Tuesday, October 28, 2008

FDIC pushes for more Loan Modifications

FDIC pushes for more Loan Modifications
Is this what the housing market needs to stabilize home prices?

October 28, 2008
By: Drew Sygit

BLOOMFIELD, MI – Sheila Blair, the Chairwoman of the FDIC, is trying to blaze her own trail out of the worse foreclosure crisis since the Great Depression. Her solution, systematically and aggressively modify mortgages instead of foreclosing on properties.

The federal takeover of IndyMac Bank gave her the opportunity to try out her theories. So far, only 3500 mortgages have been modified, but she says over 15,000 letters soliciting modifications have been sent out.

What she has succeeded in doing is getting everyone’s attention and “rocking the boat”. At a conference for the mortgage industry over a year ago, Blair was pushing lenders to be more aggressive with modifications. She was ignored then, but now is leading by example and building momentum. Last week President Bush was urged by Barney Frank, D.-Mass., chairman of the House Financial Services Committee, to appoint Blair to head an industry wide effort to avoid foreclosures with modifications.

If Blair succeeds in making her plan a standard for the industry, it could put a floor under falling housing prices by slowing the flood of low-priced foreclosures hitting the market. Lowering the supply of homes is key to stabilizing home prices and getting buyers off the sidelines. As long as home values continue to fall, buyers have a perfect excuse not to buy – why buy something you can wait to get for less?

Much ado had been made about HUD’s new “Hope for Homeowners Program”, but the program requires lenders to forgive any mortgage debt that exceeds 90% of a home’s current value. Lenders didn’t endorse the program when HUD announced it and yawned at its introduction on October 1st. Desperate homeowners have lit up lenders’ phones calling about the program, but no lender is actively participating in the program yet. Rumors are floating around that many lenders are instead holding out for the federal government to buy or insure troubled mortgages, which would negate the motivation to partake in the program.

In the midst of all the cries of the federal bailout reeking of socialism, capitalism is thriving as evidenced by the relatively overnight appearance of a loan modification industry. Googling “loan modifications” leads to 170,000 results, with all kinds of companies and offers. It’s the “wild, wild west” as there’s little to no regulation of the industry. RESPA and other regulations don’t apply as no new loan is being originated. While there are many well intentioned companies and individuals, the desperation of millions of homeowners is sure to draw many thieves looking for a quick score.

If Blair of the FDIC is going to push for more loan modifications, she would be wise to also push for some laws to protect homeowners. Otherwise, they’ll be another mess to clean up.

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMLO, CALO and has an MBA. He’s spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education. He can be reached at 248-356-3739 & dsygit@TheLendingEdge.com.

Wednesday, October 22, 2008

HUD's Hope 4 Homeowners Program makes Lenders Yawn

On October 1st the Bush administration proudly announced new legislation aimed at helping homeowners keep their homes and avoid foreclosure. Called the "Hope for Homeowners" program (http://www.hud.gov/news/release.cfm?content=pr08-150.cfm), it has lender and broker phones ringing of the hook!

The problem is, no one that matters is really answering their phone. Seems the Bush administration and HUD forgot to check with the decision makers at the lenders where they want the loans modified.

Just another example of our wonderful politicians operating in a vacuum! As usual, they're more concerned with PR to get re-elected than solutions that'll actually accomplish something. The program is hi-lited on the first page of HUD's website with a pic of an American flag. Very apple pie of them, but this is October and I'm thinking pumpkin pie.

So, what does the program offer as a solution? Well IF a lender will write down the amount the're owed to 90% of a property's current appraised value, then the homeowner can qualify for a new FHA insured fixed-rate mortgage. Well lenders aren't too excited about taking a hit by lowering the principal balance of a loan. They gave this feedback when the program was first announced a couple of months ago, but the politicians passed on the feedback & the opportunity to revise the program to get lenders to buy into it.

We do loan modifications and the LAST thing lenders will approve is a principal reduction. They will offer a lower rate, longer term or even an interest only period before they will agree to lowering the loan balance. We know of several cases where principal has been reduced, but it seems to be confined to subprime loans at this time.

Some other challenges with the program:
- Homeowner can't own any other properties. Not a lot of help for those with cottages they can't sell.

- Lenders with a second mortgage on the property must swallow 100% of what they're owed! I can't see that happening so forgot all the homeowners with second mortgages on their homes. I don't know what the politicians were thinking on this requirement.

- A minimum of 50% of all future appreciation must be shared with the lender. Surprise - this one's actually pretty creative and makes sense. I guarantee though, that many participating homeowners will have short-term memories and be shocked & outraged when they do sell in the future and have this clause sprung on them.

- Last, but not least, the program bans any new 2nd mortgages for the first 5 years of the new loan, except for emergency repairs. How will the affected homeowners roll their credit card debt into their ATM machine, I mean home, so they can keep the U.S. economy humming by charging them up again?

We live in interesting times.

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMLO, CALO and has an MBA. He’s spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education. He can be reached at 248-356-3739 or dsygit@TheLendingEdge.com.