puts their FHA scorecard at serious risk. – Best, Mr Mortgage

 

 

1/5 GMAC MEMO TO CORRESPODENTS

A GMAC Bank Correspondent Funding Announcement

CL08-289 Restructured Loan / Short Payoff Policy

 


Overview

GMAC Bank Correspondent Funding (GMACB) Approved Correspondents please take notice; this announcement provides clarification on GMAC Bank’s policy regarding refinancing of loans that have been restructured (short payoff).

 


 

Effective Date

Effective immediately

Definition of Restructured Loan/Short Payoff

A restructured loan or short payoff is a mortgage loan in which the terms of the original transaction have been changed resulting in either absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan that results in:

Forgiveness of a portion of principal and/or interest on either the first or second mortgage;

Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness;

Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage; or

Conversion of any portion of the original mortgage debt from secured to unsecured debt

In many cases, a borrower may not disclose that their existing mortgage loan has been restructured. The credit report may show a restructured loan as “settled for less than owed”. If the credit report does not specify “settled for less than owed”, scrutinize the mortgage balance reported on the credit report versus the payoff balance. If the two balances do not match and the difference is more than unpaid interest or prepayment penalties, the loan may have been restructured

 


 

Agency Loans

Fannie Mae and Freddie Mac will not purchase or accept delivery of a restructured loan refinance. Therefore, all restructured loans are ineligible for conforming loan financing.

 


 

Non-Conforming Loans

Restructured loans are ineligible for non-conforming loan financing.

 


 

FHA Loans

The rate and term refinancing of a restructured loan using FHA financing is eligible when any of the following apply:

  • Forgiveness of a portion of principal and/or interest on either the first or second mortgage;
  • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness; or
  • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage

Restructured loans in compliance with all FHA eligibility and product guidelines may refinance using any eligible FHA product. The loan may not currently be delinquent and there can be no late payments in the last 12 months unless the Total Scorecard decision is Approve/eligible. The current mortgage lender must provide a letter stating that they will not file a deficiency judgment.

Cash out refinance transactions are not eligible if the loan being paid off is a restructured loan.

GMAC will only provide FHA financing for eligible restructured loans not currently being serviced by GMAC.

Example of an Eligible Scenario

Example 1

Property Value 2 years ago:

$200,000

Current Property Value:

$150,000

Existing Loan Balance:

$175,000

Restructured Loan Balance:

$125,000

Current mortgage lender wrote off $50,000 of the existing loan balance restructuring the loan. Loan is eligible for FHA rate and term refinance.

 

 


 

VA Loans

Restructured loans are not eligible for VA financing.

Questions and Answers

1.    Will this policy apply to buyers acquiring a property through a short sale (original borrower’s mortgage payoff was less than owed)?

No, situations where the property is changing title are not included in this policy and are therefore eligible for Conventional, FHA and VA financing. Whether the borrower for the loan that is being financed through GMAC was through a foreclosure action or short sale has nothing to do with the new borrower.

2.    What if the borrower is selling their current residence with a short payoff and buying a new property? Are there any special underwriting considerations for the new purchase?

Assuming that the credit report shows “paid as agreed” and there is no outstanding balance due, the loan may be underwritten as usual, through Desktop Underwriter.

If the credit report is showing the mortgage loan as delinquent, Desktop Underwriter will take the delinquency into account when underwriting the loan. If Desktop Underwriter approves the loan, you must confirm that the entire lien is paid off and there is no outstanding balance.

Remember, the borrower is financing a new loan, which is not impacted by their previous loan. If Desktop Underwriter approves the loan, the loan is eligible for sale to Fannie Mae.

The same philosophy will apply to manually underwritten loans. If the credit report is showing the mortgage loan as delinquent, the underwriter should take the delinquency into account when underwriting the loan and applying the Comprehensive Risk Assessment. Again, it must be confirmed that the entire lien is paid off and there is no outstanding balance.

3.    What if the credit report and payoff statement don’t match?

A reasonable tolerance between the credit report and the payoff statement is acceptable to allow for such factors as the lag in reporting by the servicer to the repositories, unpaid interest, and prepayment penalties. A payoff statement that is significantly lower than what was taken into consideration at time of underwriting must be reexamined.

4.  What if the borrower discloses a restructured loan, but it is not on the credit report?

If the borrower discloses a restructured loan, regardless of whether it is messaged on the credit report is only eligible for FHA financing.

5.    If a restructured loan is not shown on the credit report as “settled for less than owed” or similar language with the same meaning is the loan eligible for financing?

The loan may only be eligible for FHA financing.

6.     What is the definition of a “soft” subordinate second?

A “soft” second is typically deferred and either forgiven or to be paid at the end of the term or when the home is sold.

