Loan modification fever is here. Families all over the U.S. are struggling to make their mortgage payments and many are expressing frustration that their lender won’t modify their loan. Any of us could try to make a rational argument that a lender is better off modifying a mortgage loan instead of foreclosing but this is a simple answer to a complex problem. This blog post will help homeowners understand who is not going to get a loan mod. Hopefully homeowners will be able to then move forward toward other solutions.
Loan modifications are not for people in temporary financial distress. Temporary financial distress is when a homeowner missed a payment for one or two months because of a temporary hardship. Lenders can and do help these folks with a forbearance and repayment plan where the missed payments are made up over time or tacked on to the end of the mortgage. This is not a loan modification, it’s a repayment plan. If your financial distress is only TEMPORARY then asking for a full-on loan mod is wasting your time and everyone elses time. New research out this week from CR shows us that 30% of all delinquent borrowers self-cure without receiving any kind of loan modification. This means lenders who can effectively triage out borrowers likely to self-cure are behaving rationally by setting aside pleas for loan mods.
Long term financial hardship means homeowners need long term financial solutions. A loan modification is only ONE of MANY long term solutions. In order for a homeowner to receive a loan mod, the homeowner must be able to document stable monthly income. Lenders have to re-underwrite the file to make sure that the loan modification will not result in further loss to the lender. This takes time. If a homeowner’s monthly income has dropped so low, to the point where they really can’t qualify to repay the modified loan, this loan modification will not be approved nor should it. (Note: Lender guidelines on qualifications vary and change often, just like the retail side of lending.) This homeowner should consider other options which will be outlined below. It should be beyond clear by now that lenders are not going to voluntarily start reducing principal balances unless forced by gunpoint. The government can try to shame them into it but let’s face it: most corporations are shameless and nothing any of us say and do is going to change this.
Long term financial hardship cases do happen. Case in point. I received an email last night from a homeowner who is on permanent disability. Her husband just got laid off. They are seeking a loan mod. In no way can they afford the $4500/month payment on their interest only loan so they’d like the lender to lower the payment (lower the interest-only rate, extend the term). They are $100,000 negative equity. Sounds rough, doesn’t it? However, they happen to have $250,00 in the bank. This is not a case of financial hardship! A lender would be wasting time and money modifying this loan. These homeowners HAVE MONEY in the bank to continue to make their existing payment for many more months. Besides, looking at the amount of money coming in the door each month, once their money runs out, chance of a re-default is sky high. The only thing a loan mod does for these homeowners is it keeps them in their home for a little while longer. If the husband can become re-employed at his same rate of pay, maybe the chance of default drops a bit, but no lender will modify this loan if there’s literally zero money coming in every month. This lender is making a good business decision to put this file on ice while they continue to pay as agreed each month using their $250K.
I agree with CR: “If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.” It would be rational for negative equity homeowners to make the decision to trash their credit score in exchange for a shot at wiping out $50K, $100K+ negative equity if they wanted to keep their home. We shouldn’t hold our breath for lenders to make principal balance reductions en masse.
I have not worked in loan servicing for many years but when I did, there was a triage system of making sure cases that were going to cost the bank the most money were prioritized over cases that could wait longer. We already know that loan servicing departments are far understaffed for the tsunami that’s hitting them full on. If we want banks to beef up staffing and spend money hiring and training more loss mitigation underwriters, the expense for these costs is going to be priced into new mortgage loans made tomorrow and in the future. Even so, this will take time. Working in loan servicing is a very high stress job. Imagine what it’s like to work 8 to 5 every day with a 1 hour break from lunch and 2, 15-minute breaks…with the rest of your day spent being yelled at by Realtors asking for their short sales to be approved RIGHT NOW. High stress = high turnover. I could never do that job today because I’d yell back and surely get fired.
Homeowners with bonafide cases of lender law violations or predatory lending can and should be prioritized in getting help modifying their loans. These homeowners are better served by hiring competent legal counsel to represent their interests in negotiating fair and just mortgage terms. But that’s not what’s happening today.
Today, it seems that the masses believe they deserve a loan mod based on whatever is going on in their lives. Job loss, reduction in hours, on and on….I know I may sound heartless here but lenders need to make sure you are able to repay a modified loan and that you are eligible for a loan modification under their specific guidelines. Not everyone will qualify.
Options beyond a loan modification:
Move out of the house
If you don’t want to sell the home, perhaps you will be able to rent out your home and cover or almost cover the mortgage payment. Then you can seek out other living arrangements that comport with your ability to pay. When your income adjusts upward again, you can move back in.
Take on a tenant
Maybe you can rent out your basement or spare room to a tenant. I know several people who are doing this just so that they can make their own mortgage payment. Check your local city or county rental guidelines.
