Foreclosure & Bankruptcy: a new Beginning, not the End

It’s not how many times you get knocked down, it’s how many times you get back up. Along the way don’t forget what’s really important – Family, Friends & Life.

MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN

TROY, MI – With pretty much everything I do revolving around real estate & lending, I get exposed to a lot of other people’s financial challenges related to the housing crisis. It’s a rare day that I don’t talk to someone in danger of losing their home.

Too many of these people equate losing their home to foreclosure or having to file bankruptcy with failure. For many, this feeling of being a failure can have a devastating affect on their mental well-being, health and relationships.

We all need to get a grip, swallow some pride and lose our egos. Failing at something is not the end of the world.

Remember when you were a kid learning to ride a bike? For most of us, learning meant a lot of falls and crashes, some of them nasty enough for stitches or casts. But most of us got back up, dusted ourselves off and kept at it until we succeeded.

I’ve got a T-shirt I picked up on a ski trip that says, “If you’re not falling, you’re not skiing hard enough!” There’s a lot of truth to that statement. In fact to make it more accurate about life in general we could alter it a bit to, “If you’re not failing, you’re not trying hard enough.”

I went to an entrepreneurial seminar several years ago, where the speaker was from California. He urged the audience to follow their dreams, take chances and not be afraid of failing. He pointed out that few entrepreneurs succeed with their first ventures and jokingly said, “if you haven’t filed bankruptcy, then you’re not trying hard enough.”

Now none of this should be taken out of context and used to justify irresponsible behavior. If you try your hardest to succeed and still fail, you have nothing to be ashamed of. Especially since our current economic situation has foreclosures, personal bankruptcies and unemployment at their highest since the Great Depression.

Keep in mind also, that many successful business people failed in their first endeavors, but later went on to great success. Here’s a list of some rather successful people who have filed bankruptcy:

Roland Hussey Macy
He failed at selling ribbons, provisions to miners and at a general store before going bankrupt in 1855. His next effort, Macy's became the world’s largest store.

J. C. Penny
First store went bankrupt when he refused to give whiskey as a kickback for orders from a large customer. Penny went belly up and got a job in a drapery shop that he later purchased and expanded into 1100 department stores nationwide.

Henry John Heinz
Started his first company in 1869 selling horseradish, pickles, sauerkraut and vinegar. In 1875 the company filed for bankruptcy due to an unexpected bumper harvest which the company could not keep up with and could not meet its payroll obligations. He immediately started a new company and introduced a new condiment, tomato ketchup to the market. This company was, and continues to be, very prosperous.

Milton Snavely Hershey
Started four candy companies that failed and filed bankruptcy before starting what is now Hershey's Foods Corporation. Mr. Hershey had only a 4th grade education, but was certain he could make a good product that the public would want to purchase. His fifth attempt was clearly successful.

Conrad Hilton
Lost all his hotels when he could not pay his bank during the Great Depression. Later, he bought them all back and built a few more. Things worked out pretty good in the end. Just ask Paris.

Frank Lloyd Wright
Famous architect lost his home, Taliesin in Wisconsin and was thrown on the street when business dried up in 1922. During the following decade, he designed some of his most famous projects.

Henry Ford

First two automobile manufacturing companies failed. The first company filed for bankruptcy and the second ended because of a disagreement with his business partner. In June 1903, at the age of 40, he created a third company, the Ford Motor Company with a cash investment of $28,000.00. By July of 1903 the bank balance had dwindled to $223.65, but then Ford sold its first car, and as they say the rest is history

Harry Truman
Opened a shop in Missouri after the First World War only to have it fail miserably. He was further humbled by having to move in with his mother-in-law. Truman later settled his debt for pennies on the dollar when the bank at which the underlying not was written actually went bankrupt itself. He is said to have learned a lot from the misadventure. And it all turned out OK in the in end. You may have heard, he eventually got a good job, in Washington, DC.

Walt Disney

His name is synonymous with Mickey Mouse and the “happiest place on earth,” Disneyland. However, Disney’s career wasn’t always a moneymaking venture. In 1921, he began a company called the Laugh-O-Gram Corporation in Kansas City, Missouri but was forced to file for bankruptcy two years later because his financial backers pulled out. It must have been fate because Disney then headed to Hollywood and became one of the highest paid animators in history.

