Northern California Mortgage Mods

Mortgage payments and underwater homes

Jul 17th, 2009
by Cathy Moran.
1 comment

National real estate columnist Kenneth Harney wrote about the decision to default on affordable  mortgage payments when the loan is larger than the value of the home.  Is default a viable strategy?

What grabbed me was not the ethical question, but the factoid that homes purchased in 2006 in Salinas are on average $214,000 underwater!  Those houses need to appreciate almost a quarter of million dollars before the homeowner has a dollar of equity.  How long do you think that level of price growth would take?

My role as a bankruptcy attorney is often to ask the uncomfortable question.  Why do you want to continue paying on a loan that is hopelessly more than the value of the property?   What economic principle says that financially smart to continue to overpay?  What are the prospect for mobility for the family who cannot sell their house for as much as they owe?

So, the issue of modifying mortgages has a far wider application than the bank supporters suggested.  It’s not just people  who “bought too much house”, it’s the people who lived next door to the people who bought too much house. The housing crash affects a wide swath of new homebuyers.

It’s easy for the older generation to sit in judgment.

Posted in: Uncategorized.

How Could HAMP be Better?

Jul 15th, 2009
by John Mlnarik.
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The Home Affordable Modification Program (a.k.a. HAMP) may be doing some good for a handful of people.  But, if there is something that everyone agrees with, it is that the program needs some changes.

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.

Posted in: Legal issues.
Tagged: · · · · · ·

Current Mortgage Modifications Aren’t Working.

Jul 14th, 2009
by Doug Jacobs.
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Current Mortgage Modifications Aren’t Working.
Recently, the government relaxed the standards for receiving a mortgage modification to include homeowners whose loans exceeded the value of their homes by up to 25%.  As home values continue to decline, more people can now qualify.  But is the system doing anyone any real good?
First of all, it’s not easy to get a modification because of the stringent requirements placed on the process by the lenders.  But even after you navigate through the process the modification you might receive may not do you any real good.  Take a look at the excellent article on the Mortgage Law Network by my friend, David Liebowitz.
And what we are seeing now is that even homeowners who received a modification are defaulting months later.  The Motley Fool says the currently-available home mortgage loan modification programs are ineffective, citing “pathetic” statistics from federal loan regulators that half of the modified loans were in default again three months later. Typical modifications now consist of lowering interest or tacking missed payments onto the back end of the loan.  A scant 1.8% of modifications involved principal reductions.  Thus, as home values decline there is much less incentive to make house payments when you aren’t building equity in the property.
Without judicial oversight, the current modification programs just seem to be delaying the inevitable.

Recently, the government relaxed the standards for receiving a mortgage modification to include homeowners whose loans exceeded the value of their homes by up to 25%.  As home values continue to decline, more people can now qualify.  But is the system doing anyone any real good?

First of all, it’s not easy to get a modification because of the stringent requirements placed on the process by the lenders.  But even after you navigate through the process the modification you might receive may not do you any real good.  Take a look at the excellent article on the Mortgage Law Network by my friend, David Leibowitz.

And what we are seeing now is that even homeowners who received a modification are defaulting months later.  The Motley Fool says the currently-available home mortgage loan modification programs are ineffective, citing “pathetic” statistics from federal loan regulators that half of the modified loans were in default again three months later. Typical modifications now consist of lowering interest or tacking missed payments onto the back end of the loan.  A scant 1.8% of modifications involved principal reductions.  Thus, as home values decline there is much less incentive to make house payments when you aren’t building equity in the property.

Without judicial oversight, the current modification programs just seem to be delaying the inevitable.

Posted in: News.

Behind in Your House Payment (Part 2)

Jul 7th, 2009
by Doug Jacobs.
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In part 1, we discussed what you can do to keep your home.  Here, we will look at your choices if you are willing to leave the house.

If you aren’t going to keep the house; you can either sell or abandon it.  Selling property in this day and age usually means a short sale – convincing the mortgage company to take less than is owed in order not to have to take the property back in foreclosure.  That has proved a workable solution and many lenders will make those arrangements.  But, is it worth it to you?

Anyone who has ever sold a house knows how much work it is: keeping the house clean for prospective buyers, filling out paperwork, meeting with realtors, being gone on weekends so it can be shown, etc.  And if you do get an offer on then house and get the bank to compromise, you get absolutely nothing back! The bank and the realtor get some money, but there isn’t anything left for the seller.  So, you’ve knocked yourself out for no gain.  Of course, your neighbors will appreciate the fact that you just didn’t leave and create another foreclosed home on the street.  There can also be personal income tax implications for a short sale.

