Archive for the ‘Loan Modification’ Category

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Three of Biggest Mortgage Servicers Get Failing HAMP Grades

Friday, June 10th, 2011

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.

Posted in Bankruptcy, Bankruptcy Legislation, Chapter 13, Chapter 13 Mortgage Modification, Lien-Stripping, Loan Modification, Mortgage Servicing | Comments Off

A Bankruptcy Doesn’t Get Rid of Your House

Monday, February 28th, 2011

I frequently talk with people who think that by filing a bankruptcy, they can rid themselves of a house they don’t want anymore. Unfortunately, this is not the case.

In the modern housing crisis, there are many people who do not want to keep an over-encumbered house. They may have lost a job and know they will never be able to pay for it, or their efforts to obtain a loan modification may have been frustrating and ineffectual, and they are just tired of fighting to keep the house. So, the logical next question is, how can I give my house back to the bank? The short answer is, you can’t . . . unless the bank agrees.

(Note: I am using the term bank here loosely. Yes, I know that almost all residential loans are handled by a servicer, not by the holder of the note.)

Often, these people need to file a bankruptcy anyway and they think that the bankruptcy can help them deal with the house they want to dump. Here comes the confusing part: they are partly right and partly wrong. The bankruptcy discharges the personal liability on the debt, i.e., the bank could not sue you and get a money judgment against you personally. However, the bankruptcy does not cause the property to be transferred from you to the bank. And this can be a big problem for several reasons.

As long as the property is in your name, you are responsible for everything that happens on the property. So, you have to keep the insurance and property taxes current, and you have to make sure that the property complies with all codes and ordinances, e.g., making sure the grass is watered. Also, if your home has a property owners’ association, you are liable for any post-petition fees or assessments. This may be why it seems like banks are slower to foreclose on houses with property owners’ associations.

So, what has to happen to have the property transferred out of your name? There are several ways that could happen when the property is “under water”:

1. Deed in lieu of foreclosure. Sometimes, the bank is willing to take a deed in lieu of foreclosure. Essentially, the borrower signs a deed to the bank. Unfortunately, the bank usually requires a laundry list of guarantees to do this, and even then, few banks will actually approve these. Banks want to get the property sold and quickly out of the bank’s name, not keep it around in the bank’s name.

2. Short sale. A short sale means selling your property for less than the bank is owed. To do that, the bank has to agree. Getting bank approval can take a long time and they may not agree to it. There are also issues with potential tax consequences from doing a short sale. Once escrow closes, the property is no longer in the borrower’s name.

3. Trustee’s Sale a.k.a. Foreclosure. The foreclosure process takes a minimum of 110 days, but usually longer. First, the bank records and sends out a Notice of Default, giving the borrower 90 days to bring the loan current. If the loan is not brought current, the bank can then give 20 days notice of a trustee’s sale. At the trustee’s sale, the property is equitably transferred to the new owner, but it is not finalized until a trustee’s deed is recorded. Usually, the trustee’s sale deed is recorded within 15 days of the trustee’s sale. It is probably not safe to consider the property to have left the borrowers name until the trustee’s deed is recorded.

In bankruptcy, we might say that the “debtor intends to surrender the house.” But all that means is that the debtor will not be contesting a foreclosure. The bank still has to complete the foreclosure for the property to be transferred out of the debtor’s name. And sometimes, it takes a long time.

I have had many clients who have told me that the bank took over 2 years to foreclose on a home. Consequently, I usually suggest that clients not move out of a home until they know the lender will foreclose. That way, the client can make sure the property is kept up and taken care of while waiting for the lender to foreclose. Of course, the client won’t have to pay any rent during that time period and can save up for moving costs.

Posted in Bankruptcy, Chapter 13, Chapter 7, Credit Issues, Foreclosure, Fresno Bankruptcy, Loan Modification, Mortgage Servicing | Comments Off

Fresno Bee: Many Valley Homeowners Abandoning Mortgages

Tuesday, June 1st, 2010

The Fresno Bee had a nice feature article on May 8 entitled More Valley homeowners abandon mortgages. I commented on the morality of strategically defaulting here, but this Fresno Bee article addresses more of the practical issues involved and the author seems to do a good job of answering all of the common questions. One question answered is the hit on one’s credit score from a foreclosure. This is what the article said on that:

Like any foreclosure, a strategic default leaves a scar on a borrower’s credit history.