Sam Walton
His first store was a Ben Franklin discount shop that he made among the most profitable and successful in the chain. Walton's problem was a short lease. When it expired, the building’s owner canceled his lease and took over the store himself. Walton was broke had to start over from scratch. You may have heard, however, that things turned out pretty good in the end. After these early financial difficulties were behind him, he later created the largest company in the world and became a billionaire.

Larry King
Filed for bankruptcy in 1978. He later went on to have a pretty decent career as a talk show host and best selling author.


If you think these people are too far in the past or too big for a relative comparison to the everyday person , look at these people:

David Anderson - http://www.famousdaves.com/about-daves/daves-biography/
Started first company in 1971 at age of 18 which failed. Promptly starts another, wholesaling plants to Chicago area florists and within two years has Sears account and all major florists in the area. Goes bankrupt 5 years later in 1979. Becomes sales manger for Fortune 500 company. Original investor in Rainforest Café in 1994. He also opens first Famous Dave’s BBQ that year and the rest is history.

Eva Sun - http://images.businessweek.com/mz/08/70/pp_fu1.jpg
In 1997 she was forced to take the reins of her 10+ year-old company after poor management by her husband, while she was raising their kids. In 2004, she was forced into bankruptcy despite her best efforts. The company though survived and today is more profitable than ever.

Jeffrey Yarbrough – http://money.cnn.com/2008/09/15/smallbusiness/back_from_the_brink.fsb/index.htm
Told his story to Fortune Small Business of filing bankruptcy after his three Dallas-based restaurants failed. Started PR firm Big Ink that now has $400k in sales and 4 employees with zero debt.


All these people failed initially and had to file bankruptcy, but they didn’t give up and eventually succeeded. Was it easy? I’m sure it wasn’t as they probably had to deal with their own feelings of failure and embarrassment. They got back up though and focused on their long-term goals of success and eventually achieved them.

There are also thousands more stories of every day people who lost their homes to foreclosure or were forced to file bankruptcy due to medical bills, lawsuits or job loss that persevered by getting back up after being knocked down. They put their lives back together by reaching out to family and friends for support

GNMA President to Step Down - A Sign of coming Trouble?

MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN

Troy, MI - Bloomberg reported late last week that Joseph Murin was stepping down after only 13 months on the job.

GNMA (Government National Mortgage Association) mainly securitizes FHA and VA mortgages and has seen its business almost double in the last 2 years.

Why would an executive walk away from a business seeing such explosive growth?

FHA loans have only become popular because so many other mortgage options have dried up. The low credit score & down payment requirements for FHA loans have many mortgage experts predicting significant future defaults.

David Moffet resigned as FHLMC CEO this past March and Herb Allison recently left FNMA.

Makes on wonder why all these executives are leaving these mortgage related organizations.

It does not bode well for the future of these organizations. More trouble is coming, which means more governmment bailouts.

HUD finally allows Loan Modifications on FHA Mortgages

Better late than never - four months after Obama announces FNMA/FHLMC loan modification plan, HUD makes FHA loans eligible.


MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN

TROY, MI – On July 30, HUD published Mortgagee Letter 2009-23, that detailed their long awaited loan modification program for homeowners with FHA mortgages. What took so long? President Obama announced the “Making Home Affordable Program” (MHA) for FNMA & FHLMC mortgages back on March 4th of this year.

We should all be glad HUD’s modification program is finally available, but HUD is supposed to be a homeowner advocate and watchdog. Some watchdog! HUD’s response time on this means if they were guarding your house, the crooks would have already been back several times and stolen everything but the kitchen sink before they sounded an alarm.

This latest piece of legislation does show the Obama administration fully believes the best way to solve the housing crisis and stem the tide of foreclosures is to make home payments affordable. This was sorely lacking with FHA’s other modification options. Most homeowners with FHA mortgages were forced into forbearance programs that usually increased their monthly payments.

HUD’s forbearance program was actually designed for different economic times when a job loss or other economic hardship was typically temporary. Worse-case in those days, a homeowner could usually sell their home to pay off the mortgage they were having difficulty paying. The current Great Recession and percentage of upside homes no longer makes forbearance a very realistic and viable option.

The new guideline kicks in August 15, 2009 for homeowners with FHA mortgages.


Who’s Eligible
The FHA mortgage to be modified must be at least 12 months old and the homeowner must have made at least 4 full monthly payments.

