The U.S. Treasury Department recently released a report on the Home Affordable Modification Program (HAMP). One of its findings was that Bank of America, JPMorgan Chase and Wells Fargo all needed “substantial” improvement. The Treasury Department was so displeased by the unsatisfactory performance that it is withholding all future financial incentives from these three titans of the servicing world until they make specific improvements. And if they don’t fix problems in a reasonable time, there may be permanent reductions in financial incentives. The problem is that the incentives are so relatively minor that it is little incentive for these big servicers. It will be interesting to see what comes of this report.
For clients that tell me about loan modification attempts, it is an incredibly mixed bag right now. If you hit everything right and get the right person handling your modification, it might go through. But a surprising number of clients with viable modifications have been declined by these servicers, sometimes with no rationale basis for the decision.
What really needs to happen is that we need a vehicle to modify home loans in Chapter 13 bankruptcy. Lenders are leery of such a solution because sometimes it is easier for a lender to just foreclose on a property and get the money out now, rather than have the money tied up over a long term at today’s low interest rates. But there has to be a Chapter 13 home loan modification proposal that would make sense. For example, what if valuation for purposes of such a loan modification was determined to be some multiple more (e.g., 15-25%) than the creditor would receive if the loan was foreclosed upon. Then, loans could be valued at, say, 120% of what the lender would receive if the property was foreclosed upon.
Let’s use a hypothetical: Borrowers owe $450,000 on a property. The payments are $3,000/mo. and borrowers are six months behind. The lender would receive $200,000 for that property through a foreclosure. (Non-distressed, it might sell on the open market for $235,000.) The bankruptcy woud value it at $240,000 and it would be reamortized over 30 years at six percent interest. That would create a payment of $1,438.92, which the borrowers could afford.
The next problem that is brought up is that everyone would do it. While I think it is unlikely that everyone would do it, the way to solve that problem is to tie the proposed modification to some kind of income metric. For example, the rule could be that you could not reduce the payment below 31% of the borrowers gross monthly income or 41% of the borrowers take-home monthly income after certain payroll deductions, whichever was less. I really don’t think this would be a problem, however, because all of the amount that is determined to be unsecured then goes over to the unsecured side of the ledger and if the debtor has a large income, they will have to pay a substantial portion of the unsecured debt.