Welcome to Loan Mod Purgatory — please take a number.

According to an article that appeared in CNNMoney on Monday, May 18, lenders are overwhelmed by a flood of applications; mortgage investors are threatening to sue loan servicers for modifying loans, and unemployment is the newest threat to stabilizing the housing market.  This article comes on the heels of an announcement on Friday, May 15 by the Obama administration, announcing a new, standardized process and incentives for short sales and “deed-in-lieu” transfers of ownership.   The newest initiative is aimed at homeowners who cannot get loan modifications. These newest actions follow by two weeks the Government’s announcement that it would provide incentives to lenders holding second liens to reduce interest rates and/or release second mortgages.

Anyone involved in the loan mod process would have to acknowledge that the entire process is bogged down.  CNNMoney noted that even though it has been three months (to the day) since President Obama announced the Housing Affordability and Stability Plan (February 18, 2009), and Guidelines were issued on March 4, many (if not most) loan servicers have been slow to get up to speed to respond to the requests.  Borrowers frustrated by the lack of clear guidance and inconsistent advice are tempted by robo-call operations offering to “help” homeowners for hefty fees.  Ironically, it turns out that investor contracts arising from the securitization and sale of the loans, which was part of the problem in the first place, are restricting which loans can be modified and how.   Congress is working on a bill to provide a “safe harbor” to allow loan servicers to use the Federal mortgage relief programs, but some investor groups are lobbying hard against passage.  It is no secret that many loan servicers are using the “investor contracts” as excuses not to make prompt and effective modifications.  Unfortunately, the borrower has no way of knowing whether or not the excuse is valid.  One gets the same feeling one gets when the car salesman returns from the back room to report the General Manager’s “last, best and final” offer, but you never even see the guy behind the curtain.

Compounding the problem and undercutting efforts to stabilize the mortgage crisis, many lenders have yet to sign up for the Federal program.  According to CNNMOney, 14 of the mortgage service companies, including Bank of America, Citgroup, J.P.Morgan Chase & Co., and Wells Fargo.  Others claim to be implementing their own versions, and still others are evaluating the program.  At the application level, each lender and loan servicer appears to have their own processing requirements.  Some permit the borrower to send the required documentation electronically, while others insist the documents be sent by fax.  One loan agent told me their fax room was a complete mess, with different applications getting mixed up with others like a crazy game of 52-card pickup.  Another loan agent told me they had no way to confirm receipt of the electronic transmission of the application documents.  Still another e-mailed me within 24 hours to confirm receipt, followed up 5 days later with a request for a missing piece of information, and provided an estimated time of review and affirmed that the foreclosure status was being suspended pending review of the loan mod application.  Simply stated, there is no uniformity or standarization.

As I’ve reported before, the fact that some of the lenders and loan servicers are only now just beginning to implement the Guidelines first released on March 4, and others are still “evaluating” the program, calls into serious question any claims or reports of successful loan modifications.  Sixty percent (60%) of all reported “loan mods” approved in the first three Quarters of 2008 resulted in mortgage payments that were the same or higher than prior to the modification.   I saw one “approved” loan modification that reduced the monthly payment by 27 cents!  And that lender insisted the borrower was foolish to reject it!  This type of chaos and confusion will only serve to further destabilize the process; create additional opportunities for fraud; and worst of all, erode any sense of confidence that the Federal program might otherwise have a chance to work.

In addition to the impact of rising unemployment cited by the CNNMoney article, there is another growing threat to the Federal effort to stabilize the situation — credit card debt.  Broke, facing unemployment, and no longer able to tap their home equity for relatively inexpensive funds to make up the difference, many homeowners have tapped the most costly source of revenue remaining — their credit cards.  Unfortunately, the card companies, who reset the loan rates faster than you can say “charge it,” have started charging cardholders the highest possible default rates of 29.99%.  Behind the wave of home foreclosures working their way through the so-called “trial periods” and voluntary moratoriums is a second wave of crushing credit card debt.

Sadly, the situation is bound to get worse before it gets better.  Unless and until the loan servicers get clearance from the investors, or simply clear directions from their managment, and free up the backlog of applications, the confusion and frustrations will continue to mount.  One problem is that no one knows what will work, and therefore everything is approached with the same level of risk aversion.  It would be a great service if the U.S. Department of the Treasury could simply select a statistically significant cross-section of different types of loans, fund the modificaion, and see what would really work to increase the probability of success.  Hindsight, of course, will teach us all many lessons.  The question is whether we can wait long enough.

