Loan Modifications

Occupying Homes As A Solution?

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Seriously..I am torn.  I just don’t believe this is the right way to deal with a lender when you can’t make your previously AGREED TO payments.

I recently became aware of the website OccupyOurHomes.org.  The site is full of heart tugging stories of people who can’t make their mortgage payments and the issues they have had with the banks in attempting to get a modification or stop an eviction.

I have to start with a basic idea here.  All of these people signed mortgage contracts under lawful circumstances.  If it could be ruled they were not of a right mind, or capable of understanding what they executed, then by now the attorneys would be attempting to void out mortgages based on the incompetence of the borrowers.  Not heard that case being made.

As I wander through this site, I see that the one thread that ties all of these people together is that they can’t make the payments they agreed to make, and getting to live in their homes at a lower cost (or even no cost) is a right extended to them by living in America.  Or under God..or some other deity.   The theme, as we now have heard it from the media so many times, is the 99% will have their voices heard.

The reasons I am torn?  A bunch really.

1. I do feel bad for people who are able to enter agreements (contracts) and really not understand the possible repercussions.  On a different scale..I assume most of these folks purchased cars on credit and signed notes for the cars.  If they can’t make the payments, the car gets repossessed.  No modification programs are being advocated by the government for car buyers.  I have heard talk of them for student loan borrowers.  I suppose cars are next..and I guess OccupyOurCars.org has already been acquired.

2. Admitadely, the banks have not shown a lot of excitement to provide modifications.  They have done it under the strong arm-twisting of the federal government..but the reality is they are complicated beasts with a VERY high rate of failure.  As I have witnessed so many times, the people who are unable to make their house payment also often choose to not spend money on maintenance.  The longer the situation exists, the more the value of the home drops (as do the ones around it).  Modifications, due to the high rate of failure, don’t stop this cycle..only prolong it.

3.  As I review the website, it appears there is a lot of good money being spent on this cause.  It in fact troubles me as to where the funds are coming from.  Yesterday, a press release found on AOL Real Estate brought me to my tipping point on this issue:

NEW YORK – Aug. 22, 2012 – The “Occupy Our Homes” movement is taking its anti-foreclosure message to the airwaves. The protesting group, part of the Occupy Wall Street movement that has a network of participants across the country, announced it has launched a national television ad campaign to speak out against foreclosures and show struggling homeowners how they can fight against evictions.

In recent months, the group has staged “sit-in” protests at properties of homeowners facing foreclosure.

The TV ads direct viewers to the OccupyOurHomes.org (Link: http://occupyourhomes.org) website for a field manual on how to “start an occupation,” which details how homeowners can protest a foreclosure using sit-in strategies.

The ads are set to appear on networks like CNN, FOX and MSNBC.

This is not inexpensive advertising!

The great thing about America and our system is there is plenty of room for groups like this to exist.  We do have laws and at some point those laws will need to be enforced.  There are thousands and thousands of people involved in the housing business who have all kinds of empathy for people who made bad decisions.  Nobody really wants people to be put out on the street.  Don’t worry..they won’t be.  There are so many options for renting and public assistance today.  What I have on my mind is who is funding this anti-capitalism, anti-law, protest movement?  And why?

That is what we all should start to be concerned about.   If you have information on this please comment and share so we can all draw our own conclusions.

Not Surprising To Me

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For almost three years I have said the economy is not getting better until we let the market work the housing mess out.   For three years,  policies have worked in a different, opposite fashion.  I quietly continue in this belief..but today found some evidence that adds fuel to my fire.  I just had to share it.

There now is evidence that the more interference in the default process, the more that we just keep working toward a much longer crisis.  Similar to how tax incentives or new taxes artificially create behaviors in the public that would not have been taken if not for taxes, evidence now points to availability of mortgage modification offers creating strategic defaulters who otherwise would have had the ability to pay their mortgage!  I know for many this news will not come as much of a surprise but it is unusual to see research like this made available for discussion.   In other words, Tom and Betty are not happy that their mortgage is more than their home is valued, but they have good jobs and can make timely payments.  Yet, when their lender publicizes modification programs that reduce payments, interest rates and even principal reductions, Tom and Betty decide to fall behind on their mortgage in order to take advantage of the opportunity.  Now I understand this does not happen every day..but it supports a point.

Another quick example.  It has become widely known that most areas now can take a year or more before a foreclosure will occur from the time the first payment is missed.  Owners often no longer move knowing this long backlog exists and their cost of shelter is so small.  Owners or occupants are also keenly aware that not moving will likely result in further profiting.  Used to be when a foreclosure was completed (meaning the defaulted owner no longer owned the home), the new owner gave an occupant 15 days to leave.  Now,  negotiations that allow occupants to stay for 30-60 days and get a check for $2000 to $3000 for leaving the property in good condition are the norm.  So, you get the idea…why leave?  wait for your deal.  And that is what is occurring.

Any more questions why the housing market is not recovering?

