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First off, I'd like to apologize for not posting a new article since the beginning of this year. Days and nights have been completely consumed by client calls, claim preparation, and lender negotiation. Today is no different, but considering the overload of information that we're taking in from the media, I feel that my direct input could be useful to those that must make difficult decisions now. During times when the words "hope springs eternal" are heard in every news broadcast, we must be prepared to face the harsh realities of the present and understand that the government can only do so much. My purpose for this letter is to clarify lenders' position on loan workouts, as related to Obama's housing relief efforts, a.k.a. the "Making Home Affordable" program. *My personal opinions stated in this article are pertaining to the loan modification aspect of the plan. I will comment on the refinance portion at a later time.
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The Real Deal about Loan Modifications
If you are like every other concerned homeowner, you've already spent countless hours online, wondering if you qualify for Obama's modification plan. Instead of writing about actual specifics, here are two useful links to help you make that determination on your own:
The Boston Globe has put together a simple list of key points, offering a simple Q&A of the plan >>
Meltdown 101. Will Obamas housing plan help me?
Financialstability.gov is a government sponsored site intended to provide troubled homeowners with sources for free relief. What you'll find however, is that the site will direct you back to your lender or servicer to apply. No matter what your financial situation, I would highly suggest that you obtain expert representation (whether it's paid or free) before facing a lender on your own. Typically, you have only one shot at making a lender see that you should be considered for relief. To locate a HUD approved counselor, search here.
Now that you know what the plan entails, what is the likelihood that you will be approved? What is the likelihood that ANYONE will be approved? That remains to be seen, as the plan has been less than two weeks into effect. Lots of patience will be required here because lenders will take considerable time to evaluate, approve, and implement the final workouts - months perhaps. We could be will into 2009 before we hear that anyone has truly benefited from this latest government subsidy. But in the meantime "hope springs," consumer confidence is restored, the economy recovers, and the government will have done its job. That's how hope works. Nothing actually has to happen, just "hope" that something will.
It is important to keep in mind that lender participation is voluntary, much like the Hope for Homeowners program as passed by President Bush in October of last year was voluntary. Very few people have been able to get their mortgages reduced to 90% of their homes' value, as that plan had promised. Please understand I am not trying to diminish hope for the 4 million homeowners that this modification plan targets to help, but people should not be surprised if they do not get approved - even if they truly do qualify on paper. There is a substantial government subsidy here, in which the lender has incentive to reduce a borrower's debt down to 31% of income, BUT the lender must first agree to take a substantial loss on the loan. As this plan has been designed, the lender (not the government) ultimately decides if it wants to avoid foreclosure and give the homeowner a workout they can afford. *But I am cautiously optimistic about the refinance aspect of the plan, since the government now has controlling interest in Fannie Mae & Freddie Mac. Again, more on that piece at a later time.
The innate characteristic that lenders and their investors all share in common is GREED. If a lender's own workout program is more financially feasible (than the government program) and it results in a reduced net loss to their investor(s), than a lender will choose their own workout plan 99% of the time. Let me give you a quick example:
Take for instance that you have a monthly mortgage payment of $2000/mo, which includes taxes and insurance, and you have never been late. Let's assume that you have no other credit related debt, such as credit cards, car loans, student loans, etc. On a monthly income of $3500/mo (gross before taxes), you would have a calculated debt-to-income ratio of 57% [2000/3500= .57]. 57% debt-to-income or "dti" as we would call it in mortgage is widely considered as unacceptable. If you also take into account regular living expenses, such as gas, food, and utilities, you would not be able to afford your home. Under the Obama plan, your lender would need to be willing to reduce your monthly mortgage payment down to $1330/mo (38% of $3500), before the government splits an additional $245/mo with the lender, for a net reduced mortgage payment of $1085/mo (31% of $3500). This means your lender must make the larger financial sacrifice before the government makes their contribution, and even after that, the government only pays for half of the difference.
Ethically, this makes perfect sense for the homeowner. And personally, I have no issues whatsoever in negotiating for this specific result. Without a doubt, $1085 is more affordable than $2000. But in order to bring that payment down, someone has to lose money, and in most cases it will be the lender and its investors. For this reason, there is a stipulation that a borrower must be at risk of imminent foreclosure if nothing is done. Most of the time, imminent foreclosure is tough to prove unless a homeowner is actually in foreclosure or seriously delinquent on payments. This is why many customer service representatives have difficulty explaining that they cannot help you unless you are late, because according to their definition, foreclosure is considered imminent only when the loan payments cease for 90 days. So in this particular situation - where the borrower has never been late on payments, and a servicing company must ask the investor whether it will approve a 50% reduction in monthly payments for 3 years - what is the most common response to the servicing company?
a) Approved. It's a better alternative than foreclosure and the government supports it.
b) Let's meet halfway and reduce the monthly mortgage liability down to $1600/mo.
c) Do nothing. Let's wait and see.
