The Lifespan of Loan Modifications

Like a Mayfly (or fishfly), loan modifications won’t be around long,
but they may leave a nasty “smell” just like the refinance boom has.

November 23, 2008 -- BLOOMFIELD, MI – If you live near a freshwater lake or river, chances are you’re familiar with mayflies. These small flying insects hatch by the millions in late spring or early summer, swarming over everything, especially light sources. Having no mouth or digestive system, they frantically mate to reproduce before dying, smelling all the while like dead fish. The only good thing about them is their short lifespan – some species live for an hour, most not more than a day.

Loan modifications have a lot in common with these creatures.

This past spring and early summer news coverage of loan modifications swarmed in frequency and the public became very aware of the term and concept. Recently, the activity of loan modifications has also swarmed as lenders have fallen over themselves announcing how many hundreds of thousands of loan modifications they’re targeting to do.

Swarms of bankers, mortgage originators, attorneys and others have been drawn to loan modifications like a mayfly to a streetlight. The opportunity to make a quick buck with loan modifications is eerily similar to the fast money that attracted many to the mortgage refinance boom, just a few years ago.

A lack of regulation and almost nonexistent entry requirements allowed many incompetents and crooks into the mortgage industry. They greedily refinanced homeowners into bad situations, took their money and quickly disappeared - leaving behind the rotten stench of the current foreclosure mess.

The bad news is the growing industry of loan modifications has little, if any, regulation. Many desperate homeowners will be duped out of money they can’t afford to lose by greedy opportunists, way over-promising and delivering nothing.

The good news is that just like a swarm of mayflies, the industry’s days are already numbered. FNMA hastened the end with their announcement to standardize loan mods and offering lenders an $800 incentive to do them. Once the list of qualifying homeowners is worked through and real estate values stabilize, loan mods will be a thing of the past.

Federal Agency Announces Mortgage Modification Plan

Will the plan do enough to stop foreclosures or just temporarily slow them down?


November 17, 2008 -- BLOOMFIELD, MI – At 2pm on Tuesday November 11th, Veterans Day, James Lockhart of the Federal Housing Finance Agency held a press conference. He and several government officials announced FNMA & FHLMC would pursue, “a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford.”

He pointed out that FNMA/FHLMC combined control 31 million mortgages or about 58% of the nation’s total, but only account for 20% of delinquencies. He called on private label mortgage servicers and investor to adopt the FHFA program as the industry standard as they account for roughly 60% of the serious delinquencies.

The program, rolling out December 15th, targets borrowers 90 days or more behind on the mortgage for their primary residence, who haven’t filed for bankruptcy protection. Housing payments will be reduced to 38% of monthly gross income through a combination of lowering interest rates, lengthening loan terms and “deferring payment on part of the principal.”

Servicers will receive an $800 incentive to restructure FNMA/FHLMC mortgages.

Will this be enough to miraculously stop foreclosures and save everyone’s home? That’s impossible and not the goal.

To qualify, homeowners need to show enough income to make a reasonable payment. Homeowners without a job aren’t likely to qualify. With recession spurred unemployment increasing, many will still lose their homes to foreclosure as they won’t be able to make any consistent payment amount.

Notice the announcement doesn’t in any way imply forgiving part of the loan balance. “Deferring payment on part of the principal” only implies “Interest Only” payments, a disappointment for the millions of homeowners upside down in their homes.

Why the requirement of being 90 days behind to qualify? Doesn’t that encourage homeowners to stop making payments to be eligible? Well, most of the “servicers” referred to that’ll be handling the modifications are actually banks, the same banks posting billions in losses and cutting employees as a result. So, the system doesn’t have the resources to help everyone, just the worst off.

The real focus of the program is to stop the “death spiral” of foreclosures causing home prices to drop, causing more foreclosures, causing prices to drop further and on and on until we’re in another depression. If pulled off correctly, it may just succeed.