The FHA mortgage must be less than 12 months behind on payments, but surprisingly, it s required that the mortgage be at least 30 days behind. This is a major difference from the MHA program where no delinquency is required.

The homeowner must still live in the property with the FHA mortgage being modified, so rental properties with FHA mortgages are not eligible.

The homeowner cannot have deliberately defaulted on their FHA mortgage payments. I’d like to know how HUD and the mortgage servicers intend to determine this. My guess is that they won’t - except in obvious cases where a homeowner has a lot of liquid reserve funds in non-retirement accounts.

The homeowner must first try to qualify for other loss mitigation home retention options – FHA Special Forbearance, Loan Modification and Partial Claim. This is a silly requirement that could lead to confusion, unnecessary delays and ultimately foreclosures instead of the intended modifications. FNMA & FHLMC modifications have no such requirement.


The Modification Process
A homeowner will have to submit detailed financial information to whoever is servicing their FHA mortgage and sign a hardship affidavit attesting to their financial difficulties. This information may be provided either in writing or verbally over the phone.

Similar to the FNMA/FHLMC modification process, the goal of the FHA modification is to lower the Principal, Interest, Taxes & Insurance (PITI) payment to 31% of the homeowner’s gross monthly income. HUD calls this a Front End Ratio.

Unlike the FNMA/FHLMC modification program though, the FHA version also has a Back End Ratio requirement where total debt payments including PITI, cannot exceed 55% of gross monthly income. Any second mortgages must also be included in the Back End Ratio.

The last calculation is the toughest to understand – up to 30% of the current mortgage balance, less payments in arrears (up to 12 months) and allowable foreclosure costs, may be deferred along with the corresponding payment amount. The amount deferred is also limited to that which will bring the PITI payment down to 31% of the homeowner’s gross monthly income.

Confused yet? I’d like to know why HUD made this so complicated. It’s bound to cause major confusion in the customer service ranks. HUD did provide an example to illustrate the process:

Homeowner had a reduction of income and is delinquent 3 full mortgage payments. The unpaid principal balance on the mortgage on the date of default is $150,000 and the monthly payment is $1,220 (consisting of P&I of $920 and escrows, including MIP, of $300). The financial analysis reveals that the homeowner’s gross monthly income is $3,500 and the total monthly other recurring debt payments are $800.

In order to fulfill the 31% Front End Ratio requirement, the homeowner’s total monthly mortgage payment would have to be reduced to $1,085 ($3,500 x 31%). Therefore, P&I would have to be reduced to $785 ($1,085 total monthly mortgage payment less $300 escrow and MIP). Assuming that the loan modification will have an interest rate of 6% and a P&I of $785, the new mortgage amount would have to be $130,931, resulting in a principal reduction of $19,069 ($150,000 unpaid principal balance less $130,931). In this example, the homeowner’s Back End ratio is 53.9% ($1,885/$3,500), which satisfies the 55% Back End Ratio limitation.

In this example, the maximum principal deferment is $41,340 (30% of $150,000, less the $3,660 delinquency, or $45,000 - $3,660). However, based on their gross income, the homeowner is eligible only for a principal deferment of $19,069 plus $3,660 arrearages (which would include any foreclosure costs incurred to that point, in accord with Mortgagee Letter 2008-21) for the total deferment of $22,729.

Once a modified payment is calculated, a homeowner must undergo a trial modification period and make three consecutive trial monthly mortgage payments on time. Failure to do so will result in foreclosure.

The good news is that no payments will be due and no interest charged on the amount deferred until the rest of the mortgage is paid off. HUD is NOT forgiving part of the mortgage balance. Effectively, HUD is lowering the current payment by extending the term of the mortgage.


Other Issues
A lender may not charge a homeowner any fees for doing an FHA loan modification and all late fees must be waived.

No appraisal is required, but a lender may perform an inspection of the property to confirm it’s in livable condition.

The interest rate may be lowered to 2% above the monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of 10 years.

A modified mortgage must result in a lower payment for the homeowner.

By the way, lenders will be paid up to $1250 for each FHA mortgage they modify. Hopefully, lenders use that money to hire a few extra bodies to handle the increased workload and don’t just use the funds to pad their profits.

Click here to read more HUD issued guidelines on modifications.