If you answered c), you are thinking like an investor. Lenders are more likely to wait and see if you truly cannot afford to make the payment before taking a large loss on your loan. Remember, investors are driven by a desire to make a profit. Otherwise, they would not have lent you the money to purchase the home in the first place. If there remains a possibility that you may continue to pay the mortgage regardless of what your financials show, the investor may hang on to that possibility in order to maintain profitability on your loan. Only when an investor is faced with the decision to modify or lose it all, will they be willing to agree to the terms I've outlined in the example above. With that said, I would never advise that a homeowner intentionally miss several payments in order to be considered for relief. Know that you will likely be considered, but there is a real possibility that you might not get lender assistance in the end. There are many cases I have seen, where intentionally missed payments have only resulted in foreclosure of the home.
If you answered b), you are being a bit more realistic about the situation at hand. Perhaps the investor may not agree to a 50% reduction in monthly interest income, but 20% might make financial sense in order to avoid the borrower from walking away. The picture I am trying to paint is a literal interpretation of what lenders and their investors consider, before agreeing to a modification of any sort. Know that a loan modification causes a loss of revenue. Do they really want to lose revenue? Not unless they absolutely have to. This is why GOOD workouts, or ones that result in principal balance reductions, typically only happen when foreclosure will result in a much greater loss to the investor AND when foreclosure is imminent.
If you answered a), you are amongst the few lenders, who are willing to sacrifice their investors' interests in order to help the economy as a whole. I've paid particular attention to the larger banks' reactions to the new government plan, issuing statements that they like the "spirit" of it and that it remains consistent with what they are already doing on their own. Dare that a lender say they offer full support and participation of adjusting homeowners payments down to 31% of what they make and you'll see their stock prices plummet instantly to less than $1 per share. Greed is good, so investors feel, and a) is not a greedy answer.
In conclusion, I too like the spirit of the Making Home Affordable program. In fact, I am presently knocking down lender doors to demand that they participate. Sadly, unless the government mandates lender participation, most investors would simply say thanks but no thanks. In the same breath, I am very anxious to hear of success stories related to government subsidized loan modifications. In the coming months, if you or anyone else you personally know receives real government aid, I encourage you to share your experience with me so I can model the same success in workouts for others. Likewise, if I am able to obtain Making Home Affordable workouts for my existing clients, you'll be amongst the first to hear of it. In direct loan modification attempts with lenders, I have been highly successful, so I can tell you that seeking relief is not a waste of your time. Just put yourself in the investor's shoes, and you'll be prepared for realistic results.
God bless,
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I think it's pretty safe to say that 2008 was not a very good year for the United States of America. In one sentence, 2008 was a historic sequence of tragedies caused by a systemic breakdown of the US housing market, which led to a near stock market collapse, which nearly caused a nationwide bank run, which forced the feds to step in, which caused a lack of consumer confidence, which led to decreased consumer spending, which led to the auto industry collapse, which forced the feds to get involved again, which led to the worse holiday retail performance in decades, which is why it's no surprise that the US has reported 12 consecutive months of steep job losses, and to top it all off: Madoff. To put it frankly, it was a record breaking year from hell, which is also why I waited a few days before writing this article ;)
So it's 2009! We should all be happy for the New Year, because it is tradition to be happy, and well, because life goes on. Whether we're in a recession, depression, or a boom, the world keeps turning and people keep producing (babies if nothing else). Regardless of our present state of uncertainty, we will get through this as a country and all will be well once again. But how long will it take before we see the road to recovery? How many more stimulus plans will need to be introduced? And will these stimulus packages ever show some real benefit? Regretfully, I doubt anyone has the true answers to these questions, but I will ATTEMPT to make some sense of our situation as it relates to mortgage and real estate and address the dreadful decision that many of us homeowners will have to make if things do not improve soon. Know that the content of this article may not directly apply to you, but feel free to pass it on to anyone you think it might help.
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How long will it take for the real estate market to hit bottom?
Unlike the stock market, housing markets do not tend to recover very quickly. For example, the housing downturn of the early 90's lasted for 10 years. According to the S&P/Case-Shiller home-price indexes, Los Angeles prices peaked in June of '90 and did not reach bottom until March of '96. It was not until 2000 when values finally regained the levels achieved in 1990. The housing slump of the 1990's in no way compares to the steep and swift downturn in real estate that we've witnessed in the last 2 years alone. At this point it remains uncertain as to how much our present foreclosure epidemic will further impact home values in the years ahead. Will the gains realized in the early 2000's be completely erased by the end of 2010? In today's world, the exotic negams and stated income loans that attributed the the surge in real estate from 2003 to 2006 will no longer be offered. From this point on, people will have to furnish verifiable income documentation that they can afford the principal and interest payment on the loan. People's ability to buy at the higher levels will be limited (and rightfully so) by their true income. As such, it may not be realistic, at least not within the next decade (or dare I say two decades) for home values to see the same heights achieved in 2006. So, for the middle-income American who is upside down on her 30yr-fixed mortgage, should she continue paying $3500/mo while the going rent for an equivalent home in her neighborhood is $1200/mo? If you would ask that question to the lender, of course they'll say yes, of course. But ask anyone else, and you'll likely get mixed reactions.
The Dreadful Decision: "Should I continue paying more than my home is worth?"