Credit
counselor Dees — whose housing counseling program is underwritten by
an assortment of federal grants and grants from banking organizations
and other industries — said many of his clients are frustrated after
their bank has denied a plea for help, especially after so much news
about bank bailouts and government programs to modify loans.

“One
of the first things we explain is that you’re not hurting the bank by
walking away,” Dees said. “You’re only putting yourself in a worse
situation.”

While still a red flag, either a short sale — in
which a bank agrees to let the owner sell the home for less than the
balance owed — or a deed in lieu of foreclosure “look more favorable
on a credit report,” Dees said. “It’s much better to work with the
lender to get it sold the right way.”

Maddux and White suggest that the effects of foreclosure are overblown.

“The
perception is grossly misrepresented,” said Maddux. “The damage isn’t
as bad as people think — it’s about 100 [to 125] points on a credit
score.”

White said most people “can expect to recover from the
negative impact of foreclosure on their credit score within a few
years.” By renting for far less, they can apply the rest of their
mortgage payment to get ahead on other bills, he said.

With the number of people defaulting, I had assumed the credit impact could not be that bad, but I had not yet seen someone take a guess as to what the average hit was.

Posted in Credit Issues, Fresno Bankruptcy, Loan Modification, Mortgage Servicing | Comments Off

Mortgage Servicers Conflict of Interest Result in Few Modifications

Thursday, April 22nd, 2010

This study by the National Consumer Law Center examines the conflicting interests of mortgage servicers and finds that servicers have more of an interest in foreclosing on properties than completing loan modifications. In other words, servicers make substantially more money by foreclosing than by doing loan modifications.

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Posted in Loan Modification, Mortgage Servicing | Comments Off

Proposed FTC Rule Bans Up-Front Fees for Modifications

Friday, February 5th, 2010

California law already prohibits upfront fees for loan modification services. Now the Federal Trade Commission has prposed a similar rule.

The Federal Trade Commission has proposed a new rule that would prohibit third parties, including loan modification specialists and loss mitigation attorneys, from collecting payment for foreclosure prevention services until after they obtain a documented offer from a lender or servicer for a modification or other form of mortgage relief.

Interestingly, the rule would apply to attorneys as well, with a limited exception for attorneys representing a consumer in a bankruptcy or other legal proceeding.

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The FTC has brought 28 cases against companies suspected of foreclosure rescue and mortgage modification scams, and state and federal law enforcement partners have brought hundreds more. According to the agency, generally these cases charged that companies do not provide the services they promise and that they misrepresent their affiliation with the government and government housing assistance programs, including the Making Home Affordable program.

Apparently, this has become a big enough problem that the FTC in Washington has heard about it.

Posted in Bankruptcy Legislation, Loan Modification | 1 Comment »

Beware of Southern California Loan Modification Lawyers

Tuesday, January 26th, 2010

This article in the Fresno Bee should give pause to anyone thinking about hiring one of the Southern California loan modification mills. What generally happens is the client sees an internet or other advertisement, calls the number and reaches a call center. They then are asked to put down $1,500 – 5,000 to get a loan modification. Sometimes, a loan modification can be achieved, but oftentimes, the client could have obtained a loan modification without the significant cost incurred. The California State Bar has been actively investigating these cases, providing news releases tracking their progress (See July 15, 2009, August 15, 2009, September 18, 2009, October 21, 2009, and November 10, 2009). The article also notes the following:

The loss to the public from loan-modification cases is in the millions of dollars, State Bar officials say. Most of the attorneys under investigation are from Southern California, but many of the victims live in the central San Joaquin Valley, enticed by loan-modification companies that advertised on the Internet.

I have seen that happen time and time again. I have also seen similar lawyers from Southern California try to represent clients in Bankruptcy Court in Fresno and they almost always make a mess of the case, especially in Chapter 13. If you are thinking about filing a bankruptcy, hire a local lawyer.