Sell the home
If you have negative equity, interview at least three real estate agents who are COMPETENT in the practice of listing and selling short sales. Do NOT hire an agent who has no experience in short sales. If you decide to hire a Realtor who’s your friend or relative and that person has no experience listing and selling short sales, you get what you deserve.
Hire an attorney
Some homeowners seek out a loan modification only to find out that the real problem was far beyond just the mortgage but instead was an abundance of consumer credit card debt. Maybe an appointment with an attorney who represents debtors is in your future. An attorney can fully explain all the reasons for and reasons against letting the home go to foreclosure, as well as all the legal consequences. News today suggests a foreclosed homeowner might even be able to rent back their home from the lender!
Whatever you do, do NOT pay ANYONE cash up front for services before the services are actually performed (with the exception of when you hire an attorney.) If you part with cash to pay a loan mod company, you are setting yourself up to become re-victimized. They will tell you anything you want to hear in order to get your money because they know you are desperate. If you have money, hire your own attorney who will represent you directly. If you do not have money, contact your state’s bar association for a referral to free legal aid.
Also worth saying: Avoid any third party who claims to have a solution to all your problems and asks you to sign anything. Especially if they say, “This is perfectly legal.” Before signing anything hire your own local legal counsel. Foreclosure rescue scams continue to be on the rise nationwide.
Not everyone will qualify for a loan mod and not everyone is going to get their loan mod processed in a timeframe that the majority would consider anywhere near “good customer service.” Loan servicing doesn’t have to provide you with good customer service because you have no where else to go. There is no automated underwriting slam dunk approval system for loan mods. There’s no stated income program for loan mods. Real humans underwrite the file and this takes time. It’s going to take many, many years to work all the bad loans out of the system. We are in for a long ride. If you don’t qualify for a loan mod it might be time to move on to other solutions.
Jillayne,
This makes for a great post with great information and advice. I can see where many homeowners will try to do just what you are saying and then have no idea or understanding as to why the bank or lender says no. I hope that your post will help them to gain insight to the bigger problems in the system. Thanks for the Great item!
Hi Apella,
Thanks for stopping by. Apella sent me this link that contains an interview with a Calif real estate investor who owns 10 homes and bought several with a Pay Option ARM. The interviewer asks him if he put any money down and he said “Yes, I put 10 percent down. I have a 90% first and a 10% second behind the first.” So he bought these rentals with a zero down Pay Option ARM. All are rented and all mortgage loans are current but he is planning on ruthlessly defaulting to force his lender to modify his ARM into a 30 year fixed because he got another lender to do it so why not this lender.
http://www.cnbc.com/id/15840232?video=1178814720&play=1
Who is more deserving of a lender’s time and money? This person or the out-of-work owner occupied homeowner? If you had both files on your desk, which one would you prioritize?
Jillayne, As always- a most interesting view into the back office- and what goes on there.. JG
Hi Jerry, loan servicing departments today are a pressure cooker job, however, those folks have lots of job security right now. There are lots of opportunities to go into that field and and be gainfully employed for many years.
Jillayne- We’re going through a Re-Fi with Wells Fargo right now so we do know what you’re saying. The really interesting back offices are the various Building Departments- San Juan County and other. J-
Hi Jillayne – thanks for writing this. People ask me a lot of questions and even I am just mucking through this process so I can only share what I have experienced. I am not a financial expert and it is hard to find someone who can explain all the inner workings and what possible options might be.
I am trying to retain my profession as a real estate agent, in part because I searched for a J-O-B for 6 months without being picked as “the winner” in several situations. I have an extensive resume in the corporate world that qualifies me for a lot of administrative positions. My income has been severely impacted for 11 months and we just received word that my husband will be unemployed in 10 days. We’ve been working on a modification since January. We’ve had some help from family to get by. It is a painfully slow process but I think we do qualify and hearing how you lay the different situations out just gives me faith that things will work out and I will be able to remain in my community. I have to thank my husband for a lot because I got so frustrated in trying to deal with the staff that I delegated negotiations to him since he was able to maintain his cool longer than I could.
When this finally culminates in a solution I will be documenting our experience on my blog.
Hi Jillayne – thanks for writing this. People ask me a lot of questions and even I am just mucking through this process so I can only share what I have experienced. I am not a financial expert and it is hard to find someone who can explain all the inner workings and what possible options might be.