The latest statistic provided by Moody's Economy.com reveals that ONE IN EVERY SIX HOMEOWNERS IS UNDERWATER. There are 75 million homeowners across the U.S - of those, 11.7 million owe more than their homes are worth. Optimistically speaking, 24 million homeowners have free and clear properties (meaning they actually owe NOTHING against their homes). Pessimistically speaking, this means roughly 23% of the people, who do owe money on their homes, are underwater! In short, one in 4 people in America who have a mortgage must make the same decision every single month to continue paying more than their homes are worth.
The Federal Reserve estimates that lenders are on track to initiate 2.25 million foreclosures in 2009, more than doubling the annual pace before the crisis set in. One in 10 U.S. homeowners is delinquent on mortgage payments or in foreclosure. - Associated Press
I'm pulling this delinquency statistic into the equation, because one in 10 homeowners or 7.5 million people may already have made their decision, either because they cannot pay or no longer think it is worth it. This does not take into account how many millions have already lost their homes from foreclosure to date.
For most of the people I speak with, financial priorities have begun to shift. Incentive to continue paying on an upside down home has diminished. People are no longer motivated to pick up additional hours or find a second job in order to keep up with mortgage payments. People are taking a closer look their incomes and questioning whether a monthly mortgage payment plus property taxes and insurance really fits within their budget. Food, education, and even vacations have been placed higher on the list. In years past, the idea was to keep your mortgage current no matter what, because the consequence would be to lose your "nest egg" if you did not. By not making your mortgage payment, one would lose everything he/she has struggled so hard for over the years. Today, this argument does not hold up very well. For every one in 4 people, the nest egg has busted. The money has been lost, regardless if the mortgage is paid or not. Don't get me wrong, these same people have the integrity and intent to pay if they only could, but the jobs are non-existent. It simply isn't as easy as it once was to work OT or accept a 2nd job, especially not with all of the overqualified professionals taking all of the available positions at Home Depot and Starbucks.
Obviously those with some equity in their homes absolutely do not want their underwater neighbors to foreclose. This would only lead to further depreciation, where they too would have to make the same decision if their equity is depleted. But is it fair to expect people with upside down homes to keep on paying, in order to protect the remaining equity of their neighbors? This housing crisis has caused Americans to re-evaluate the reasons why they decided to buy in the first place. Was it for investment? or shelter? I dare to say that 99.999% bought for investment FIRST and shelter SECOND. With property values down below 50% in some areas of California, at which point would someone be ethically okay to walk away from their bad investment? By the same token, would a senior citizen be expected to keep his investment in the stock market if it's already lost half of its value? I think he would be encouraged to sell, especially if that were his entire net worth. Likewise, homeowners are wondering if the values will ever get back to where they once were, or if they will continue paying on their upside down mortgage for decades before they even breakeven. Like investors should, people are considering unloading on their biggest investment: the home.
No more than 2 years ago, one would simply sell if she could not afford her home. There was liquidity in the real estate market and a home could be unloaded almost as quickly as stock. It goes without saying that in today's market, one will likely not be able to sell her home, even if it's listed short. When real estate is not liquid, the only options are 1) to continue paying as agreed, 2) negotiate with the lender to pay less than agreed, or 3) walk away. Walking away is by far the easiest method to rid yourself from the upside down burden of your home, but it does not come without consequences. If you are seriously considering walking away, please bear with me as I try to talk you out of it...
2 reasons why you should continue paying on your underwater home
Aside from the more obvious reasons of ruining your credit and doing what's "right," there are at least a couple of concerning issues you'll want to run by a real estate attorney and CPA. *Randy Miguel is NOT an attorney or CPA and the following information shall not be construed as legal or tax advice.
Deficiency judgment - You will want to inquire with an attorney if your loan is a recourse loan, which would allow for the lender to seek a deficiency judgment if you do not pay as agreed. California prohibits deficiency judgments on purchase money loans (See CA Code of Civil Procedure section 580b). This means that if you ever foreclose on your property the lender's only recourse is the property itself. They cannot seek judgment to levy your personal accounts, seize your remaining assets, and hold you financially liable after the home is long gone. However, if you have ever refinanced or taken any cash out of the home, the lender may have legal recourse that extends beyond the amount they can recover from the sale of the property. For this reason, many people who have foreclosed on their home have also been driven into bankruptcy, because they were ultimately found liable for the full amount of the debt. This post-foreclosure liability is most often overlooked when one makes the decision to walk away.
Forgiveness of debt tax - When a home is foreclosed and ultimately sold at auction or through an REO sale, the lender(s) may not recover the full amount of the original loan(s). In these situations, the lender(s) must file a tax document to write off the difference as a loss, essentially forgiving the amount owing by the borrower. This debt forgiveness can result in a major tax liability to the borrower, depending on the amount of the lender write off. You will want to speak with your CPA before making any rash decisions in letting your home go. The amount of the resulting tax liability can be greater than the amount you're trying to save by not having to make your mortgage payments. Remember, you cannot walk away from the IRS. Now there is a small window of time open for people to short refinance or short sell, without having pay this tax (See Mortgage Forgiveness Debt Relief Act of 2007). However, this act does not apply to investment properties or may not apply if one intentionally walks away from his home.