Posted in Loan Modification | Comments Off

The Problem of Loan Modification Assistance Providers

Thursday, January 21st, 2010

Clients and acquaintances often ask me if I can refer them to someone who can help get a loan modification. Unfortunately, I can’t. I don’t know of anyone who is going to do any better of a job than the client could do working directly with the lender. So I usually suggest that clients try to negotiate directly with the lender to obtain a loan modification. Almost all loan modifications now are done through the HAMP program, so I put together an article on the HAMP program that gives a basic framework of how that program works.
Recently, I noticed a press release from the State Bar identifying various loan modifications that were under investigation. (The release is dated 9/18/09.) I don’t know what the current status of this investigation is, but I would highly suggest that individuals in California considering using a loan modification law firm contact the California State Bar to see if there have been any complaints regarding the firm they propose to use.

Posted in Loan Modification | Comments Off

Citi decides not to play Scrooge for the holidays, but in January all bets are off

Thursday, December 17th, 2009

Trying to repair an image that is pretty bad right now, Citi has decided not to pursue foreclosures for the Christmas holidays. But, because life does go on, they will start back up again in January. Citi estimates this will benefit about 2,000 homeowners, albeit temporarily. What if Citi got some real Christmas cheer and looked seriously at some of the 100,000 loan modification requests they have received? That would be something. Unfortunately, Citi has only modified 270 of those loans. Think about that–a 2.7% loan modification rate. That is pretty bad and brings us back to the point discussed on this blog many times: the only way lenders will make serious changes to their loan modification process is if Congress allows mortgages to be modified in Chapter 13 bankruptcy. Will it happen? Only time will tell.

Posted in Foreclosure, Loan Modification | Comments Off

COP: HAMP Not Enough; Chapter 13 Mortgage Modification Needed

Friday, October 9th, 2009

The Congressional Oversight Panel appointed to oversee the Home Affordability Modification Program (HAMP) has put out a very interesting 6-month report on the effectiveness of HAMP. The report first analyzes the current market and what has happened to date.

The report notes that the crisis has come in waves. The first was driven by speculators abandoning homes when the prices started falling. This drove the prices even lower and brought about the second wave with Option ARMs and other exotic mortgages resetting, homeowners were unable to refinance and faced the choice of whether or not to let the house go because they could not refinance to an affordable payment.

The next wave has been a little more subtle but has continued to grow unabated and is now the dominant factor in the residential market: negative equity. Life changes sometimes force relocation and debtors do not have the option of staying in a particular house. If the house has positive equity, it is easy to sell the house. But, if the house has no equity, it must either be foreclosed upon or sold at a short sale. Foreclosures and short sales almost always result in lower sales prices than market sales. Thus, market values have been driven lower and lower forcing more and more people into the negative equity situation and the cycle perpetuates itself. In California, approximately 35% of all homeowners have no equity in their home. In Nevada, approximately 60% of all homeowners have no equity. The negative equity loop was described as follows:

Homeowners with negative equity are also constrained in their ability to move, absent abandoning the house to foreclosure. There is a wide range of inevitable life events that necessitate moves: the birth of children, illness, death, divorce, retirement, job loss, and new jobs. When one of these life events occurs, if a homeowner has negative equity, the primary choices are between forgoing the move, finding the cash to make up the negative equity, or losing the house in foreclosure. Many have chosen the foreclosure route.

Unfortunately, as the Panel has previously observed, foreclosures push down the prices of nearby properties, which can in turn result in negative equity that begets more defaults and foreclosures.21 A negative feedback loop can develop between foreclosures and negative equity. To the extent that negative equity alone may produce foreclosures, progress in addressing loan affordability will have a limited impact on foreclosure rates over the long term.

The Panel noted that the only way to stop the negative equity foreclosure loop is to make a way for a substantial number of borrowers to fix their negative equity problem. HAMP currently provides an option for lenders to reduce principal balance to solve the negative equity problem, but lenders are almost never taking advantage of that option. One option would be to mandate principal reductions under HAMP, but the Panel noted this would create a perverse incentive for borrowers because there was little cost to the borrower to get the principal write-down. The Panel then noted that Chapter 13 revision might be the way to resolve that issue by authorizing mortgage modification in Chapter 13. That would involve significant cost to the borrower due to the rigor and negative credit effect of going through bankruptcy, but would allow a significant amount of principal reduction that would help to stabilize values. The Panel said:

Negative equity can only be eliminated through principal write-downs, but this raises a number of difficult and complex issues. When principal is written down, it impairs the balance sheets of the owners of the mortgages. In many cases, this means the impairment of the balance sheets of the very financial institutions whose stability is an essential goal of the EESA. To be sure, if principal write-downs actually increase the true value of the loans, by reducing redefault rates, then principal write-downs might cause more immediate losses, but they would produce more realistic, and therefore more confidence-inspiring, balance sheets.

