The problem with this advice from a bankruptcy standpoint is that those transfers are made in fraud of creditors and recoverable by a bankruptcy trustee.  If you are one of these people,  you should know that bankruptcy is where you will likely end up.

Countless modification applicants end up in the office of a bankruptcy attorney on the eve of a foreclosure sale because SURPRISE, your modification was denied. And the money you transferred to your relative can not be exempted because it is no longer in your possession.  Waiting to the last minute means the eventual bankruptcy problem will be full of surprises and problems.

So, if you think your loan mod professional is great and you have nothing to worry about because he’s giving you all this “expert” advice, consider thinking ahead about what the next step will be if your modification application is unsuccessful.

Alys Cohen and Diane Thompson of the National Consumer Law Center released a list of recommendations on July 6th that recommends greater visibility, principal reductions and access to the program for those in bankruptcy.

Greater Visibility:

Right now the Net Present Value (”NPV”) test used under HAMP to qualify borrowers for the program is not available to the public.  As a result, homeowners seeking a modification are dependent on the servicers who are not motivated to modify a borrower’s loan, but are motivated to collect the debt and continue to accumulate fees and costs under their servicing agreements.

With no one monitoring the “negotiation” on the other end of the telephone line, who is to know whether the borrower qualifies or if the servicers are just playing games to get homeowners in fear of foreclosure to send them money with hopes of a modification.

Many homeowners are finding out that the money they sent to the servicer went to pay penalties and interest, not towards payments for their trial modification or towards paying down the principal of their loan.

Those in charge of reviewing homeowner situations, qualifying homeowners and making the modifications must have an interest in providing homeowners with relief.  Homeowners need relief in order to prevent foreclosures and not simply delay them while payments are made to a servicer who only provides hope that a modification may occur sometime in the future.

Principal Reductions:

Forbearance works in some cases, but in most of the cases in California forbearance is none other than wishful thinking.  Values have dropped so far in most areas that even if forbearance were applied to a borrower’s situation it would take years before the homeowner has any equity.

Without principal reductions most homeowners are left with no realistic option to keep their home and must turn to short sales, deeds in lieu of foreclosure, or surrender in bankruptcy.

Access to HAMP for those in Bankruptcy:

Currently HAMP guidelines allow servicers to decide whether or not they make modifications available to homeowners in bankruptcy. Cohen and Thompson recommend that HAMP guidelines provide clear guidance to servicers dealing with a homeowner in bankruptcy.

Specifically, they recommend the guidelines include;

1) Upon receipt of a bankruptcy filing, servicers be required to send information about the HAMP program to the debtor or debtor’s cousel,

2) Servicers should work through debtor’’s counsel and offer appropriate laon modifications under the HAMP guidelines,

3) The bankruptcy trustee should be copied on all communications,and

4) The communications should not infer that it is in any way an attempt to collect a debt.

Conclusion

Everyone agrees that change is needed to provide  relief to homeowners.  I suppose part of the problem is that those interested in change are not as well funded or united as the banks and mortgage servicers paying our decision makers to bring about the change.

After all, who received billions of dollars in taxpayer money when they couldn’t pay their bills, over exteneded thier credit and made bad decisions? Those who have been provided relief continue to deny relief to the very people who made help available to them in the first instance.

Have the banks not staffed their modification programs with enough people?  Are they simply using the Obama Administration’s plan as some kind of collection tactic to squeeze homeowners afraid of foreclosure?

While no one knows for sure what is causing the long wait times, experts in the area have come up with logical explanations and the American Bar Association released a free web seminar earlier this month discussing these issues and how the real estate crisis developed.

The 60 minute pod cast features Jamie Lathrop, Marc S. Stern and O. Max Gardner, III who all agree that without a motivating factor banks will continue to drag their feet.  O. Max Gardner, III calls modification in a Chapter 13 bankruptcy the hammer that is missing from the Obama Plan.  Having failed to pass the Senate earlier this year, Max predicts that a bankruptcy modification bill will be before Congress again by September.

The threat of foreclosing and having to write down their balance sheet should motivate banks, but as pointed out in the seminar, servicers have an incentive to allow a troubled property to sit on their balance sheet as it collects penalties and fees.  After all, when the property is foreclosed on, the servicer or a related third party will be paid for liquidating the troubled asset while the investor and the homeowner take the hit.

O. Max Gardner, III compared the securitization of mortgage loans to an expanded mortgage flipping scheme, pointing out that those borrowers with ARM loans are forced, by a scheduled increase in their interest rate, to refinance and again pay fees associated with doing so.

The experts also discussed limitations placed on servicers by the pooling and service agreements they have with investors.  Some of these agreements do not allow for any modifications and others only allow for a handful.

While it may not be entirely clear what is taking so long, it is clear that things are unlikely to change until a new kind of motivation presents itself.

While the Administration’s plan provides incentives to those involved in a refinance, modification, short sale or deed in lieu, it has to be clear to the American public that the plan is worth little absent a real motivating factor.

Don’t get me wrong, the Washington think-tank that came up with the plan did a fantastic job structuring a solution to the problem they were given.  But the crux of the plan’s success depends on our elected officials in Washington passing legislation making it possible for a bankruptcy judge to modify a debtor’s loan in a Chapter 13 Bankruptcy.

Without the threat of a cram down ,a bank’s corporate executives have little choice but to do their duty, and make decisions based on what is best for their company.  Until the possibility of a cram down in bankruptcy becomes reality, things are going to need to get a lot worse before banks stop taking government hand outs and start making loan modifications that aren’t just for show.