Some soft second have a balloon in certain situations, such as if the borrower sells the property. That sort of provision could be construed somewhat like a prepayment penalty – a lender is willing to forgive a portion of the original loan amount, but only with the confidence that the borrower will remain in the property.

The most common examples of soft seconds are employer-sponsored programs (employer-assisted housing), or other programs that meet Fannie Mae’s Community Seconds requirements.

More Mr Mortgage on Loan Mods

208 Responses to “Effective Immediately – No Refi’s For Borrowers with Modified Loans”

  1. MB,

    “I must say if our choices are only cram downs and allowing “investors” to purchase homes for pennies on the dollar; I might chose cram downs”

    That is your only choice at this moment in time.

    “We need to do something to eliminate bulk, deeply discounted sales and avoid bailing out fraudsters”

    I agree, and principal write downs do just that.

    “Allowing defaulting homeowners to remain as renters in certain circumstances is the way to go. Defaulting homeowners must cooperate in the sale of their homes to others”

    I agree, and especially for those that do not qualify for a write-down

    “We must let the banks fail”

    I agree that roughly 2,000 banks need to go under in the next calendar year… minimum.

    “What we have seen in losses is only a drop in the bucket compared to what will be in store”

    There will be much more pain to come I agree…

    “The only thing we really have left in our country is our Constitution and legal system. We must keep these in tact if our Nation is to survive”

    I totally agree with you on that!!!

  2. All these soothsayers want to throw ALL homeowners who want a principal reduction into the streets while they have their $70k/yr job or more.

    By the way is that income really so secure in this economy?

    Many of these responsible folks were making great money but lost their job or had large reductions in pay, like myself so a modification is warranted. You can call us stupid all you like (sticks and stones!) but We’re not lazy.

    Please, no one saw 50 to 70% off in values coming.
    This is unprecedented as was the surge in prices from those toxic 100% No Doc Loans. The lenders do have a responsibility as do the buyers. I say reduce it; but the lender shares partial equity up to the original purchase price. A kinder version of the Hope Now program.

    Like other soothsayers from the 70’s saying any year now we’ll be in a bear stock market. I see it coming, Well, it happened in 2000 and again in 2007. Now you got your real estate buyer’s market.

    Dive in! or will you procrastinate again?

    Or you want it to be picture perfect?

    I do agree prices were out of whack. What I didn’t see was loan programs virtually drying up. This is killing any type of base.

    Why buy now when rates are low and rates can now only go up which means what for housing prices? Yes, tough times for another 5 years people.

    Some good reading is patrick.net and Harry Dent

    good luck

  3. Adam,

    Layoffs are a normal part of the ebb and flow of business. A prudent borrower should be able to cover their basic expenses for 6 months with savings. If they are in a job with more specialized skills, where it may be more difficult to find new employment, 12 months of savings is recommended.

    I do not want to throw anyone into the streets. Those that can pay their mortgage, which appears to be everyone posting here, should continue to do so. Why shouldn’t they? They wanted *that* house at *that* price, irrespective of anything else that occurred.

    As for interest rates, I will gladly buy when interest rates (and credit standards) are high, since in these times of “joe howmuchamonth”, interest rates are inversely proportional to housing prices. And, I won’t be competing my hard-earned dollars against folks with no skin in the game, and no financial sense to know a good investment from a bad one.

  4. Jonathan Said:

    “A prudent borrower should be able to cover their basic expenses for 6 months with savings. If they are in a job with more specialized skills, where it may be more difficult to find new employment, 12 months of savings is recommended.”

    “Those that can pay their mortgage, which appears to be everyone posting here,should continue to do so. Why shouldn’t they? They wanted *that* house at *that* price, irrespective of anything else that occurred.”

    Johnathan, if someone is short that 6-12 month cushion that you recommend, do you think they should walk and build their cushion now? Also if they now find that they don’t want *that* house at *that* price should they not walk as well? Dr. Housing Bubble posts that the average downturn is 5-6 years based on his research. That would put us until mid 2012 before anything happens *upside*.

  5. Bert –

    I would tend to agree with the 5 – 6 year downturn time frame – in a normal market correction.

    Question: Based on the charts, graphs, comparisons, readings (?), empirical data, etc., is what’s happening out there right now a ‘normal’ market correction? Is this your ‘average’ garden variety downturn?

    Here’s the down-low:

    Where is the sector of the economy right now that poses relief soon? Which sector of the economy is shining a light as the next ‘boom’ to underpin a healthy and real recovery? Web 2.0? ‘Financials’? (sarcasm off)

    When outsourcing of major manufacturing capacity reverses and returns to domestic shores, that is when you will see a turnaround. That ‘metric’ will be your canary in the coal mine of better times on the horizon.