Buy a new home and then foreclose on your existing home?
This is typically one of the first things that comes to mind when a homeowner sees the home across the street selling for less than what he paid. Buy something more affordable and potentially even bigger, before walking out on the home he has now. Aside from the ethical issues with this idea, it would be a sound proposition if it could only work. Many people actually think the financing is available to do this, but the world is so much different now. There are 3 entities that make financing happen for practically all of the loans across the US: Fannie Mae, Freddie Mac, and FHA. Whether someone gets their loan at Bank of America, Wells Fargo, Citi, or Chase, one of these government sponsored entities will need to give their stamp of approval before it will fund. They will not guarantee a new loan if the borrowers cannot prove they can afford BOTH homes and WITHOUT having to rent out the first one to qualify. Combined debt to income ratios cannot exceed 45% when all is said and done. Debt to income ratios are calculated by taking the sum of all credit obligations with the payment on both houses, INCLUDING property taxes and insurance, then dividing by the total gross monthly income. The reason for not permitting the use of future rental income to qualify for a new home loan is primarily to prevent walk outs on existing loans. For most people, unless they are capable of paying in cash, they will not be able to carry out this plan. And for those that do have the cash, they would not risk their good standing credit by walking away. For those who would actually benefit from buying a cheaper home and then foreclosing on their upside down one, financing is simply not possible. Lastly, if one can somehow obtain the financing required to execute this plan successfully, he also runs the risk of the existing lender proving his intent to walk away after the new home was purchased. This could open a whole can of legal worms that most do not want to deal with.
Negotiate First
Still not convinced that you should continue paying on your underwater home? How about if the lender made terms more acceptable? What if the lender and their investors were willing to reduce the principal amount down? If not that, what if they were willing to defer a majority of the payment for 30 years? Keep in mind, it is no easy task to get a lender to agree to modified terms, especially terms that would result in an immediate loss to their investors. But if you are seriously thinking about walking away, you may want to first think of the true reason why; and if it's a business decision, then good business would bring you to the negotiation table first. It may be in your best interests to obtain outside help from a loss mitigation professional. An experienced 3rd party negotiator will have a solid understanding of the entire process, and could let you know likely outcomes even before engaging the lender. Ultimately, if the lender chooses foreclosure is a better alternative for them than a balance write down or loan modification, then at least you explored the possibility and discovered your real options. If you must walk away in the end, the lender may have given you no other choice. And if conditions prove more favorable in the future, perhaps you can reinvest.
Let's appreciate the things in life we do have and enjoy 2009 to the fullest.
Regards,
Randy Miguel, Broker | Loss Mitigation Counselor
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"BAILOUT" is the is word of the day, EVERY DAY. Expect to hear it over and over again into 2009, as the US Government figures out how to solve the now global economic crisis. With yesterday's 800 intra-day fall of the Dow, you've seen real potential for an absolute crash of the stock market. And this happened the day AFTER the president signed the $700B bailout into law. As a quick summary, the pending bailout package gives broad authority to purchase troubled mortgage investments and other distressed assets from financial institutions. But the US treasury has not yet disclosed exactly how it intends to do this. The underlying purpose of this bailout is to make credit available to consumers and businesses, by giving banks the "liquidity" they desperately need to lend - thereby injecting the economy with the money it needs to recover. However, there is absolutely no guarantee that banks will resume lending again. As proof, economists sited global interventions in other countries, where their lenders are opting to hold bailout funds on deposit for less interest, instead of lending it out! Why would it be any different here? Will US banks suddenly see lending as profitable because they were given a little extra money? The global markets await to see the impact (if any) the pending bailout will have on restricted US credit. Today 10/07/2008, the markets continue to sink deeper in the negative at -325pts...
Earlier this month, I was hopeful that the bailout legislation would be revised to directly help homeowners and not just banks. Didn't happen. The bailout as it was passed will not stop foreclosures, and as you can tell, I do not have much faith in our government's ability to fix things overnight. In fact, Bush himself says that will take some time to figure out how to resolve our credit crisis. Unfortunately, for most delinquent homeowners, there is not much time left. After missing one mortgage payment, it takes only 6 months for a lender to foreclose on a home.
SO WHAT NOW?
For homeowners, there is "hope" as it is sold. There's the HOPE for homeowners program. There's the Hope hotline or HOPE Now Alliance. Countrywide has a Hope Department for deliquent borrowers. Is it real hope or just a government campaign to boost confidence in times of dire straits? Honestly, I think it's a little bit of both. Obviously, the government does not want you to give up hope so you'll continue paying on your mortgages, but there are very promising programs either in effect or being discussed by lenders now that will make your payments more affordable. In this article, I'll make an attempt to explain what can be done sooner rather than later, for the delinquent and/or upside-down homeowner, based on loss mitigation programs offered by these lenders.