One concern related to the idea of principal reduction is the incentives it may create. Witnesses at the Panel?s foreclosure mitigation field hearing were asked about this matter. Dr. Paul Willen, Senior Economist at the Federal Reserve Bank of Boston, testified that the “problem with negative equity is basically that borrowers can?t respond to life events.” Borrowers with positive equity simply have “lots of different ways they can refinance, they can sell, they can get out of the transaction.”330 He noted that although most borrowers with negative equity are likely to make their payments in the present or over the next couple of years, they still remain “at-risk homeowners” and may face more serious issues several years down the road should a life changing event, such as unemployment, occur.331 In that sense, Dr. Willen offered that principal reduction may have some virtue. He also noted, however, that most borrowers with negative equity make their mortgage payments, and that if principal reduction is provided as an option, one runs the risk of incentivizing borrowers, who would otherwise continue to make their mortgage payments, “to look for relief” even when it is not necessarily needed.332 In this sense, according to Dr. Willen, mandating a principal reduction option under HAMP could put additional pressures on the program, and ultimately reduce its overall effectiveness. However, in response to a question from the Panel, Dr. Willen agreed that revising bankruptcy laws to permit principal modification was a clear way to address the idea that there should be a cost for receiving a principal reduction.

Other witnesses at the hearing also argued that the incentive “to look for relief” may be reduced if the costs to the borrower of opting for principal reduction were significantly greater.333 For example, revising Chapter 13 bankruptcy to include a cramdown or a principal reduction component could be one way to impose more significant costs. Because of these costs, such a revision could provide borrowers with the option of principal reduction without creating the potential perverse incentives to other borrowers that may occur by mandating principal reduction as an option under HAMP. Filing for bankruptcy is not an appealing choice to any borrower; however, to the borrower facing certain foreclosure it may be the only choice. Whereas mandating principal reduction as an option under HAMP may attract a larger than desired group of borrowers, allowing principal reduction as an option under Chapter 13 is more likely to attract only those borrowers who are truly in need of such assistance. In this sense, Chapter 13 bankruptcy could be used as a tool to employ the benefits of principal reduction to borrowers in need without attracting other borrowers and putting any additional pressures on HAMP.

I think this makes a great deal of sense and that Chapter 13 mortgage modification could help to stabilize home values.

Posted in Bankruptcy Legislation, Chapter 13 Mortgage Modification, Loan Modification | 2 Comments »

Wells Fargo Exec – "We know we’ve fallen short of our customer service goals . . ."

Tuesday, August 4th, 2009

Now there is the understatement of the year. In this article on The Business Journal, online version, Mike Heid, co-president of Wells Fargo’s mortgage unit is quoted as saying, “We know we’ve fallen short of our customer service goals in some cases.” The reason? Wells Fargo has only modified six percent (6%) of eligible loans under the HAMP program.

By comparison, Chase had modified 20% and Citigroup 15%. On the other end of the spectrum, Bank of America had only modified four percent (4%).

“We think they could have ramped up better, faster, more consistently and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy,” said Michael Barr, the Treasury Department’s assistant secretary for financial institutions. “We expect them to do more.”

Possibly. But these lenders have to add and train staff. That takes money and time and servicers are getting compensated very little for doing these modifications. The better resolution would have been to allow modifications in Chapter 13 bankruptcy. That would have required very little additional investment by servicers, but would have made it readily available to the most needy borrowers.

The lending industry is asking for patience, saying the industry needed time to implement the program.

Very interesting. Will these same lenders exercise patience waiting for borrowers to make unmanageable payments because the lender does not have the staff to process the loan modification? Call me synical, but I doubt it.

Posted in Loan Modification | Comments Off

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