Overall, it’s about time HUD caught up with FNMA & FHLMC in regards to more aggressive loan modification guidelines. It didn’t make sense to force FHA lenders to only offer an antiquated forbearance option to homeowners experiencing economic hardships.

It’s interesting that there’s still no official loan modification program to lower payments on VA mortgages.

I’d like to know how many homeowners with FHA mortgages lost their homes to foreclosure while waiting for these new modification guidelines from HUD. Many of them could probably have avoided foreclosure with this new modification plan. Congress should call the organization to task for this delay.

If anyone you know has any questions on modifying their FHA mortgage please forward them this article. Although we don’t handle loan modifications, if they need further assistance have them contact me, but please warn them there may be a consulting fee for my time.

Homebuyers – You’re Pre-Approved by Payment, not Purchase Price!

Lenders do a terrible job of educating homebuyers that they’re actually approved for a monthly payment, not a purchase price. Why don’t pre-approval letters make this clear?

MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN

July 26, 2009 -- Troy, MI – A homebuyer follows instructions and jumps through the hoops (which are many today) necessary to get a pre-approval letter before looking at homes for sale. They find one they like, at a price their pre-approval letter says they’re good for, make an offer, negotiate back and forth with the seller and finally agree on a price. They’re elated.

Then the rug gets pulled out from under them and they’re told they don’t qualify for this house and all their efforts were in vain.

What’s even scarier is that often the homebuyer doesn’t find out they don’t qualify for the property they got their hopes up for, until weeks into the formal approval process, sometimes only days before the target closing date.

Why does this happen?

The lender they were dealing with didn’t do a very good job of explaining how the mortgage industry actually approves homebuyers. Even if they did, it was just one of the numerous topics discussed and the homebuyer forgot about it. Then, the lender didn’t double-check the pre-approval requirements for the specific property.

Because of issues like this, it’s extremely important that homebuyers understand the following:

MORTGAGE APPROVALS ARE MOSTLY BASED ON MONTHLY HOUSING PAYMENTS NOT PURCHASE PRICES!

Let’s study the pre-approval process to understand why.

A homebuyer only makes so much money per month, which means they can only afford to spend a portion of that income on a monthly housing payment. The rest of their income goes towards various income taxes, car payments, credit card payments, student loans, etc. On top of that, unless the homebuyer wants to freeze in the dark during winter, they have to pay utilities to keep the heat & lights on (if you’re outside the snowbelt, think air-conditioning).

If you think about this, it makes sense.

Now, let’s look at an example homebuyer:

Annual Income: $75,000
Monthly Debt Payments: $1,000

How much of a housing payment would this person qualify for?

First, let’s break the annual income down to a monthly basis: $75,000 / 12 = $6,250/month income.

FNMA/FHLMC typically allows 40% of one’s gross monthly income to go towards monthly debt, including a housing payment. The 40% number is called a Debt Ratio. The other 60% of monthly income is allocated for income taxes, utilities, food, clothing, car insurance & gas and other necessities of life.

So, to calculate the maximum amount of monthly debt allowed we calculate 40% of the monthly income:

$6,250 x 40% = $2,500.

But, our example homebuyer already has $1,000 per month in existing debt. That money then, cannot be allocated towards a housing payment. So, we calculate what’s left:

$2500 minus current debt payments of $1,000 = $1,500 for a maximum housing payment

This is what our example homebuyer could afford. Now, they don’t have to spend that much of course. There are also other variables that could allow for a somewhat higher housing payment. For example, if the homebuyer put 20% down, the 40% debt ratio might be allowed to increase to 45% as the higher down payment compensates for the higher debt ratio.

Now that we know our example homebuyer’s maximum housing payment we’re done right? Wrong – houses are sold by price, not monthly payments. So now we have to convert the maximum housing payment to a purchase price.

Here we run into a problem. It’s actually the reason many pre-approval letters are misleading and homebuyers get unpleasant surprises.

The term “housing payment” is not the same thing as a mortgage payment. The mortgage industry considers a housing payment to include the following:

Mortgage payment
Monthly amount for property taxes
Monthly amount for home insurance
Monthly association fees

Property taxes are usually the biggest unknown when pre-approving a homebuyer for a home they haven’t identified yet. Depending on the state your in, property taxes can vary significantly for similarly priced homes. Let’s look at an example:

Assume:
Loan amount: $200,000
Interest Rate: 5.250% (APR 5.891) no PMI
Home insurance: $900 annually

If we compare these two monthly housing payments to our maximum payment allowed of $1,500, you can see that our example homebuyer would not qualify for property #2 - even though it had the exact same sales price as property #1.

