Loan Modifications Perpetuate The Problem, and Don't Use The Benefit Of Experience

Real Estate Agent with Coldwell Banker Townside

Inman News posted information last week a new plan whose focus was to streamline the loan modification process

I'm admittedly behind on this post, and it's been rehashed across the web.  Essentially, if (1) you're at least 90 days delinquent on a home that is your primary residence and on which you owe at least 90% of the home's value AND (2) either Fannie, Freddie or one of their participating loan companies must own theRed Leaf loan, then under the loan modification program you can restructure your loan to as much as 38 percent of your gross income

Forgoing the in-depth analysis and critique from economists and Harvard-types for a moment, I have a problem with this.  I'm struggling with the issue of personal responsibility, and Government subsidy of these loans doesn't resolve the problem.  The problem is poor decision-making on the part of consumers and lending institutions and the real estate industry.  I'm not sure modification or "streamlining" resolves the issue of personal responsibility, and on the flip side I don't know that allowing millions of loans to default and further crippling the housing and financial sector makes a lot of sense either.  I have no answer for this, but struggling with the issue.

Bloodhound writes (emphasis mine):

The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.

The government is offering loan servicers $800 for every homeowner they get into the plan.

Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.

I can see Schiff's point.  Desperate lenders will have an incentive to push people into what appears to be an even worse problem. 

As I said, I'll leave the bulk of the analysis to economists and people who have a better grasp of the larger picture.  I know that locally, Blacksburg and Christiansburg lenders haven't gone crazy with out of control loan terms.  Rates are low, borrowers are bringing money to the closing table and deals are getting done.  Mark Weddle says it's "Back To Basics" and he's right ... you can still buy and sell in today's market.

It was eery watching this video, reposted on Jim Duncan's blog, this morning.  Take the 10 minutes to watch what Peter Schiff has to say, and then tell me you didn't raise your eyebrows in surprise at how history has played out these last several months.

No ... the photo has nothing to do with the post.  I took the photo, and I liked it.  That's all.

Comments (4)

Tina Merritt
Nest Realty - Blacksburg, VA
Virginia Real Estate

I like the photo too!  I also agree with you 100% - the bailout is just a delay of the inevitable.  Let the market correct it self and quit trying to play mother nature!

Tina in Virginia

Nov 19, 2008 11:33 PM
Jeremy Hart

"Let the market correct itself ..."

Isn't that the point of a free market society?

Nov 20, 2008 02:24 AM
Sean Dreznin
NAI Tampa Bay - Sarasota, FL
Commercial Investment Real Estate Agent

I used to feel the same way, but as I now find myself in a precarious position, I must say, I did not foresee the dire market to the depth that we as Commercial Real Estate Agents are suffering.  I made a lot of cash for 3-4 years and rather then sit on it, I invested in Income-Producing and a future home for myself in another area.  I live in my apartment building.  Now i find that the future homes' value has plummeted and of course the fair price I paid on the apartment building is bleeding me dry each month... But whereas some folks had no money and simply got themselves into unwinnable situations, I feel like I can make it through this, but it is not easy and a loan modification would go a long way.  I do not want to renig on any payments, just simply restructure my 30-yr fixed loans into possibly, 3-5 year interest only or just a reduced payment to ease the burden...  So far I am 0-2 trying to work with my lenders, because, of course, I am not in default and in fact have paid on time, yada, yada, yada...

In summary, have a little bit of compassion as some have found themselves in situations that they may have thought they smartly planned for.




Dec 08, 2008 08:53 AM
Jeremy Hart

Sean, thanks for the real-world scenario.  Didn't intend to give you an ivory tower perspective - not in the least!  As I said in the post, I'm struggling with the issue as well.

The lenders you've tried to streamline with have said that they won't restructure because you're not late, correct?  It's baffling to me that in a situation such as we're in, when borrowers are proactive and persistent, that lenders aren't willing to see the big picture.  What are your options if they don't allow a restructuring?  (1) You struggle with the payments, (2) short sale it, or (3) be foreclosed on.  Options 2 and 3 are expensive and loss-propositions for the banks, yet they lean towards those.

I certainly didn't intend to give the impression I was throwing stones because that certainly wasn't the intention.  I appreciate you sharing your story; it's a reminder to think that no matter what foundation is laid, sometimes the best plans don't follow the course we expected.  I hope you can find a solution to your situation ...

Dec 08, 2008 02:40 PM