I am trying to retain my profession as a real estate agent, in part because I searched for a J-O-B for 6 months without being picked as “the winner” in several situations. I have an extensive resume in the corporate world that qualifies me for a lot of administrative positions. My income has been severely impacted for 11 months and we just received word that my husband will be unemployed in 10 days. We’ve been working on a modification since January. We’ve had some help from family to get by. It is a painfully slow process but I think we do qualify and hearing how you lay the different situations out just gives me faith that things will work out and I will be able to remain in my community. I have to thank my husband for a lot because I got so frustrated in trying to deal with the staff that I delegated negotiations to him since he was able to maintain his cool longer than I could.
When this finally culminates in a solution I will be documenting our experience on my blog.
Hi Wendy,
Thanks for sharing your story. I hope your husband can become re-employed quickly so that you can still qualify for the loan mod. Many 100% commission salespeople in all fields have seen their income drop dramatically in 08 and into 09.
Jillayne! I was hoping you were still posting to this blog! Thanks as always for your lucidity.
Kate Hoyt
Hi Kate,
You’re welcome! How’s it going out there for you; are you surviving the recession?
Thank you for the information, you wrote a very long and fully thought out article that was well put together. A great example of why I read Rain City Guide.
-Tyler
If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future?? Here is an example of how it could work.
• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.
What the government has done is to provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.
This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.
A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.
There needs to be conditions such as confirming gross income via income tax statements; confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%).
This total assistance would be capped at $50,000 and could run for 24 to 36 months
In a given year up to $25,000 could be provided.
The government would be releasing the funds over 12 months, thus the federal outlay would be limited.
The total cost of $10 million loans receiving assistance would be $250 billion per year or $500 billion in total.
This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.
The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost due to desperate situations.
Yes it is possible and yes it can work.
The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices, everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.
As stated earlier, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try.
We only fail if we do not try.
My idea has been to make all current mortgages 30yr fixed at 6% and fully assumable. A home owner could choose this option during a period of about six months.
This would maintain values into the future and give people an option to trade properties.
Of course banks would be without loan origination fees, but investors would get interest income. There again many investors may want to cash out of the loans and this would help facilitate that.
In my opinion this would be a stable investment instrument. If one person doesn’t pay another person can assume the debt until the principle is paid down enough to have equity.
For quite a few years part of my duties to my custom home design clients was to help get them a mortgage.
David Losh’s “My idea has been to make all current mortgages 30yr fixed at 6% and fully assumable. A home owner could choose this option during a period of about six months” would have made this a lot easier. Here’s more on this:http://tinyurl.com/ko9228
If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future?? Here is an example of how it could work.
• Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest).
• The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700
• So the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government.
• But the government says okay, you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.
What the government has done is to provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.
This program is not perfect, but it can assist a lot of people who want to own homes. Most importantly, it is channeled directly to the property owner, not a large corporation that has other motives besides keeping the property owner solvent.
A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.
There needs to be conditions such as confirming gross income via income tax statements; confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%).
This total assistance would be capped at $50,000 and could run for 24 to 36 months
In a given year up to $25,000 could be provided.
The government would be releasing the funds over 12 months, thus the federal outlay would be limited.
The total cost of $10 million loans receiving assistance would be $250 billion per year or $500 billion in total.
This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.
The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost due to desperate situations.
Yes it is possible and yes it can work.
The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices, everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.
As stated earlier, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try.
We only fail if we do not try.
My idea has been to make all current mortgages 30yr fixed at 6% and fully assumable. A home owner could choose this option during a period of about six months.
This would maintain values into the future and give people an option to trade properties.
Of course banks would be without loan origination fees, but investors would get interest income. There again many investors may want to cash out of the loans and this would help facilitate that.
In my opinion this would be a stable investment instrument. If one person doesn’t pay another person can assume the debt until the principle is paid down enough to have equity.
Thanks for spreading your story! Good luck with the job search… I hope this will help others in a similar situation.
Jillayne..I’m a bit off topic but I’m wodering if you can comment on Title Vll–Protecting Tenants at Foreclosure Act 2009.
Sec 702. Effects of foreclosure on Preexisting tenancy.
I continue to be a HUGE advocate for tenants. Coming from Nevada and Sacramento where the market is about 2 years ahead of us thousands were left in 2008 with serious questions.
In particular:
Does the tenant get to live in the home RENT FREE when they display a bona fide lease for the entire duration? What if its a 2 or 3 year lease? Who is collecting the rents? Damage deposits? I know if the home is purchased as an owner occupied the residence the tenant has 90 days…
I know Washington State now allows 60 days for tenants but what about this NEW Federal Foreclosure Act?
If not you Jillayne? Ardell? Galen? This is HUGE for tenancy.
Unfortunately, loan mod is a false hope for most who get them as they are likely to end up in foreclosure anyway.
According to Comptroller John Dugan, Office of the Comptroller of the Currency, after six months more than 50% of borrowers who received a loan modification re-defaulted. Report
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