Michigan State Legislature works on Home Foreclosure Prevention Act

Are they trying to force lenders to do loan mods?

November 12, 2008 -- BLOOMFIELD, MI

Elections are over and the Michigan legislative "lame duck" session begins in earnest in Lansing.

The House legislature is expected to start working on establishing the Home Foreclosure Prevention Act, which would establish a state database on mortgage foreclosures and allow a state commissioner to mediate foreclosure matters.

Lawmakers are off today, for Veterans' Day, but will be in session Wednesday and Thursday. Then the Legislature will be on a two-week break before returning to work in December.

A bill concerning foreclosures, HB 6615, is before the House Banking and Financial Services Committee for a hearing on Wednesday. The bill would affect foreclosures on primary residences secured by a subprime loan.

You can read an outline of the bill below, but my take on it is that the legislature is trying to force lenders to consider more loan modifications by extending the time before starting foreclosure or by requiring mediation to do so. I think it’s a great start in the right direction, especially given the bailout money the Feds have committed to the banking industry.

More of the bailout money needs to trickle down to homeowners instead of winding up as bonuses in the pockets of those that ran the banks and got us all into this mess.

An outline of the bill’s provisions:

1. Require a foreclosing party to notify the borrower 45 days prior to starting the foreclosure process that they may be eligible for a loan modification or other solutions.

2. The notice must also include:
i. an itemization of all past due amounts
ii. an itemization of any and all charges to bring the loan current.
iii. The earliest date foreclosure proceedings may commence.
iv. A statement that the borrower may have options to avoid foreclosure.
v. The address, phone number and other contact information for the lender or their agent authorized to discuss other solutions.
vi. The name, address & telephone number of HUD or MSHDA approved counselors.
vii. The address and phone number for the consumer complaint area of the Office of Financial and Insurance Regulation.

3. Within 3 days of sending this information to a borrower, the foreclosing party must file this information with the state court administration office.

4. By January 1, 2009, the state court administration office shall design a database to hold this info. This info shall not be available to the public.

5. The commissioner of the program shall solicit solutions other than foreclosure from all sources.

6. If, after review of a foreclosure case, the commissioner decides there is merit to avoid foreclosure, they can either delay the start of foreclosure proceedings by up to 90 days or require the borrower and lender to pursue mediation.

7. After December 14, 2008 lenders are required to file a certification that all the above is true BEFORE commencing to foreclose on a primary residence secured with a subprime mortgage.

8. A subprime mortgage is defined as a mortgage originated after December 31, 2001 and prior to January 1, 2008 with an APR that exceeds the comparable US Treasury yield by 3% for a 1st mortgage or 5% for a 2nd mortgage. A loan will also be considered subprime if it’s APR exceeds the mortgage rates published by the Federal Reserve by 1.75% for a 1st mortgage and 3.75% for a 2nd mortgage.

Read the entire bill at http://www.legislature.mi.gov/documents/2007-2008/billintroduced/House/pdf/2008-HIB-6615.pdf

Why all the Doom & Gloom about Michigan?

More and more people are talking about leaving Michigan for better opportunities. But, where's the grass really greener?


November 8, 2008 -- BLOOMFIELD, MI – With the Presidential election over and Americans’ focus turning back to the economy, the news isn’t good concerning the domestic auto industry.

Rising unemployment, falling consumer confidence & lower spending are causing a severe drop in domestic auto sales. The automakers have responded with more plant closures, employee layoffs & buyouts.

The most recent report from the U.S. Department of Labor shows that Michigan has the 2nd highest unemployment rate in the country. Michigan also led the nation with 28,300 jobs lost in the period from September to October of this year.

It’s no surprise that as a result of all the automaker job cuts, the 3rd quarter statistics from RealtyTrac have Michigan ranked 7th in the nation in foreclosures. Michigan also comes in at 2nd of all states in terms of financed homes with negative equity. 38.6% of Michigan homes are worth less than the mortgages on them.