FHA Bailout a.k.a HOPE for Homeowner's Program
I've reviewed this in depth in my previous FHA bailout update, but in short, it gives seriously delinquent homeowners a chance to refinance at a reduced loan balance, equal to present market value minus another 10%. The idea is to give homeowners, who are near foreclosure, real incentive to stay in their homes by lowering their payments and giving them back some lost equity. The catch is that 1) the current lender MUST AGREE to the write-down at their option only; 2) all subordinate liens (2nds or 3rds) on the subject property must be non-existent; 3) you must own only ONE home; 4) you cannot make too much money but still enough to make the new loan payment; 5) you must agree to share equity with the government if you later sell or refinance; and 6) you must not have intentionally gone late to qualify for the program. I receive an unbelievable number of calls about this program, and as of 10/07/2008, it is still not available on the wholesale mortgage level. As with any new programs, it may take yet another several weeks for banks to train loan staff, program automated systems, and release underwriting guidelines. More importantly, no one lender wants to be the first to offer such a risky loan product, in terms of the complexity involved with this short refinance transaction. Official information on the HOPE for Homeowners program can be found at FHA.gov. Even there, you'll see that FHA has not yet published a list of participating lenders, although the program was effective October 1st. If you think you qualify for this program, please email me directly at randymiguel@gmail.com, and I'll reply once it becomes available. If I already have your email address, you can expect to receive a follow-up announcement the same day I receive the broker alert to begin submitting applications.
Remember, the primary take away here is that your lender MUST AGREE to accept less than what they are presently owed. And if you have a 2nd equityline of credit or equity loan, that lender MUST ALSO AGREE to completely forgive that debt. Very soon, I'll be directly negotiating with lenders to convince them that taking the write down makes more financial sense than foreclosure. However, you must understand that as of right now, there is no incentive for banks to accept this lesser amount other than the tax write off and to cut their losses short. Like I've mentioned before, short sales are no different in net payoff to the lender, besides the fact that the borrower remains in the home. So it should be a no brainer to the lender then, that they should accept FHA bailout loans in any case where the borrower qualifies. Unfortunately, they [lenders] haven't learned to put 2 and 2 together, and it's my job to teach them how to add.
One possible draw back to the $700B bailout of banks, is that the Feds are now offering to buy up a significant amount of bad debt. Considering delinquent mortgages are classified as bad debt, why would banks agree to a balance write down if they can sell your loan to the Feds instead? Will the Feds then modify your loan? Quite possibly. In fact, I read verbage in the bailout plan that stated the government's ability to modify the acquired loans. Perhaps they [the Feds] will then approve you for the FHA bailout program after acquiring the debt from your bank. It will be interesting to find out what the impact of the $700B bailout will have on the FHA bailout, and banks' willingness to accept short payoffs through the HOPE for Homeowners program. Because there is presently little incentive for banks to participate, likely candidates will be homeowners who are in clear and imminent danger of foreclosure if the lender decides to do nothing. In the near future, I'll make certain to keep you posted with my successes and failures in negotiating these loans. Again, I'd be happy to assess your situation if you think you might be a strong candidate.
Countrywide (Bank of America) Bailout
Yesterday 10/06/2008, Bank of America announced their "Home Ownership Retention Program for Countrywide Customers." This plan was actually forced as a settlement to predatory lending lawsuits filed against Countrywide. Even if you do not have a Countrywide loan, please continue reading as this may set a precendent for other banks with severely delinquent loans in their portfolios - which is pretty much all of them. The program allocates $8.7 billion for nationwide relief, where $3.5 billion is slated for California alone. 400,000 loans will be examined across the nation, assuming all eligible borrowers participate for possible relief. Bank of America has acknowledged that they may also require the cooperation of investors, who own the loans through mortgage securities. This creates a problem, since Bank of America may not be the sole decision maker on the workout. All troubled homeowners with Countrywide mortgages should inquire with the lender or seek professional assistance for negotiation. Program highlights include complete suspension of foreclosure, reduced rates as low as 2.5%, and principal balance reductions for certain borrowers. How do you become one of the select borrowers to receive a balance reduction over a reduced rate? You may want to take a proactive approach rather than passively wait for a letter in the mail. As with the pending FHA bailout, I'll soon be negotiating terms for this Bank of America bailout as well. Please contact me if you would like to be informed as soon as this program becomes available.
IndyMac Bailout
The Federal Deposit Insurance Corp. is now renegotiating loans that were acquired from the now defunct IndyMac Bank. Likewise, it has announced a similar program to modify loans that were originated by the failed lender. When entering into negotiations with IndyMac, FDIC will ultimately make a decision on your loan modification claim. IndyMac customers have an advantage in negotiation, as their loans are not owned by investors with an eye towards profits. Although the federal government will also make money on its loans, it may be more likely to produce a favorable workout since it secured its loan portfolio for pennies on the dollar. Make certain that your loan modification package is prepared by someone who thoroughly understands your situation and who has the ability to effectively communicate your situation to the FDIC.