Perfect Storm for Foreclosures – Obama’s Katrina?

Get ready for a perfect storm — a Category 5 foreclosure tsunami.  The first wave was launched on February 17 when FannieMae announced an extension of the temporary halt to foreclosure sales (Lender Letter) to March 6, 2009.  The second wave came on February 18 as President Obama announced the Homeowner Affordability and Stability Plan (HASP).  This Plan included the start of the third wave of this storm — the announcement that Guidelines will be released on March 4, 2009.  When these three events collide on or around March 4 – 6, hundreds of thousands of homeowners, investors and tenants are going to wake up to find themselves adrift in a stormy sea of chaos with no life preserver.

Unless the Federal government comes up with a miracle when it releases the much-anticipated Guidelines on March 4, we can anticipate a sharp increase in the number of foreclosures that will be filed and/or processed.  Moreover, the sheer number of foreclosure actions currently pending in the nations’ State courts will have to be processed off the books.  The same day as President Obama announced his plans for mortgage relief, the WSJ carried an article about a Judge in Lee County, Florida, running a “rocket docket” to clear the backlog of pending foreclosure actions.  He only had two questions for the homeowners:  Are you current?  Do you still live there?  For those who answered “No” to the first and “Yes” to the second, he gave them 60 days to work out a deal or move out.  President Obama, in his Feb 18 speech, pretty much left only one option for those who were not current on their payments — Bankruptcy court.  Although lenders generally would like to avoid this option, borrowers have little hope that the results will be any more favorable.  There is very little sympathy for the borrowers in these situations, and therefore very little political will to launch a rescue effort.

Adding to the chaos of this bleak forecast is the fact that hundreds of thousands of borrowers are being swindled by loan modification scams promising to “stop foreclosure now” and “save your home.”  Although these so-called “loan mod experts” have been around for years, their business took off in the past couple of years as the Federal government put pressure on lenders to voluntarily work out new terms in order to keep people in their homes.  Unfortunately, approximately 60% of the loan modifications that were worked out have gone back into foreclosure.  The blame seems to fall evenly between the lenders’ meager concessions and the economy’s continuing decline.   It doesn’t matter what new terms you agreed to in January if you got laid off in February!

Unless the HASP Guidelines includes a miracle and not just a placebo of unrealistic conditions, and unless Fannie Mae and the lenders extend the moratorium on foreclosures, we can expect foreclosure hell to break loose in early March.  Sadly, the impact will be devastating on families, neighborhoods and communities across the country that are already suffering from the blight of foreclosures.  The Obama Administration must recognize that this situation is akin to a Category 5 economic storm that will rage across the entire country, and must respond accordingly.  Failure to do so will make the Bush Administration’s response to Katrina seem benign in comparison.

New Homeowner Mortgage Relief Plan Announced

President Obama has announced his new initiative to provide relief for homeowners caught in the mortgage crisis.  Summaries have been posted by the WSJ and the Washington Post.  What is clear is that President Obama is attempting to walk a thin line between arresting the foreclosure spiral while trying not to upset those outraged by bailout abuses.  The focal point of the Homeowners Affordability and Stability Act (HASP) is to help the homeowner who has been trying to meet payments but cannot qualify for refinancing because their home values have been shattered by falling housing prices.  What the Act does NOT do is address what will be done for those already behind in their payments or who have already entered the final phase of the foreclosure process.  It will be interesting to see what happens when the current foreclosure moratorium announced by several lenders expires next month.

Clearly, the mortgage relief is NOT aimed at “the unscrupulous or irresponsible speculators who took risky bets” or “dishonest lenders.”  However, in the text of President Obama’s speech, he makes it clear that the Administration will continue to “support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value — as long as borrowers pay their debts under a court-ordered plan.  That’s the rule fo rinvestors who own two, three, and four homes.  It should be the rule for ordinary homeowners too, as an alternative to foreclosure.”  In other words, the newly announced Act will not provide any direct relief for homeowners or investors facing bankruptcy, but President Obama has send a strong signal that his Administration supports the authority of Bankruptcy Judges to reduce mortgage debt by court order.  The Lending industry will undoubtedly see this as incentive to continue to negotiate loan modifications.

Yogi Berra said it’s tough to make predictions, especially about the future.  The Plan announced today will be followed up by the release of guidelines which will go into effect on March 4th that will affect the entire mortgage industry.  As the President said, “Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines.”  The target is to get lenders to reduce interest rates and make other adjustments so that the mortgage payments will be no more than 31% of a borrower’s income.  If you’re a mortgage broker, you’re going to be very, very busy.  If you are a Lender, you will be looking closely at how you can conform your program to the new guidelines.  If you are a homeowner who is behind in payments and trying to negotiate a loan modification, you may find a more cooperative attitude.