We’ll leave the reason as to why property taxes may vary on similarly priced properties to a future article. For now, just ask your local real estate expert.

How can a homebuyer address this problem? Simple, demand something in writing from the lender you get pre-approved by, that specifically states the maximum payment you’re qualified for. While they’re at it, they should also disclose the interest rate they pre-approved you at. Interest rates change daily and if it takes you a month or two to find a property, higher rates could affect your pre-approval purchase price just like property taxes.

Real estate agents also need to understand this issue to better assist their homebuyers. Agents should contact their homebuyer’s lender with the property taxes and any association fees to confirm the homebuyer does indeed qualify for the specific property, before writing an offer.

Understanding the process, putting specifics in writing and relying on true professionals can remove many of the unpleasant surprises in the pre-approval and home buying process.

Witch Hunt or Consumer Protection? - 178 Loan Mod Companies Pursued by Government.

Loan Modification companies seem to be the latest mortgage industry group in the crosshairs of government officials.

MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
-- DETROIT, MI – Over the last several weeks I’ve noticed a substantial increase in the number of loan modification companies being investigated by various government agencies.

All I can say is that it’s about time.

Now don’t misinterpret that statement - I believe that loan modifications may be part of a viable solution in getting our country out of the current housing crisis, although it’s too soon to determine their actual long-term effectiveness.

I also have nothing against loan modification companies in general nor the people that work at them. I’ve met or connected with many individuals that are intent on really helping people and do their best to do so.

Lastly, many homeowners do need some type of assistance as lenders don’t have their best interests in mind when they do loan modifications and many lenders draw the process out seemingly forever.

On the other hand, I’ve personally heard many stories from homeowners victimized by loan modification companies, have heard the same stories from mortgage associates and have read many more on the internet.

From Subprime to Loan Mods
I predicted over a year ago that loan modification companies would become the new subprime “churn & burn” debacle. This was triggered by my observations that many local subprime loan originators were flocking to do loan modifications. I even heard several stories of these originators approaching the same clients they’d put in subprime loans, with offers to now do loan modifications for them.

There really is no barrier of entry to do loan modifications. All you need is a phone and the ability to find clients. Finding clients is easy with so many homeowners struggling with their mortgage payment.

This should all sound familiar as much of it applied to the mortgage industry in general until recently, when state governments started requiring individual licensing of loan originators and the federal government created a national registration system.

When Michigan enacted its Loan Officer Registration Act, April 1, 2009, the state expected 10,000 to register based on past data. To date only 3141 have met the requirements of 24 hours of class time, passed a multiple choice test and background screening. How many of the unregistered do you think are now using their limited mortgage knowledge to do loan modifications?

Desperate People do Desperate Things
One would think that a homeowner, burned by a bad mortgage, would be a bit more cautious when considering a loan modification.

The number of loan mod companies popping up however, prove otherwise. It’s basic supply and demand – the numbers of these companies wouldn’t be expanding if there weren’t desperate homeowners to support them.

So, how do homeowners get burned by these companies? In no particular order:

• Paying upfront fees for a modification never completed.
• Being told they’ll get a principal balance reduction, when in reality it rarely happens.
• Getting approved for a modification that raises their payment or insignificantly lowers it.
• Following advice to not contact their lenders during the loan mod process, only to get foreclosed on.
• Not being made fully aware of the possible credit damage, legal issues and tax consequences.

It’s all boils down to these companies over-promising and under-delivering.

What Took the Government So Long to Act?
If I saw this problem coming over a year ago, you’d think the smart people in our government would’ve saw it coming also.

In a recent informal poll of mortgage originators by “Think Big Work Small”, 81% responded that over 50% of those doing loan modifications are “rats”.