Washington Mutual (JPMorgan Chase) Bailout
Be aware of ongoing bank mergers and takeovers. Troubled Washington Mutual customers can expect that JPMorgan will soon address their newly acquired mortgage holdings. In fact, the company expects to write down more than $30 billion in loans. Existing WAMU borrowers should hang tight, in anticipation that more favorable workout solutions will be made available in the coming weeks.
Wachovia (Citi or Wells?) Bailout
Yesterday 10/06/2008, Citigroup sued Wells Fargo over its recent merger agreement with Wachovia. No matter the result, Wachovia (and ex-World Savings) customers can expect similar workout programs to be enacted by the new owning bank. If you presently hold a Wachovia loan, and are now in default, you will want to make contact with the lender to prevent your home from foreclosure, but maybe not be so quick to demand a loan modification. Once the acquisition is complete, it will not be long before a real modification program is put in place. Due to the pending merger, you can expect interim workouts to offer little homeowner benefit, as there is limited authority to modify the loan in the borrower's favor. Bottom-line, present Wachovia management has little say so when approving a loss. If you can, wait for the real decision makers to settle your loan. Ultimately, the new Wachovia owner may follow Bank of America's lead in writing down loan balances rather than offering temporary payment relief.
Direct Lender Negotiation
If your loan is held by another lender that was not mentioned here, or if it is managed by an unknown servicing company, you may indirectly benefit by the aggressive actions of the government and other major banks, because this is a "follow-me" industry. Financial institutions know what needs to be done to fix our housing crisis, but no lender wants to go first. Banks do not want to see their investors flee as they become known for settling on their bad debt. Even worse, they do not want to be sued by their investors for settling on their bad debt. Sadly, it took class action lawsuits to persuade Countrywide to take an aggresive action in loan workouts. Very soon, you'll hear about balance write-down modifications that were previously not considered for Countrywide customers. These write downs will echo throughout the industry. And hopefully, banks that are now standing on the sidelines for short refinances and write-downs will soon follow suit as they become the acceptable norm. In the meantime, enter into loan modification negotiations with your lender if you can present a clear and imminent threat of foreclosure, AND if you can prove that threat will be extinguished if a modification agreement is reached. But do so with caution, because you might accept a temporary workout agreement in haste, when a more favorable resolution may be right around the corner.
As always, feel free to email me with questions or concerns about your specific situation. I'd be glad to help.
-Randy Miguel
IMPORTANT UPDATE 09/2008: In the best interest of my clients, I have decided against negotiating short payoffs and loan modifications with lenders AT THIS TIME. Please read on... The financial landscape of our U.S. credit markets will soon change. Due to pending government legislation for the swift bail out of banks from their troubled mortgage debt, lenders may soon take a new stance in helping HOMEOWNERS rather than favoring their stockholders (see Critical News below on Sept 19th). I anticipate it will take at least 3 to 4 weeks until the government releases official details of the largest bail out in American history. At approximately the same time, official loan guidelines for the FHA bail out plan should also be released. If your present situation can wait, I would suggest that you also wait and see if this new fed proposal will benefit you. Thank you for your patience, and please do check back with me again soon for more details. ONCE WE HAVE A SOLID UNDERSTANDING OF THIS NEW PLAN, AND THE GOVERMENT HAS GIVEN THEIR LEGAL STAMP OF APPROVAL, I MAY IMMEDIATELY OPEN UP NEGOTIATIONS. In the meantime, I would be pleased to give you FREE advice. Feel free to share your situation with me, and I'll give you my realistic opinion of possible workouts from your lender. *Randy Miguel is not an attorney, and any and all advice provided is not to be construed as legal advice.
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Clients often inquire, "What is your success rate?" or "What are the chances for a short refinance?" Most people do not want to hear this, but it depends. Loss mitigation is a highly complex process, with the ultimate decision belonging to the lender. Certainly it is not as easy as it was to qualify for your home purchase loan or refinance. In qualifying for a home loan you get a simple yes or no answer. In qualifying for loss mitigation, you will instead get certain degrees of maybe. I am writing this article to help people better understand which homeowners in specific situations may have a greater opportunity for lender aid, and explain why lenders may decide to help - or not.
First of all, everyone's situation is uniquely different, so to try to assess your ability to get a loan mod on an agency's overall "success rate" is probably not the best way to go about it. I've seen other sites boasting 90% success or greater, but if you read between the lines, what they really mean to say is that they have a 90% shot of taking your money. Loss mitigation agencies truly cannot guarantee you any success at all, and neither can I. However, I can help you better understand a lender's reasoning in offering assistance, so you can make the determination on your own as to whether or not a loss mitigation case will be worth your time, effort and money. Every day, I counsel 7 to 10 clients across the United States about the possibility of negotiating relief with their lenders. Of these 7 to 10 people, only 33% actually pre-qualify to open a loss mitigation case. In hopes to help you better classify which statistical group you fall under, let me give you a couple examples of the other 66.666% who DO NOT qualify:
Disqualification Case 1: A person brings home $5000/mo. She owes $500,000 on her mortgage but her home is worth only $250,000. Her adjustable rate mortgage payment is now $3600, including property taxes and insurance. Her personal budget, including food, utilities, and gasoline add up to an additional $2000. She has savings account reserves of $20,000. She has never been late. Up until now, she has made every effort to do the right thing and keep timely on her payments. She is clearly negative $600 per month and most certainly does not like the idea of taking money out of her savings account to cover the difference - especially on a home that is worth 50% less than what she presently owes. She seeks assistance through a short refinance, so she can re-gain equity in her home and make her payment more affordable.