I will post updates as the picture becomes clearer.  One tip from the Washington Post — if you are already involved in a loan mod workout, notify your lender or loan mod representative that you want to be considered for eligibility under the terms of the Homeowner Affordability and Stability Plan.  If nothing else, this should buy you some time while everyone attempts to sort it out and figure out what it is.

Fannie Mae says Ten Okay with Reserves

Starting on March 1, 2009, Fannie Mae will allow individual real estate investors once again to refinance up to ten (10) properties, relaxing the stranglehold limit of four that kicked in during the Summer of 2008.  According to the Announcement (09-02) issued February 6, 2009, the borrower will be subjected to some new requirements, including no history of bankruptcy or foreclosure within past seven years, no delinquencies on any mortgage loans in past 12 months; rental income must be fully documented; and borrowers must have six months reserves on the subject property and on each other financed second home or investment property.  In addition, the real estate investor or borrower must have a minimum credit score of 720, and the maximum LTV will be 70%.

Fannie Mae is expanding the definition of “reserves” to include all components of the monthly housing expense (PITIA), including principal and interest, insurance premiums, property taxes, special assessments, association dues, and any monthly cooperative corporate fee.

The Effective Date for multiple mortgages up to ten financed real estate properties will be March 1, 2009.  Fannie Mae has encouraged all lenders to implement the reserve requirements immediately and will apply them to all whole loans purchased by Fannie Mae on or after June 1, 2009.

Loan Mods and Deep Breathing

Upside down on your home loan?  Real estate investment property vacant?  Don’t know what advice to follow?  Should you walk away or let it go to foreclosure? File bankruptcy?  Hire a loan mod specialist?

Homeowners and real estate investors are scrambling to cope as the economic crisis hits home — literally.  Even in California, property owners are waking up to the harsh reality that their homes and real estate investments are worth less than what they owe on their mortgages.  Add the misery of a layoff or news that an investment has gone sour, or the fact that your 401(k) has suffered a 30% drop in value, and you cannot make the payments.  What can you do?

Three steps to get out of the muck

First, CALM DOWN, don’t panic.  The threat of losing one’s home is certainly grounds for concern, but if you panic, you are more inclined to do do the wrong things.  People who panic tend to listen to bad advice, especially when it comes in the form of a promotion making ridiculous promises.  Most of this advice comes from people who are trying to make money, not people who are trying to help you.

Second, GET BUSY!  The process of working through a loan modification takes time, and requires a lot of hard work on your part.  You will need to demonstrate that you will be able to make the payments if and when the real estate loan modification is approved.  This will require you to make some tough financial decisions, get your financial records and documents in order, and probably make some adjustments to your plans.

Don’t blame yourself or others.  It only serves to waste time and energy that you will need to develop a solution.  Instead, make a Plan.  Ask yourself, “What do I want to do?”  “Where do I want to be?”  Chances are, if you are facing the prospects of a layoff, or have been unable to make mortgage payments, or are facing the prospect of foreclosure, you’ve been caught up in the chaos of the moment, and haven’t taken time to focus on the future.  Working through a loan modification process only makes sense if you have a clear idea where you want to end up.  In the end, it may make sense to short sale a property, or let it go into foreclosure, but only if it helps you to get where you want to end up.

Third, take ACTION.  Get help now!  Consult with a professional and explore your options.  I recently received a call from a distraught individual reporting she had been evicted that morning by the Sheriff from the home she had owned for 20 years.  Not an ideal time to start getting legal help!

Before you sign up with someone advertising loan modification services, find out exactly what they will do for you. Look for a real estate attorney or a specially registered real estate broker.  Pursuant California law, in many instances real estate brokers cannot charge you a fee in advance unless they have been approved by the Department of Real Estate (DRE).  Attorneys licensed to practice in California are exempt from this requirement, but make sure they are experienced in real estate law. For more information, see the Consumer Alert by the DRE: http://budurl.com/DREAlert

Fourth, reread step three and take ACTION.  Too many individuals become paralyzed by worry.  Your circumstances will not improve without action.  So, take a deep breath and pick up the phone. Contact a professional experienced in loan mods who will get started right away.  The sooner, the better.  It may cost you some money, but with the right help, you will be able to avoid even more costly mistakes.