Unfortunately, just like with the mortgage meltdown and the banking crisis, the government only seems to act after the damage has already been done. Here’s a list of the agencies currently chasing loan mod companies:

• Federal Trade Commission
• United States Attorney’s Office for the Central District of California
• Arizona Attorney General’s Office
• California Department of Justice
• California Department of Real Estate
• State Bar of California
• Colorado Attorney General’s Office
• Idaho Attorney General’s Office
• Illinois Attorney General’s Office
• Iowa Department of Justice
• Kansas Attorney General’s Office
• Maine Attorney General’s Office
• Maine Department of Professional and Financial Regulation, Bureau of Consumer Protection
• Maryland Department of Labor, Licensing, and Regulation, Office of the Commissioner of Financial Regulation
• Massachusetts Attorney General’s Office
• Michigan Attorney General’s Office
• Missouri Attorney General’s Office
• New Jersey Attorney General’s Office
• New Jersey Department of Banking and Insurance
• New Mexico Attorney General’s Office, Consumer Protection Division
• North Carolina Department of Justice
• Ohio Attorney General’s Office
• Oregon Department of Justice
• Texas Attorney General’s Office
• Washington Attorney General’s Office

Charges are being filed because of deceptive and/or false advertising (Section 5 of the FTC Act), charging upfront for services before rendered, unlicensed activities, mail fraud, attorney misconduct and several others.

Solutions
The Obama administration really needs to step up and address this issue quickly. The crooks and sharks need to be forced out of the industry to protect homeowners. Honest professionals also need protection - from overzealous government agencies. It’d be a real shame if those that were actually doing good things for homeowners were put out of business, fined or jailed.

An easy to implement option would be to allow loan modifications to only be done by licensed mortgage companies and attorneys. The mechanisms are already in place across the country to control this.

A better solution would be for the administration to create a national solution instead of letting all 50 states come up with their individual plans.
For a list of the loan modification companies currently be investigated, click here and then click on “preview”.

Are Loan Modification Programs Working?

Many financial experts say they aren’t, quoting old data to support their statements. The latest data may force them to change their tune though.


DETROIT, MI – The Obama administration continues to push loan modifications as the best way to address the nation’s growing housing crisis. Many so called financial “experts’ though, disagree with this focus.

It’s interesting to note that the administration recently announced that due to disappointing numbers for its Home Affordable Refinance Plan (HARP), the program was being expanded to allow refinances to 125% of a homeowner’s property value, up from 105%. To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets.

The disappointing numbers for HARP are a sign that many homeowners don’t qualify for it because they’re either too far upside in their homes or they’re behind on their mortgage payments. This makes loan modifications their only option - hence the administration’s focus on loan mods.

So, what about all the naysayers against loan modifications?

Well, they all quote studies that seem to “support” their claims that modifications aren’t working due to the high number of homeowners that default on their loan modifications.

One of these studies was done by the Federal Reserve Bank of Boston, published July 6, 2009. The study had some valid points:

1. Lenders are reluctant to modify mortgages. Only 3% of seriously delinquent loans have had modifications.
2. Percentage-wise, lenders are modifying FNMA/FHLMC and mortgages held on their books the same.
3. 30% of delinquent loans become current with no intervention by the lender.
4. Most modifications result in an increased loan balance as back payments are rolled into the loan amount.
5. More and more modifications are being done and resulting in lower homeowner payments.
6. 26% of modified loans in the 4th quarter of 2008 resulted in lower payments.
7. Payment decreases before the 3rd quarter of 2008 ranged from 10-14%.
8. Payment decreases in the 4th quarter 2008 averaged 22%.
9. 30-45% of modified mortgages redefaulted within 6 months of a modification.

These are all interesting statistics. The financial “experts’ all seem to focus on the fact that 30-45% of modified mortgages redefault, while ignoring one important fact – only 26% of the loans modified resulted in a lower payment!

Why would a lender expect a homeowner that’s already defaulted on their current payment, to be able to afford that same payment or a higher one? Anyone citing this report’s redefault rate without taking that point into consideration should stop calling themselves an “expert”.

A more recent report (through 1st quarter of 2009) from the Comptroller of the Currency Administrator of National Banks, shows something a bit different:

1. A significant increase in the number of modifications made by servicers. Up 55% from last quarter. Payment plans decreased in favor of loan modifications.

2. Servicers implemented a higher percentage of mods that reduced monthly payments than in previous quarters.

3. Modifications with lower payments continued to show fewer delinquencies each month following modification than those that left payments unchanged or increased payments.



4. Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans

5. The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter.

6. Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter.