How Meaningless Are Foreclosure Statistics?

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Apparently quite meaningless.  All the ways that defaulting borrowers can stall the process seem to be working.  Working to basically juice the statistics to not really provide an indicator of free-market defaults, but often a whole lot of borrowers who finally just give up from trying the latest modification program offered. 

Interesting that when the day is over, the market actually seems to win out.  I am not a cheerleader for people going into default and eventually having a foreclosure on their home, but the sad reality is getting clearer every day.  We can’t change these situations with homeowners who are treading water.  No matter how hard somebody comes up with a new twist for modifications, in the end I wonder if significant principal reductions would even matter.  People do not get into these problems overnight and artificial mechanics won’t fix the problems any faster.  At best.  More likely, as this story points out, we are just postponing the inevitable.

National Mortgage News

Repeat Defaults Boosting Foreclosure Sales

Friday, March 4, 2011

The January Lender Processing Services Monitor report shows frequent moves in and out of loan delinquency and foreclosure traffic is one of the reasons why apparent improvements in the nation’s distressed mortgage market are relative, if not meaningless, when seen as part of the overall picture.

LPS reports that repeat foreclosures or loans that had cured in one way or another but have fallen back into foreclosure now account for over 35% of foreclosure starts.

It means the fact that foreclosure starts decreased 11.4% in the first month of 2011 compared to December and 20.1% annually does not call for rejoicing even though the good news is that there is some stability in the number of those who are adding up to the existing number of distressed borrowers. (Similarly, new seriously delinquent loan rates also improved as all states reported significant annual declines in new seriously delinquent loan inventory.)

The bad news is that despite government/private sector efforts to help keep these distressed borrowers in their homes the assistance given to many of those who repeatedly go into foreclosure may be futile and just postponing the inevitable.

Since ultimately foreclosure starts still outnumber foreclosure sales by almost three-to-one—plus it is equal to 25 times January 2011’s level of foreclosure sales—the current foreclosure inventory is poised for faster growth.

This trend appears to be consistent in the long term. In January the total U.S. foreclosure inventory rate was 4.16%. It increased 0.2% on a monthly basis and 7.9% compared to January 2010. By the end of January foreclosure inventories were at nearly eight times the historical average while delinquencies more than doubled historical norms.

At 8.9% the total U.S. loan delinquency rate increased 0.8% on a monthly basis but decreased 18.8% on an annual basis bringing the total U.S. noncurrent loan rate to 13.1%.

Whether the primary driver of loan performance change is borrowers’ unemployment, other financial distress, or foreclosure moratoria, what appears to be adding to that list is longer foreclosure timelines that consistently continue to extend.

LPS data show the average loan in foreclosure has not made a payment in over 500 days. It finds the foreclosure process “continues to drag out as the timelines for foreclosure starts, days in inventory and sales all continue to extend.”

It means that along with the increase in the number of serious delinquencies, or loans that were 90 days or more delinquent, the number of future foreclosure prospects is growing. According to LPS, a large number of loans were transitioned out of foreclosure back into the seriously delinquent category.

Data show deterioration in the seriously delinquent category “increased last month, for the first time since May 2010” marking overall growth with the largest increase in the over 12-month delinquent category as more loans were removed from foreclosure.

As of Jan. 31, 2011 over 2.2 million loans were 90 days or more delinquent but not yet in foreclosure bringing the total number of loans in some stage of delinquency or foreclosure to over 6.9 million.

Furthermore, refinance activity—which could help reverse the status of some delinquent loans into current—has declined significantly due to increasing rates and the fact that the market seems to have exhausted these opportunities during several months of strong refinance volume.

As to where the most problematic areas are, the story has not changed.

The state with the highest number of noncurrent loans, including foreclosures and delinquencies as a percent of active loans, is Florida, followed by Nevada, Mississippi, Georgia and New Jersey.

What To Do About Mortgages?

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Today the news started to leak that, surprise surprise, none of the government plans have really worked to fix the housing problem (aka foreclosures) so there is now some strong arming to go where most of us dreaded..the principal write down solution.  If this really happens, look for one of the largest controversies in recent housing news.  How fair is it to people who have struggled to make their mortgage payments when banks start deciding who gets a loan balance reduction based on who is closest to default?  Who pays the bill for the write down?  Only two choices I can think of.  Bank customers in higher fees or the taxpayers as part of another bailout.  Either way..I think you and I will be on the hook.

Seems kind of obvious but can we really afford this?  Is the alternative of just letting the market work through this that bad?

Now everybody is having a fit that there is actually a plan to dismantle the government’s involvement in the mortgage business (aka Fannie and Freddie).  You would think the sky was falling.  How can we ever be able to buy a home unless Uncle Sam provides its guaranty?  Groups are so indoctrinated with the old methods of finance they actually think what we had going a few years ago is the best choice!

