Interest in the commercial mortgage modification consulting business has intensified as the residential loan modification industry in California is squashed in its infancy by SB 94.
The law prohibits advance fees for loan modifications on residential properties of 4 units or less. The new statute was enacted to protect the public from a group of attorneys (16 in total are being investigated) who allegedly took advantage of vulnerable homeowners by collecting advance fees without obtaining results for the clients. In a few cases homeowners actually lost their homes when they believed the attorneys in question were processing modifications on their behalf.
In one fell swoop thousands of for-profit housing counselors, intake clerks, receptionists and loan modification processors got pink slips this week. While there are some companies that will remain in the business, they can no longer collect any fees until specific work and milestones have been completed.
Essentially an attorney or loan modification company would have to provide unsecured financing for people who have already demonstrated their inability to pay. Recent data show that over 50% of modified mortgages re-default within six months. This demonstrates the fact that the credit risk is too great for service organizations that rely on income produced by service fees to finance continuing operations.
Those who have built their livelihood on helping homeowners get modifications in California have to find a new line of work. Homeowners will have a hard time finding someone that will take their case under the new statutory terms.
Mortgage brokers and attorneys who were doing residential loan modifications are now looking at the commercial mortgage modification business as an alternative. Advance fees and retainers are not prohibited for commercial property under SB 94.
There are many misconceptions about the commercial mortgage modification business especially in how it relates, in scope to the residential business. Let's have a look at the numbers.
There are about 125,000,000 single family homes in the United States. Extrapolating the data released from RealtyTrac today who said that foreclosure reached one in every 136 homes, gives us a little over 900,000 homeowners in imminent danger of losing their home. Several hundred thousand more loans will default in the coming quarters as Alt-A and the toxic pick-a-payment loans reset in 2010, peaking in 2011.
The commercial property marketplace is much smaller in terms of the number of property owners. There are about 5 million commercial properties in the US. With the default rate on commercial loans running just under 3% this represents about 150,000 properties in which the owner is in need of modification consulting. There are more potential clients that are not in default but this number represents a nominal market place population of under 50,000 individuals since many commercial property owners have more than one property.
With the termination of an entire industry in California, somewhere around 10,000 and 25,000 entrepreneurs and their employees in California are looking for a new business model. Many are exploring commercial modification as a new line of work.
The misconceptions about the commercial modification business starts with the numbers and continues with the scope of work required to complete a successful modification. In residential modifications, 70% of the deals were cookie cutter deals that fit nicely within the Obama modifications plans like HAMP and Making Home Affordable and other programs put forth by the FDIC and Federal Reserve. There are rarely any negotiations. The loan mod company simply submits a package that has been underwritten according to the guidelines published by the FHA, FNMA and Freddie Mac and approved by the loan mod company before being sent to the loan servicer. This is why many companies claimed a 90% or more success rate. They were easy to do if you knew how to get it done.
The commercial modification business involves real negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting. Most of this is foreign to the residential mortgage broker turned loan modification consultant.
I am getting several calls and inquires everyday from loan mod companies who are in this position. On one call I got, the owner of the company who has been processing hundreds of deals per week for residential modifications asked me how much for commercial leads and could he get a volume discount. I asked what he needed and he replied that he needs 500-1000 leads per week. I chuckled.
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