Assessment: Can she do a short refinance? Unfortunately at this time, NO. In order for a short refinance to happen, her lender must agree to accept less than what they are owed. Why will the lender most likely not agree to accept a short payoff? Although it may not be fair, the harsh reality is that lending institutions must first act in the best interests of their investors, where the borrower's financial well being is secondary. Before they would even consider reducing her loan balance and realizing a quarter of a million dollar loss, she would need to prove that the lender will face imminent near-term foreclosure if the lender should decide to do nothing. In her case, if the lender decides not to accept a short payoff, then she will likely continue to make payments until her savings account completely depletes over the next 2.7 years; she will not foreclose in the short term; and her credit will remain unblemished. You might think she can easily walk away from the home at any point in time, thereby making foreclosure quite imminent for the lender. But in this case, at this point in time, the lender will take that chance and hope that she is more concerned about maintaining her good credit than her concerns of paying on her devalued property. In the lender's eyes, she can make the payments for now, and the situation does not YET warrant the lender to take an immediate financial loss .
Disqualification Case 2: A man has been laid off from his job due to the ailing economy. He can no longer make the $2000 mortgage payment on his home that is now worth 25% less than the mortgage balance. After all he has suffered financially, he does not want to lose his home. He seeks assistance from the lender, asking them to reduce the principal balance and interest rate, so he can consider accepting jobs that might pay him less than what he was making before.
Assessment: Sadly, the lender will opt to accelerate foreclosure proceedings, given that he cannot prove to pay the mortgage, even if they are to modify the loan. Although the lender would lose money by foreclosing, it does not makes sense for them to delay what they see is the inevitable.
Disqualification Case 3: A person was sold a negative amortization mortgage he did not understand. 5 months ago, his barely affordable payment ballooned to an amount more than DOUBLE what he paid before. This happens when the mortgage of negam note must "recast", re-amortizing the loan to require principal and interest payments over the remaining 30yr term. Because he purchased the home 7 years ago, he does have *some* equity in it, just not enough to refinance. He seeks relief from the lender, for them to reset the mortgage payment back to the minimum amount prior to the adjustment.
Assessment: A modification of terms would only result in a faster rate of negative amortization and increase the likelihood of foreclosure in the near future. In this situation, the lender would likely foreclose on the property, given that they can be "whole" after selling the home at auction.
In each of these cases, the homeowners do not deserve to lose their homes. It is certainly not the borrowers' fault that they have fallen victim of the housing economy and can no longer afford to keep up. The "right" thing for their lenders to do is to accept loss and do whatever it takes to make their loans more affordable. However, what needs to be learned here is that lending is a FOR-profit business. Lenders will help their borrowers only if there is a real threat of foreclosure AND if they will lose more money through foreclosure. Otherwise, they are more likely to negotiate "catch-up" payments for delinquent borrowers, if anything at all. Hopefully this greedy corporate rationale will change through future legislation and continued housing rescue efforts by the Feds.
After reviewing the 3 cases above, you might think lenders are absolutely unwilling to help in any circumstance. On the contrary, lenders WILL adjust terms and sometimes write down balances if a borrower can prove with documented evidence that it makes more financial sense to do so. Let's make some key changes to the scenarios above and see how these changes shift leverage to the borrowers' favor:
Case 1 Revised: Let's alter the woman's situation slightly to a scenario where she has now become late, due to running out of cash reserves in her savings account. Additionally, her adjustable rate mortgage has now increased her payment to $4000 from $3600/mo. Having no cash on hand to cover the shortage from her pay, she has now had no other choice but to go delinquent. She faces imminent foreclosure, unless her lender takes action to prevent it.
Re-Assessment: Now faced with a decision to foreclose or modify, the lender must determine which choice results in the least degree of loss to their investors. In this case the cost of foreclosure, reconditioning the home for resale, paying commission fees to real estate agents, and the closing costs of sale would net a far less amount to the lender, than accepting a short payoff from a new lender (a.k.a short refinance). So long as she can qualify for a new refinance loan, all the existing lender must consider is the expected net payoff. Now that she has mortgage lates on her credit, unfortunately she cannot qualify for a traditional FHA loan. However, she may be an ideal candidate for a short refinance through the FHA bailout plan, designed to refinance severely delinquent borrowers out of troubled loans. For the lender, accepting a short payoff through FHA would mean that they would have to forgive the difference of their existing balance *plus* an additional 10%. If the outstanding loan balance is $500,000 with a present market value of $250,000, the lender would realize a net loss of roughly $275,000. If the lender chooses to accept a short payoff, they would get $225,000 NOW and could immediately reallocate these funds to guaranteed loans instead. They could possibly get an equivalent amount through foreclosure, but they would have to wait an indefinite period of time before they could resell the home. Once they do the math, it is likely they will see that an FHA short payoff will yield the lowest net loss to their investors. [The whole purpose of negotiation is to mitigate or minimize the loss to the lender, hence the name "loss mitigation."] Notice the decision to accept the short payoff has very little to do with the lender's desire to offer "help."