Generally, the lender will take what they can get and forget the rest of your obligation.  But Bank of America recently enacted a new program to ask sellers in a short sale to agree to repay the difference that the bank is compromising!  This language was quietly added to their standard short sale agreement, and hopefully, no other banks will follow suit.  So, if your lender is Bank of America (or was Countrywide who was purchased by Bank of America), it’s one more reason to avoid a short sale.

Finally, you can always walk away and the house will be foreclosed.  In California, the holder of the first loan on the property can’t get a deficiency judgment against you under almost all circumstances.  Thus, if they get the house and sell it for only a fraction of what you owed, you are still in the clear: they can’t come after you.  But, a second deed of trust or home equity line of credit can, in most instances, pursue you if they have been wiped out by the foreclosure of the home.  That needs to be considered in a foreclosure.  Always check with a good real estate or bankruptcy attorney if you are going this route to protect yourself from any unforeseen consequences.

Posted in: General.

Mortgage Modifications Just Got Tougher

Jul 6th, 2009
by Doug Jacobs.
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New legislation introduced, allegedly at the request of California Governor, Schwarzenegger, will make it tougher to get a mortgage modification.  This legislation, California Senate Bill 94, includes language that says that attorneys can’t be paid for helping a homeowner apply for a modification until the process is completed!

Frankly, attorneys aren’t used to working that way.  They’re used to being paid for the work they do as it is done; not afterwards.  Most attorneys, facing several hours of work, request a retainer from the client in order to insure that the costs and fees incurred get paid.

A standard modification can take three to six months to complete.  During that time the attorney is working hard on the matter, has to pay his staff, his office rent, his expenses, and his mortgage!  Forcing him to wait until the process is over is asking him to lend money to the client.

Not only is this bad business for the attorney, it immediately creates a conflict with the client.  Now, the attorney is forced to get a modification (else he won’t be paid), rather than give the client his best advice which might be to walk away from the house or file bankruptcy if the lender won’t offer a workable solution.

All in all, if this becomes law, I think you’ll see an immediate drop in the number to attorneys willing to attempt a mortgage modification.

Posted in: News.

Banks lose big when they foreclose

Jul 6th, 2009
by Cathy Moran.
6 comments

Modifications are down in the second quarter of this year, and foreclosures are on the rise, reports New York Times reporter Gretchen Morgenson in a piece entitled So Many Foreclosures, So Little Logic.

My experience in the San Francisco Bay Area is consistent with the theme that modification are few and the degree of change in the troubled mortgage is limited.  Seldom is the principal reduced to reflect today’s value.

But the figure that caught my eye was this:  banks who foreclosed lost  an average of 65% of the loan balance! The figures come from a study by Valparaiso University professor Alan While of some 3.5 million subprime and alt-A home loans managed by Wells Fargo Bank.

You have to ask why those managing these loans think that modifying the loan will incur an unacceptable loss for the note holder.  The loss could hardly be greater than 64%.

Who will hold those making these decisions accountable for the loss imposed on the note holder?  And the cost to the country as  a culture of home ownership is shredded is incalcuable.

Morgenson expects that ultimately the taxpayers will have to pick up the cost, but only after families have lost their homes.

Posted in: Uncategorized.

Behind in Your House Payment? (Part 1)

Jul 5th, 2009
by Doug Jacobs.
3 comments

There are basically four choices for a homeowner who is behind in his mortgage payment.

1.    You can get caught up by paying the arrearage.  Most mortgage companies want you to do this all at once, but if you can’t afford to come up with that much in cash, you can seek bankruptcy protection (typically a Chapter 13 bankruptcy) to spread the amount you are behind over several years.

2.    You can seek, and sometimes receive a mortgage modification. These are pretty hard to get, in spite of the fact that there are federal and state laws to encourage such programs. But the lenders have all sorts of conditions placed on the application process and there is no legal requirement that anyone be granted a modification. Worse, there is no court, judge or administrator to oversee the process.

3.    You can do a short sale.  This requires the mortgage company to reduce their loan so that you can sell your house to someone for its true value in today’s market.

4.     You can walk away and allow the property to be foreclosed.

There are advantages and disadvantages to all of the above, but only 1. and 2. will allow you to keep your home.

Generally if you do want to keep the home, try the mortgage modification program as a first step.  If that works realistically (something that actually reduces your payments so you can afford to stay there and doesn’t just delay the inevitable), great.  If not, you can try 1. – paying off the arrears.