I had lunch with a mortgage banker this week.  I was impressed with the variety of programs and offerings his employer offered.  Many of these loans were outside the world of government insurability.  Strangely, they were really built on the private market.  Sure, some products were routed through the entities known as Government Sponsored Enterprises-GSE’s (aka Fannie and Freddie).  But, there was a great selection that the private sector was figuring out how to offer.  Programs that if I just believe all I read, I would not think would be possible without Uncle Sam.

There is a little known area of the mortgage industry that could step up and possibly serve a huge role as the markets switch away from the reliance on what they can sell to Fannie and Freddie (and the securitized market). It is called PMI or Private Mortgage Insurance.  These companies are Private-in case you did not get that part of it.  You pay a PMI premium to allow lenders to loan money that provides loan to value ratios in excess of 80%.  In other words, smaller than 20% down payments.  These private companies could use a bit of American ingenuity and I bet find the funding and creativity to support all the exciting new programs I see being offered for borrowers.

So, just keep in mind whether it involves bailing out people who made a decision to borrow funds on a property that went south, or the idea that all housing finance will go away if the government is not involved…I am just not buying it.  In fact, given a period of transition, I bet the private sector will handle housing finance just fine.  I wouldn’t be surprised if the private sector also could figure out some better options for defaulting homeowners than just writing down their mortgages. 

Or maybe the majority do not want to take the medicine to see if it makes the patient better.  I do think it is time to get a second opinion.

Some Coffee To Go With the Modification Report

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Time to sober up!  The headlines blare the possible triumph of the Home Affordable Modification Program yesterday claiming the redault rate is much lower than anybody projected.  According to the US Treaury’s housing scorecard, the re-default rate (90 or more days past due) for homeowners for at least six months is just 1.7%.  Wow!  This news will make HAMP the greatest loan modification program in history! 

Under the program, homeowners who qualify can have their mortgage payments cut to 31% of their monthly income by extending their loan term to 40 years or slashing their interest rate to as low as 2% for five years. Participants must make three monthly payments during a trial period before they receive a permanent modification.

As much as we all wish this news to be true, as it would surely lead us back to housing stability as we quickly modify home loans and fix the housing crisis…it just is not accurate.  We return to the central point of many of my posts.  Numbers can be presented in many ways and statistics can be used to make many different, and often conflicting points. 

In what I will propose is a lack of research in our media or understanding of this economic situation, combined with just the right words utilized through the Treasury Department, renewed optimism now exists that loan modifications may be a very successful part of our economic recovery.  Oh, I hate being the person to throw cold water on this whole idea but here goes.

  •  According to research from Barclays Capital, in a July 21 intra-day commentary on residential credit, Barclays analysts Sandeep Bordia and Jasraj Vaidya write that while they believe overall redefaults from HAMP will be better than those from prior modifications, “we find that the data as reported…are misleading and fail to capture the full magnitude of redefaults from these modifications.”   The federal report showed that almost 6% of permanent modifications were 60+ days delinquent at the six-month mark, while fewer than 2% of permanent modifications were 90+ days delinquent. A caveat, as pointed out by Bordia and Vaidya, can be located in a footnote in the report, which states, “a HAMP permanent modification is canceled for nonpayment if it is more than 90 days delinquent.” The analysts interpret the footnote to mean that 90+ day delinquent loans are removed from the percentage of delinquent numbers reported. “Removing 90+ [day delinquent] permanent mods from the delinquency calculation and basing the calculation only on successful modifications makes the redefault rates look too low,” Bordia and Vaidya write. The analysts additionally say that their base case expectation of approximately a 60% lifetime redefault rate on HAMP modifications is still adequate. 
  • The number of homeowners leaving the program exceeded those who received new loan modifications for the second straight month. More than 91,000 homeowners cancelled their government loan modifications in June, while just 38,728 received new modifications, according to data released Tuesday.
  • Almost 530,000 of the nearly 1.3 million government modifications have been cancelled since the program began last March. Dropouts climbed as homeowners missed payments on their modified loans or failed to turn in required paperwork.

I for one look forward to the day we see stabilization in housing.  The debate continues as to what is the best way to accomplish stability.  Nothing is going to stop the train that is long ago out of the station that is pursuing every possible action to keep homeowners in their homes.  It serves the government to send out this type of news to work on the optimism factor that is very much in a deficit today.As I look across my own neighborhood, not knowing what the circumstances some of my neighbors carry, but seeing their inability to maintain their homes to community standards, I am again reminded that just because a method is offered to reduce a mortgage payment, the likelihood that suddenly a homeowner can pay for replacing windows, maintaining landscaping, and trimming overgrown tree branches hanging over their homes, is only solved through an orderly sale and relief of their debt through liquidation, or prosperity.  The prosperity thing seems to not be a likely option as most states are now seeing an actual increase in unemployment rates and many people have left the job market entirely. 

What do modifications really provide in the big picture and why do so many press organizations trumpet success when there are hard questions that really need to be asked about those results?