Make no mistake, things will get better.  If you have any doubt read Chuck Lorre Production’s Vanity Card #248.   It is one of my favorites.

]]> http://norcalmortgagemods.com/2009/04/16/incentives-we-have-motivation-we-need/feed/ 0 http://norcalmortgagemods.com/2009/03/31/home-affordable-modifications-the-nuts-and-bolts-of-the-obama-plan/ http://norcalmortgagemods.com/2009/03/31/home-affordable-modifications-the-nuts-and-bolts-of-the-obama-plan/#comments Tue, 31 Mar 2009 14:23:53 +0000 John Mlnarik http://norcalmortgagemods.com/?p=160 If your disposable income has disappeared because you have experienced a change in circumstances and are struggling to make your house payments, the Obama Administration’s mortgage modification plan was designed with you in mind.

To qualify your home must be your primary residence, the amount you owe on your first mortgage must be equal to or less than $729,750 and you must have obtained the mortgage before January 1, 2009.

Do not be surprised if you qualify.  The Treasury Department’s plan released March 4th states that as many as 4 Million homeowners will receive assistance.

Qualified homeowners need to gather information to provide to their lenders including information about their gross income, their assets, any second mortgage on the house, as well as balances and minimum monthly payments on all credit cards, student loans and car loans.

The stated goal of the Home Affordable Modification program is to reduce the amount homeowners owe per month to a sustainable level in order to stabilize communities.  The target affordability level of a monthly mortgage payment is set at 31% of a homeowner’s gross income.

But the financial institutions and investors need only get the payments down to no greater than 38% of income.  Then the program matches further reductions in monthly payments dollar for dollar to reduce the debt-to-income ratio of a borrower down to 31%.

You might be asking yourself, “How is this possible? How are they doing this?”  Well, in order to reduce the debt to income ratio down to 31%, interest payments are first reduced down to as low as 2%.  If the ratio is still above 31% lenders then extend the term of the loan up to 40 years.   Finally, if the payment has not yet reached the 31%, lenders forbear principal at no interest.

In order to entice lenders, borrowers, servicers and investors, the plan offers certain incentives for loan modifications.  Servicers receive $1,000  up front for each eligible modification and also receive another $1,000 each year for up to three years when the borrower makes their modified payments.  Borrowers are enticed to make their monthly payments under the plan with $1,000 for each year that they stay current on their payments.

Loan modifications under the Treasury plan do not require the participation of junior liens and the program includes additional incentives to extinguish them. Servicers are reimbursed under the plan for the lien release according to a specified schedule and also receive an additional $250 for obtaining the release of a valid junior lien.

Notably, none of the incentive payments are made unless the modification lasts for at least three months.  And borrowers who have a debt to income ratio over 55% are required to undergo HUD counseling as a condition of the modification.

When modification is not available the Treasury plan offers servicers incentives to take alternatives to foreclosure. A future post will discuss the possibility of deeds in lieu of foreclosure, short sales and the incentives provided to the parties who agree to their terms instead of going through foreclosure.

Also present in the Home Affordable Modifications section of the plan is a concession by major mortgage insurance firms.  Those firms are said to have agreed to develop a plan by which they will accept partial claims on modified loans where it is appropriate to do so in order to avoid foreclosure.

Running through the entire Treasury plan is the sense that everyone involved is giving a little in order to minimize the impact of the foreclosure crisis by trying their best to avoid foreclosures that are otherwise uneconomic to proceed with.  Qualifying for a modification under the plan could mean that the home you have been burdened with will become affordable again.

For years the courts have had the power to modify loans on property that is not the debtor’s principal residence.  No doubt the new law will work similarly.

Specifically, the Act will allow a Bankruptcy Judge to reduce the secured amount of the loan to the fair market value of the home.  Thus, if the house is only worth $250,000 but the debt is $300,000 the judge can reduce the secured portion to $250,000 and the debtor can treat the other $50,000 as wholly unsecured.   A debtor in a chapter 13 plan pays only a portion of her unsecured debts depending on several factors.  A likely scenario is that the debtor may only have to pay 5 to 10% of that $50,000.

Additionally, the Act will allow a judge to dictate a reasonable interest rate for the loan.  He will also be able to extend the term of the loan to 40 years from the normal 30. Both of these provisions will dramatically and substantially reduce the monthly payment amount.

All in all, the Act will save thousands, if not millions, of homeowners from losing their houses to foreclosure.

Often, a change in the law applies only to cases filed after the law becomes effective.  Wisely, the bills under consideration will apply to all cases then open.

There are lots of unanswered questions about how it will work:

• is the value of the property the value at filing or at the filing of the procedure to modify?
• will the bill require some sort of threat of foreclosure to qualify
• how will the clawback formula apply when the case is already several years old at modification?

I will be delighted to deal with these unknowns if we get a bill that will keep people in their homes.

So, there is no need to wait for Congressional action to file bankruptcy if there are other issues that make filing necessary beforehand.

Presently in bankruptcy court, servicers who bring motions for relief from stay  often can’t tell you who owns the note.  They  haven’t a clue who has physical possession of the instrument, and even more often can’t tell you correctly  whether the debtor has made a payment or what they did with the money.

If you interpret this provision as requiring the borrower to contact the servicer in search of loan modification, the law will be easily satisfied.  The debtor can certainly testify what they’ve done, and the credibility of any servicer who disputes such assertions is likely to be suspect.

If “holder” is intended to invoke its technical meaning in the Uniform Commerical Code, then the courtrooms will be awash with questions on this score.