To pay off the arrears, you either need to have a lump sum of money or to file bankruptcy.  I don’t know of any mortgage companies that will allow you to make payments if you’ve gotten behind except under very limited circumstances, and those usually include being completely caught up in 90 days.

By filing a chapter 13 or chapter 11 bankruptcy, you can spread the arrears out over the length of the bankruptcy plan.  Thus, a $10,000 arrearage becomes slightly less than $300 a month for 3 years or $166 a month for 5 years.   That’s usually a lot more doable than coming up with the $10,000 in cash.

Please see Part 2 for a discussion of what you can do if you are willing to leave the house.

Posted in: General.

Refinancing Limits Raised: Happy 4th of July!

Jul 3rd, 2009
by John Mlnarik.
No comments yet

Remember when you were a kid and the simplest things intrigued you? When you parroted the reaction of those around you because you were learning how to react to something new, something you had never seen or experienced before.

That is how a lot of American’s must have felt when the most recent expansion to the Making Home Affordable Plan was announced on July 1st.  For an explanation of the Home Affordable Refinance Program otherwise known as HARP see my previous post.

Now borrowers, who have loans backed by Fannie Mae and Freddie Mac, can refinance up to 125%  of their home’s value.  Sure this will allow more American’s to qualify for a refinance under the plan, but if you are one of those who now qualify you’ve got to be asking yourself, “Do I really want to do this?”

Well do you? Do you really want to refinance your house when the loan to value ratio is over 105%?  That is what the government would like you to do, and now those who are between 106% and 125% loan to value can do it too!

Forgive me if I feel like a kid again.  Like a kid who just saw fireworks for the first time and can’t figure out if it is great or just, as my grandfather used to tell me, “Like burning money”.

Don’t get me wrong, I like fireworks and fanfare just as much as every other red blooded American.  But who among us enjoys being told something will help when in reality doing that very thing is not in our best interest?  I don’t know about you, but I like it even less when I find out later that those who it is really helping are those among us need help the very least.

So, light your fireworks this 4th of July and burn a little money to celebrat our independence.  But before you exercise your freedom to light the big fat stick of dynamite the government just put in your hands, think about the first time you held a firecrecker too long and how your fingers felt.  Oh and don’t forget to multiply that feeling by 125.

Posted in: News.
Tagged: · · · · · ·

Look! Look! a modification

Jun 30th, 2009
by Cathy Moran.
No comments yet

I actually met a client yesterday who had negotiated the modification of her loan .  Interest rate reduced to 2% for 2 years; 4% for 2 years; and 6% thereafter.  Arrearages added to principal.

If that’s all you knew you might think that lenders were serious about making modification work.  The remaining fact is that the client now has an $839,000 debt on a house now worth $575,000.

The modification did nothing to make it economically rational to keep paying on this loan.  The house must gain a quarter of a million dollars in value before the house could be sold simply to pay off the mortgage.  The payments go up and, for reasons personal to this client, her income is unlikely to increase at the same rate.

So, in my cynical view, all the lender had done here is postpone the train wreck  for a couple of years, perhaps when the market isn’t so depressed with a flood of foreclosures.  And in the meantime, it can congratulate itself on its “successful” loan modification program.  Or, when this deal craters, it can say that modifications are doomed anyway.

Certainly, superficial loan modifications are doomed.  That I will agree with.

Posted in: Uncategorized.

Waiting for mortgage modification

Jun 29th, 2009
by Cathy Moran.
1 comment

Does the Obama Administration read the New York Times?  Then perhaps today’s paper will point out that voluntary loan modification isn’t working. Papers lost, hours on hold, arbitrary denials, the litany goes on.  The Administration can’t tell us how many loans have been modified.

The mere existence of a “program” such as the Times shows in action gets lenders a pass on the extended period for California foreclosures. Yet you have to think a “program” that can’t even track the applications, much less consider them is only window dressing.

Changes to bankruptcy law to allow the modification of home mortgages through Chapter 13 were defeated in Congress this spring.  Opponents  touted the sanctity of contract.  Banking interests  (who made the crisis possible with rotten lending practices) promised to voluntarily help the “deserving”, with sweeteners from the Obama HAMP and HARP plans.

Economists tell us that the recession won’t end til the housing market stabilizes.  Santa Clara County experiences 67 new foreclosure proceedings a day.

Voluntarism, a marvelous thing in the life of our communities, isn’t cutting it in staunching the torrent of housing loss.  It remains time for judicial mortgage modification.

Posted in: Uncategorized.

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