    Until then, it’s going to be a dark & cold corner as far as the eye can see.

    We’re only in the first few innings of a major turn-around in mindset from consumerism to savings, let alone to where the masses will be able (or willing) to take on a mortgage debt-load.

    We could easily see – and experience, housing prices decline to late 1970’s averages. Crazy, yeah? Keep an eye on commercial real estate (office buildings and malls for starters) numbers as your guidepost to foretell the immediate future – after the coronation tomorrow and ~90 day honeymoon that follows…

    -C.C. (aka Mr. negativity)

  6. C.C.,

    “Where is the sector of the economy right now that poses relief soon? Which sector of the economy is shining a light as the next ‘boom’ to underpin a healthy and real recovery”

    I don’t see one do you? I think healthcare, due to the boomers, will thrive moving forward, but this is hardly new. The going green initiatives will add jobs, but because nobody can afford the cost it can only go so far. Military is shrinking and so will our Government as a reult of this downturn and fitingly so.

    “When outsourcing of major manufacturing capacity reverses and returns to domestic shores, that is when you will see a turnaround. That ‘metric’ will be your canary in the coal mine of better times on the horizon”

    I totally agree which is why I call for massive tax subsidies for companies employing workers in this country. Give credits to those building long term jobs that will allow our economy to prosper again. The only problem will be finding people who can afford to buy the stuff we produce.

    “Until then, it’s going to be a dark & cold corner as far as the eye can see”

    Everywhere and not just here mind you.

    “We’re only in the first few innings of a major turn-around in mindset from consumerism to savings, let alone to where the masses will be able (or willing) to take on a mortgage debt-load”

    I agree and see a very hard landing for much of the elderly and much of the young in this country. Off course we will all suffer but much of the elderly were reliant on their home values for retirement, and mush of the young did not anticipate needing 40K-50K to plunk down in order to buy a home. Most simply just don’t have it and may not have it for decades to come. See what havoc that reeks on housings recovery plans.

    “We could easily see – and experience, housing prices decline to late 1970’s averages. Crazy, yeah? Keep an eye on commercial real estate (office buildings and malls for starters) numbers as your guidepost to foretell the immediate future – after the coronation tomorrow and ~90 day honeymoon that follows”

    That sounds a tad eager to me, but check out deadmalls.com in terms of your other point on CRE. This will be the demise of 100’s upon 100’s of much smaller regional lenders. The FDIC will surely be busy in 2009.

    On top of all of this we are going to see even more handouts and more bailouts in just a matter of days. This will ensure housing doesn’t recover for a decade or more. Nobody has money and after paying for all of these bailouts neither will the tax payers of future generations. We are just making sure that we are broke and will stay broke for a long, long time to come.

  7. @BertDilbert,


    Johnathan, if someone is short that 6-12 month cushion that you recommend, do you think they should walk and build their cushion now? Also if they now find that they don’t want *that* house at *that* price should they not walk as well? Dr. Housing Bubble posts that the average downturn is 5-6 years based on his research. That would put us until mid 2012 before anything happens *upside*.

    Good questions.

    A lot of people can hold until 2012 and beyond, and they will eventually see the market come back.

    For those that can’t, I don’t see why they don’t start walking… I can’t think of anyone who can stop them. Although I don’t think that walking is the most honorable course of action, it’s still slightly more honorable than begging for taxpayer funded bailouts.

    So, we actually have 3 groups here…

    1) of the underwater borrowers, some are brave enough to walk. They will likely be rewarded by cutting their losses, and they will be able to buy again sooner. They’ll be smarter the next time (which I hope also includes saving more money)

    2) the underwater borrowers who can’t afford their mortgages who pathetically wish for a bailout will end up paying on their mortgage a little longer, and then still ultimately be foreclosed on, after suffering much distress.

    3) the the underwater borrowers who CAN afford their mortgages but are not brave enough to walk, some will beg for others to give them free money. But in general they will end up holding their properties until the market turns around.

    (Of course I can’t legally recommend that anyone takes any course of financial action.)

  8. @Stu

    I agree with most of what you have written in this last post.
    It will be painful, but it’s entirely proportional to the irresponsible excesses we have engaged in as a country. I think it will only be counterproductive to try to prevent this economic correction from occurring — we’ll just make it slower and more painful and screw up more peoples’ life plans.

    principal reductions are the same as bailouts —
    people in denial about the fundamental changes that are underway think they can prevent them from occurring. It’s futile. And it wastes resources we will need to use to recover once we are through this mess.

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