Automatic Loan Mods?

Just Like The Lottery

Believe it or not, one bank has actually started offering automatic loan mods. No more reams of paperwork delving into intimate financial records of borrowers [treated more like beggars], no more waiting for six months, eight months and even more than a year to get an answer from the haughty banks. Finally, one bank, JP Morgan Chase, is automatically writing loan mod contracts for its underwater borrowers.

Chase Bank

Yes, it’s true. Some Chase customers are getting loans mods, offering rate reductions, principal reductions or both–all without having to file the onerous paperwork. In one case cited by CNN Money, Chase surprised a Darrington, Wash. couple, who had tried, without success, to effect a loan mod with the very same bank, with a loan mod reducing their interest rate from 6.5% to 2.8% for five years and then a fixed 3.19% for the remaining 18 years of their loan, saving them $229 a month. For this couple, still suffering with job loss as well as an underwater house, it was just like winning the lottery.

Why Would Chase Offer Automatic Loan Mods?

Bank Trick

Why would Chase be doing this? Is this a trick?

It’s not a trick. In fact, in accordance with the $25-billion mortgage settlement agreed to a few months ago by 49 out of 50 attorneys general, discussed in a previous post, Chase’s share of the payout burden is $4.2 billion.  Because banks get “extra credit” for acting quickly and making their mods during the first year, Chase  bit the bullet and decided to go ahead and make loan mod offers to thousands of underwater borrowers. In the past, contacting all these homeowners has proven difficult if not impossible. Many homeowners are so inundated with financial woes they no longer read their mail or answer the phone. Many underwater homeowners move out, anticipating a foreclosure.

Borrowers who receive the loan mod offers must, of course, sign the new contracts which typically would run for 5 years and then, most important, start making the new payments which are usually hundreds of dollars less than the previous amounts. Between March and June 2012, Chase claims that it has completed 3,086 loan mods,  $359 million’s  worth.

But, Isn’t The Housing Crisis Over By Now?

To understand how deep-seated this problem is despite the good news we’ve been hearing about home prices rising,  look at what Chase, just one of the five major banks involved, says it still has to do: another 11,500 loan mods. I say, “Bravo,” to Chase for undertaking to honor the settlement. It is too bad, though, that the banks had to be forced by litigation to treat their borrowers like human beings. Makes you wonder what else we could get the banks to cough up if the federal government would just hold their feet to the fire just a teensy, weensy bit?

After December, The Avalanche?

Louis XIV of France, styled the Sun King, famously opined, “Apres moi, le deluge.”  After me, the flood. He was right, of course, for his excesses so infuriated the people that his successor was guillotined and his monarchy overthrown in the French Revolution.

SoCal Plunge In Foreclosure Filings

Something similar seems to be brewing in Southern California and maybe even nationwide as lenders ratchet up their foreclosure filings after the “robo-signing” lull. Though foreclosures dropped dramatically in SoCal this fall, so, too, did all home sales. The reasons seem to be many: the end of the home buyer tax credit, stubbornly high unemployment and the generally still-moribund economy. In fact, sales are down a full 16% from November of 2009. This at the same time foreclosure filings fell 14% from the previous November after a 22% decline in October for a two-month total 36% decline. Nationwide, the filings fell 21%.

December is traditionally a slow month in real estate as consumers focus on retail buying, parties and holiday travel plans. Typically, though, also in December  smart investors are out there snapping up last-minute bargains of the now-extremely motivated sellers still on the market. Competition is almost always much less, to put it mildly, and sellers are determined to close out their books for year’s end.  This year seems to be different as even investors are holding back.

That may be because the huge drop in  foreclosure filings this fall has ominous repercussions for home prices in the new year. With the foreclosure freeze over, informed observers now expect to see the banks ratchet up their foreclosures with a vengeance, restarting filings begun in October and November and barreling ahead with new ones in January. Executives from RealtyTrac, a real estate data collection firm, speculate that the housing recovery could be set back three months, if not more, as the foreclosures pile up. In fact, we can expect ” an avalanche” of foreclosures shortly.

SoCal Home Prices

The most immediate effect of an avalanche of foreclosed properties on the market will be to further depress prices in Southern California which had started a slight upward movement. Los Angeles County home prices had dropped 1.2% over November 2009 to a median of $325,000. Riverside and San Bernardino Counties, the hardest hit by the bursting of the real estate bubble, lost 2.5% and 5.0% respectively to medians of $195,000 and $152,000. But, that is a huge improvement over the 30% and 40% drops of previous years. Other SoCal counties actually gained in value. Orange County eked out a .6% improvement for a $435,000 median home price. San Diego topped the charts with a 3.1% improvement over last year to a median of  $335,000 with Ventura County just behind at 2.7% uptick to a median of $375,000.

Future: More Underwater Homes

These hard-earned gains will soon be lost as the promised avalanche of foreclosures hits the market. Perhaps sales will pick up as buyers and investors are lured back into the game. But, bargain-hunting fun aside,  another price drop for already distressed homeowners will plunge yet more homeowners underwater.  That, in turn, spirals down into more foreclosures and more equity loss in future.