One very important statement from the report: “The number of modifications recorded in this report does not reflect actions taken under the Administration's "Making Home Affordable" program, which was announced in March and began to be implemented after this reporting period.”

As Obama’s plan is the most aggressive loan modification attempt to date, focusing on reducing homeowner payments to 31% of monthly income, the numbers should start turning even more positive.

Even without those numbers, statistics from the 1st quarter of 2009 show improvements in loan modification performance after previous quarters showed a trend to the negative:


What can we conclude from all this?

While it’s important to note that we’re far from out of the woods on the housing crisis and we don’t have enough recent data to really draw any long-term conclusions on the benefits of loan modifications – we do seem to be heading in the right direction.

For all the free-market advocates out there railing against bailing out upside homeowners – your arguments went out the window when the government bailed out the banks. If we can bailout upside down banks, how can we not bailout upside down homeowners?

For those who believe we have to lower mortgage balances to effectively modify mortgages, I disagree that we have to do so. It would be nice as I’m upside down in my own home, but I think it’s more important to lower house payments.

People buy cars all the time where as soon as you drive it off the dealer’s lot, you’re upside down in it. I don’t hear anyone asking for a bailout on their car loan. Why do they continue to pay on their upside down car? Because they need transportation and they can afford the payment.

Why are people losing their homes? Because they can’t afford the payments. Statistically, most people are emotionally tied to their homes. Most won’t do the logical thing and walk-away from their upside down home anymore than they would walk-away from their upside down car. Give them an affordable payment and even if they’re upside down, they won’t walk. Bring the payment down to their local rental rates and they won’t be able to live anywhere cheaper. Yes, their will be a small percentage that move in with relatives or move to a lower income area, but most will stay.

It seems the so called “experts” live in their own little worlds and seem to have their own agendas. Few actually report unbiased facts, instead preferring to only focus on what supports their positions while ignoring all other facts. Heaven forbid they actually take the time to digest & think through the statistics.

The media is just looking for sensational headlines to sell more advertising. Very little actual research seems to happen these days. What’s more, they all seem to regurgitate the same stories, propagating incorrect stories, fooling the public into believing them because of the repetition.

So be forewarned not to buy into what you read in the headlines or what so called experts tell you. Click on the links I’ve provided and read the material for yourselves to come to your own conclusions.


# # #
Drew Sygit writes and speaks about the mortgage & real estate industries. He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He’s presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA’s, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications. He also publishes his own blog: http://drewsmortgagenews.blogspot.com/. He can be reached at dsygit@TheLendingEdge.com.

125% Refi's Announced! The Government Finally Gets it

The government appears to be finally understanding how many Americans are upside down in their homes.

As I've been predicting for months, the FHFA just announced today that they will be allowing FNMA & FHLMC to refi underwater homeowners up to 125% of their property's value.

Previously the cap was at a joke amount of 105% LTV, resulting in President Obama's hyped Home Affordable & Stability Plan being way behind on the estimated number of homeowners it was meant to help.

Whether or not the government should be doing this is up for debate.

The argument against is all for letting the free market work its magic. Get the pain over now and let the economy recover.

Those for government intervention argue that the nation's housing market is "too big to fail". If the government bailed out the "fat cats" on Wall Street, then it should bail out ""Joe Six-Pack" also.

Since we've already started down this slippery slope, it would have been better if they would've done away with the appraisal requirement on refinances all together. A new appraisal hasn't been required on an FHA Streamline refi since 1984. Now with FNMA/FHLMC owned by the government, what's the difference? If it works for FHA, it'll work for FNMA/FHLMC.

Either way, this county's mortgage debt is backed by the government and if payments can be lowered, less homeowners will foreclose. People have to live somewhere.

As a side note, think about what doing away with appraisals on refiances would do to HVCC appraisal issues!

Now, keep in mind that this will take awhile to be implemented as a lot of software needs to be rewritten.

Also, the when the government approved the 105% LTV, FNMA & FHLMC both added pricing hits, which offset some of the gains of lower rates. I would hope they don't do the same this time.

Lastly, let's hope FNMA & FHLMC allow more lenders and brokers to do these loans. Right now, FHLMC forces homeowners to only go to their current lender. These lenders are pretty backed up, some taking 60-90 days or more to close these loans causing many homeowners to miss low rate opportunities.