So, we should all pack up and leave Michigan right? Perhaps head for those sunny locales where everything has to be better?

Well, let's look at the stats for those popular destinations California, Arizona, Nevada and Florida to see.

California and Nevada rank 5th and 6th respectively in unemployment. The top four states in foreclosures are Nevada, California, Arizona and Florida. The Case-Shiller Index shows those same four states suffering from the worst drops in home values. Finally, Nevada is number one in the percentage of financed homes being upside down, with Florida, Arizona and California being 3rd, 4th, and 5th.

So much for the, “go west” advice for greener pastures!

I'm not leaving Michigan as it's not significantly better anywhere else. I will try to make a difference here by thinking positively and choosing to focus on the postive rater than the negative.

Is there any Mortgage Relief for the Average Homeowner?

Is there any Mortgage Relief for the Average Homeowner?
There’s lots of buzz about HUD’s Help 4 Homeowners program and Loan Modifications. Average homeowners want to know if there's help for them!

November 3, 2008
By: Drew Sygit
CMPS, CMLO, CALO, MBA

BLOOMFIELD, MI – The media headlines have a new update or wrinkle about the Federal Bailout of banks daily. Stories abound also about new programs and initiatives to stem the tide of foreclosures sweeping the country. All this talk of aid for banks and for distressed homeowners has the average homeowner wondering and hoping there’s something in all of this for them.

The latest figures show that roughly 90% of homeowners are paying their mortgage on time and are not a financial risk for foreclosure. So, why are these homeowners worried and looking for some type of aid? It could be that recent estimates have nearly 20% of this nation’s homeowners being “upside down” in their homes – owing more on their mortgages than the homes are worth. Another 5% of homeowners barely have any equity in their homes and values are predicted to drop another 10% in the coming year. That’ll leave 25% of homeowners nationwide upside down and perhaps reconsidering what the American dream of homeownership means to them.

From a pure financial perspective, it makes no sense to keep throwing good money after bad on an asset declining in value. Especially when you can buy that same asset, next door at a steep discount. Homeowners everywhere, from the well-off to those cutting corners to make their mortgage payments, are wondering why should they keep making their payments.

They also have questions about fairness. Why is so much being done to help delinquent homeowners, many of whom made foolish decisions buying more than they could afford and taking out toxic mortgages to do so, while nothing’s being done to help those that made wiser decisions?

Our office receives several calls a day from homeowners who are not delinquent on their mortgages, but are upside in their homes and looking for some type of relief. Most want to know if anything can be done to reduce the amount of their mortgages in light of the falling values of their homes. Sadly, there are no easy answers for them.

Every program and relief effort announced so far is targeted at helping distressed homeowners avoid foreclosure. Loan modifications are reserved for those facing a viable hardship and even then, a reduction of mortgage balance is not very likely. Lenders understand that to keep people in homes they just have to make the payments affordable. On the other hand, homeowners have to show the ability to make the negotiated lower payment, otherwise the lender will just continue to foreclose.

Hud’s new Hope 4 Homeowner program not only requires a homeowner to be delinquent to qualify, but also requires the servicer/lender of the mortgage to take a loss on the mortgage amount that exceeds 90% of a property’s current value. Lenders are not falling over themselves to do this.

So, why should the 90% of homeowners that are not delinquent continue to make their mortgage payments and not walk away from their upside down homes? Besides the arguments that they have to live somewhere and a foreclosure trashes your credit record, we can find viable answers in analogies.

How fair is our tax code that shifts more of the tax burden to those that do well and gives some of that back as welfare to the poor? Why are so many leaving their money in the stock market, which has dropped as much as many home values, willing to take a long-term view there? Beyond those examples we have the fact that something has to be done to break the vicious cycle we’re now in – foreclosures cause nearby property values to drop, resulting in more foreclosures, which drives values down further, etc…

# # #
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. His blog: http://drewsmortgagenews.blogspot.com/