Case 2 Revised: Now let's revisit the man who was laid off from his job. Consider a situation where he is able to get himself back on his feet with a new employer. He now has slightly less pay but works at a stable full-time job nonetheless. His reduced income will not be enough to support the present mortgage payment on the home, and he has now gone several months behind.
Re-Assessment: Faced with imminent foreclosure, the lender must decide if a loan workout will be more favorable. He can now prove that he is financially capable of making a reduced payment. With the desire to remain in the home, he will commit to making the payment if the lender will either reduce the rate/balance or accept a short payoff - again through the FHA bailout plan. The decision to modify the existing loan with lower payment terms or permitting a short refinance is up to the lender to make. It is not likely the lender would opt to foreclose, due to the significant disparity between the mortgage and the value. Foreclosure would result in a greater net loss to their investors, so a loan workout of some sort makes better business sense. But a good loss mitigation agency should present a strong case for the short refi, as it is in the best financial interests of the borrower.
Case 3 Revised: For the person with the negative amortization note, it is only a matter of time before payments become completely unaffordable. Typically, a negam borrower has 2.5 to 4 years before the recast point is reached. [For World Savings or Wachovia negams, their recast point can be 5-7 years.] Recalling the gentleman who went late *after* his negam payment ballooned, let's assume he seeks help before this happens AND his home is upside down by 50% (meaning the home is worth 50% of his total mortgage balance).
Re-Assessment: People in this situation actually have a strong chance at short refinancing their home, without having to be late on their present mortgage. There are several arguments to support a lender's decision to do this:
- First, the borrower has gone negative due to his inability to afford the interest only or principal and interest payment. If a lender modified this loan without adjusting the balance, it would result in a new payment that is substantially higher than the one he has now. This would solve nothing. Only a modification that results in a balance write down will yield an affordable payment for this borrower. In my experience, I have seen more lenders willing to accept short payoffs than they would be willing to reduce the balance on the existing note.
- Second, it would not be wise for a lender to offer a modification that allowed for a mere extension to his minimum negam payment, due to the fact that his balance will only continue to grow - increasing the likelihood of foreclosure again in the near future.
- Third, if the lender simply opts to do nothing and allows for his loan to recast, then he will most certainly foreclose. This would result in the lender having to wait 6 months before recapturing the property and having to sell it at a price possibly lower than it is today. If the lender accepts a short payoff now, the borrower with untarnished credit can obtain a traditional FHA loan up to 97% of the home's present value, and refinance out of this troublesome loan. Compared to accepting a short payoff under the new FHA bailout terms, the lender would have to lower the payoff amount to the equivalent of 90% of the home's market value. Remember, FHA bailout loans will require that lenders write down the balance to market value PLUS 10%. From a lender's standpoint, the loss will be 7% greater if they wait until the borrower goes delinquent and has no other choice but to take out an FHA bailout loan.
These are only examples but one could easily find herself in one of these situations. Please understand that the expected outcome can vary, depending on the lender's position on how they are handling their troubled loans. One very important thing to remember, is that no matter how compelling one's case may be for a loan modification or balance write down, the lender makes the final decision to change terms. You will for this reason want to take on the services of a loss mitigation agency you can trust, that they will negotiate the best result for you - NOT the lender. In trying to determine your own chances at getting relief from your lender, consider our agency's qualifying guidelines:
“The current Homeowner has to show within 90 days (possibly longer) a documentable unaffordable change in the terms of the mortgage and/or the homeowner has documentable circumstances that indicates an increase in expenses or decrease in income, which without aid, there would be imminent foreclosure."
“The delinquent Homeowner has to show a documentable unaffordable change in the terms of the mortgage and/or an unavoidable circumstances that caused a temporary or permanent increase in expenses or decrease in income, which without aid, there would be imminent foreclosure, and with aid will result in an affordable retention program, which demonstrate continued homeownership or will result in a transition to more affordable housing and avoid foreclosure, through a non-retention program.”
As always, you are welcome to contact me directly to hear my assessment of your own unique situation, and how I think a lender will choose to resolve it. Take good care of your home and family. - randymiguel@gmail.com
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By now, everyone has heard of lender loan workouts. Very few however, know anything about how to negotiate them successfully. Many struggling homeowners have tried to contact lenders on their own, to be strung along for months without end, only to be told nothing can be done. Many have opted to take on the services of professional loss mitigation agencies to negotiate their loans, but they are often not informed of the loan modification timeline and how it works. Before entering into an agreement with any loss mitigation agency, you will want to have realistic expectations of the entire process. I am writing this short article to let the general public know what to expect, before relying on a strange 3rd party to save their homes. If anyone you know has concerns about using a loan modification agency, please feel free to pass this information along. I cannot speak for any other firms, but here's what you can expect from my agency, from the moment we first speak on the phone:
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