Short Sale Blog

July 2010 saw more cancellations of government-sponsored loan modifications than new loan modifications.

HAMP, the Housing Affordable Modifications Program, was initiated by President Obama in April 2009 to help homeowners who are struggling to meet their mortgage payments. The program can provide assistance for mortgage holders who want to refinance their mortgage or negotiate a loan modification with their lenders. It also includes opportunities for those who wish to mitigate their losses through short sales.

HAMP helps homeowners looking to modify their loan by giving lenders incentives to negotiate more favorable terms: for example by increasing the time period of the loan and by lowering interest rates. Homeowners start with at least three payments on “trial” before the loan modification becomes permanent.

However, nearly half of the 1.3 million loan modifications that have been negotiated under the HAMP program have been cancelled. This July, the number of new government-sponsored loan modifications grew by its slowest rate since the program started, and there were five times more cancellations than new modifications.

The Treasury indicated last week that there will be more cancellations than new trials for the coming months. This is to clear a backlog of “aged trials” from the program’s early days, when banks were encouraged to approve new trial loan modifications without supporting documents to ensure borrowers’ eligibility.

A total of 422,000 borrowers have received permanent loan modifications through HAMP. Other alternatives HAMP offers to homeowners include negotiating a short sale or a deed-in-lieu of foreclosure.

Seattle Short Sales, Inc. is a specialist in the marketing and short selling of properties in the Seattle area. Please contact us with any of your questions about short sales.

In my experience, working with hundreds of Seattle area pre-foreclosure homeowners since 2004, the homeowner is best served when they find closure as soon as possible.

Loan modifications, for the vast majority of homeowners, only postpones the inevitable.

Consider this reality: Out of 3.1 million delinquent mortgages in September of 2009, only 16% have been successfully modified. The average homeowner has roughly a one in six chance of getting their bank to agree to a loan modification.

To even get to that point, the homeowner usually has to suffer through months of agony, as they fax and re-fax the same documents to the lender, are given conflicting information, and struggle to come up with the funds necessary for entering trial forbearance programs.

But what happens to a homeowner who successfully achieves a loan modification? The majority of homeowners (56%) re-default within 12 months. After just three months, 28% are already in default.

That takes the odds of success down to one homeowner in twelve. But even that sole survivor is not in great shape.

Only 10% of the loan modifications involve a principal reduction. The loan modification is usually achieved by lengthening the term of the loan, or making the loan into an interest-only loan, with the principal payback postponed until the future sale of the house. What this means is that the borrower continues on the hook for a property that is underwater, for an additional ten years, without paying down the principal for the entire time. That is not the recipe for success. It is that kind of creative lending that caused the bust in the first place.

Here are the specific track records for a few select lenders:

Bank of America: 11 percent of eligible loans have been modified under the Making Home Affordable program.

JPMorgan Chase: It has offered modifications to 27 percent of eligible borrowers through the federal program.

Wells Fargo/Wachovia: They have modified 17 percent of eligible loans.

All of the above numbers come from the September 2009 report of the Office of the Comptroller of the Currency, or OCC, which regulates national banks. The OCC is a division of the U.S. Treasury, the entity that oversees the Making Home Affordable program.

The bottom line is that if a homeowner wants complete, guaranteed finality to their situation, there is usually just one answer. Find a new housing payment that they can afford and lock it in. For many homeowners, that means ditching their $2,500/mo mortgage payments and renting a $900/mo studio apartment. I understand, that might sound horrific to homeowners who have never missed a payment in their lives and feel like they are just going through a rough patch.

However, in my experience homeowners will choose to drain their retirement accounts in an attempt to save their house, yet in the end, completely run out of money and be forced to move anyway. In contrast, I have seen great results from homeowners who make a clean break from a bad situation and as a result, preserve their precious resources.

Another significant result of taking charge of the situation, is the added benefit of freeing up mental space to pursue new income opportunities. By not spending all the waking moments focused on the past, amazing amounts of creative energies are released.

Perhaps someday, the Making Home Affordable loan modification program will work for the vast majority of homeowners. In the meantime, carefully analyze the existing program, and make sure it works for your situation, before committing precious time and money to getting a loan modification.

Click here to learn more about the Seattle Short Sale Advantage program, and how it has helped hundreds of other local homeowners.

Here is a good article from the New York Times covering some of the problems of the loan modification process. There are some great quotes from the actual servicers, making up stories for lost files. It is funny, but tragic. Due to the media and the government, many homeowners honestly believe that there housing problem might be turned around with a loan modification.

In reality, if a homeowner has received a Notice of Trustee Sale in Washington state, there is only a very slim chance that they will be able to pull off a loan modification. What often happens is that the homeowner is strung along for months, before finally being rejected at the last second, days before the auction. At this point they have pretty much run out of all options.

We have found that it is best that the homeowner deal with their situation pro-actively and sell the home. By taking matters into their own hands, they are guaranteed to lower their housing costs by becoming a renter. For most borrowers, hoping for a loan modification only delays the inevitable.

Here is the article: http://www.nytimes.com/2009/06/29/business/29loanmod.html?_r=1&emc=eta1

Loan modifications have been promoted as the 'answer' to our nation's housing crisis. The idea was that by either reducing the principal balance of the loan, or lowering the interest rate on the loan, troubled borrowers would be able to keep their home.

The first statistics that came from the FDIC were not promising. 65% of borrowers who had their loan modified via the government run IndyMac bank were in default within 6 months. Since then, the government has encouraged even more loan modifications, with the argument that the loan servicers need to lower the monthly payment for the borrowers even further to make the policy work.

Well, Fitch Ratings has come out with a report looking at a bundle of securities from 2005 to 2007 that are managed by around 30 mortgage companies. Fitch found that a conservative project was that between 65% and 75% of modified subprime loans with go into default within the first year after the modification. Even loans where the principal was reduced by 20% were still redefaulting at rates of 30-40% in the first year.

If you are a homeowner, and are not able to make your payments, the best thing to do is take matters into your own hands and get your property sold and your accounts settled with your lender. All too often, the hope for a loan modification makes homeowners wait until it is too late to sell the house and then they lose it to the auction.

It is very disappointing to see many former mortgage brokers and real estate agents suddenly become Loan Modification specialists. Many companies charge up to $3,000 to help homeowners modify their loan so that they can stop their foreclosure and stay in their house. The reality is that the homeowners are usually getting ripped off. It doesn't cost $3,000 to talk to the bank on behalf of a homeowner. In addition to sucking the remaining few dollars out of a struggling homeowner, the bigger issue is that rarely do loan modifications truly help the homeowner in the long run. 

I met with a homeowner last week. His name is Daniel. He is a general contractor and his business has come to a grinding halt over the last six months. He may have a couple possible jobs coming up, but they are doubtful he tells me. He is living in a split-level in Kirkland with his special needs son. He owes over $450,000 on the house, and he knows he can't sell it for that today. He just ran out of money, and won't be able to make his next mortgage payment. 

Government loan modification programs aren't working. The next thing to try is cram-downs. That is when a mortgage lender is forced to lower the principal amount of the loan on properties that are underwater. It is expected that the new administration will allow bankruptcy judges to force cram downs on lenders on behalf of bankrupt borrowers.