Like Louis XIV, banks see this as well as anyone, yet still refuse to modify loans in any serious way. Like Louis, they see, but, obviously, don’t give a damn as long as they get their bonuses. Short-term is the only term.

Save Money: Don’t Pay the Mortgage

Sounds awful, doesn’t it? Contrary to the frugal rules your parents taught you or maybe your grandparents. Well, the Great Depression was a long time ago and we’ve come a long way, baby. No more do trivial items like mortgage contracts bother us because, well, the other partner in the contract, the banks, are showing how little they care for us.

I’ve discussed loan mods ad nauseam in this blog. The fact is for most borrowers either the bank refuses to offer one for a variety of reasons [too much income, not enough income, current in payments] or the loan mod proffered after months of paper-pushing is too draconian for the homeowners who soon fall into arrears again.

What’s the solution?

As mentioned in a recent NY Times article, in practice passive resistance rules . Homeowners simply stop paying on their underwater mortgages. Now, living “rent-free”, they take  whatever money they have and pay down bills, eke out an existence, put it away for the post- foreclosure rent deposit  or do whatever they have to do to make ends meet.

What about the foreclosure?

Don’t the banks swoop down and grab the house throwing its occupants into the streets? That’s what most of us think of when we think foreclosure, but the simple fact is the banks are swamped. In fact, today,  the average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

In my travels I’ve met plenty of homeowners who manage to stay in their homes rent free for months, even years. Not so long ago I talked to a man whose home in the Hollywood Hills had been in foreclosure for 24 months before the bank even threatened to evict him. He also had a guest house and had been collecting rent for the entire time. By law, his tenant was allowed to stay for another 60 to 90 days, though not rent-free.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier. In California, a non-judicial foreclosure state, the process can be fairly rapid, 3 months and 21 days from start to finish. That’s theoretically and legally possible, except, again, it rarely happens. In California, the average is now 415 days and lengthening every month. The reason is the overwhelming number of defaulting mortgages.

Even in short sales, the banks seem to be in no rush to consummate the transaction as borrowers forced to wait for 3 to 6 months have discovered. In the meantime, the homeowner lives rent free or collects rent from tenants Everyone lives in a kind of limbo knowing the ax will fall sometime and some would much rather just move out and get on with their lives and reconstructing their credit reports. For  many, it may not be  much, but it is some small revenge again the behemoth banks who took all that bailout money and turned a tidy profit while the nation’s homeowners bore the brunt. Yes, a small but satisfying revenge.

New Rules: Short Sales on Steroids

The new federal guidelines for short sales, called HAFA [Home Affordable Mortgage Alternative] came into being November, 2009 and just recently became operational. Most loan servicers and banks are now using HAFA.

What’s So Great About HAFA?

Really,  what’s the big deal? Everybody knows short sales are tedious, take forever and are a last resort for the homeowner, right? Not exactly–HAFA does streamline the process, shorten the time periods and provide significant incentive s for both short sellers and their banks. In short, it’s a win-win for all parties.

If you’re a homeowner considering a short sale, then,  it’s a fairly big deal, assuming that it works out as envisaged by the federal government.  Home sellers can get up to $3000 in relocation money from the transaction. That’s very helpful to distressed homeowners who may want to rent and need to pay a deposit. And, another very big deal is that homeowners would be guaranteed from their banks to have no deficiency judgments. Coupled with the 2007 law foregoing any tax on defaulted income, that leaves short sellers really free and clear once they close escrow on their underwater properties.

What Do the Banks Get Out of HAFA?

We have to ask why would the banks want to do this? What’s in it for them? Here, too, are some very positive reasons. Banks prefer short sales over foreclosures because banks save about 20% on average by doing the short sale. This program simplifies the process, streamlines it, and allows the mortgage servicers $1500 to cover administrative costs with an additional  $2000 to the investor who actually owns the loan.  Banks do better with this program. Altogether, sellers, servicers and investors are collecting $6000 on each HAFA transaction. Not too shabby.

Now the Big One: Who is Eligible?

If your principal residence qualified for a loan mod under HAMP [Home Affordable Modification Program]  and you can’t pay or have fallen behind you are eligible. If this is an investment property or rental, you are not eligible.  If your loan is FHA or VA, you are not eligible. Both FHA and VA have their own short sale programs with different rules.

Having applied for the HAMP program is crucial. If you applied and were rejected, you are eligible. If you entered a trial period and fell by the wayside, you are eligible. If you received a permanent loan mod under HAMP and have missed at least two payments, you are eligible.

Let’s say, you discover you probably are not eligible for HAMP or HAFA, what should you do? Don’t worry. The servicer will still do a short sale; it will simply not be using the HAFA guidelines. We’ve been doing what seems like zillions of short sales for the past three years, so the process there has become more streamlined as well. If you need help or want to do a short sale, make sure to call me at 626-641-0346. I can even help if you are outside of California.

Oh-one last thing-if you are an investor who would like to purchase a HAFA short sale then flip it, you must wait for 90 days.

Here’s the National Association of Realtors’ video on the topic

NAR on HAFA

Loan Mods: What’s the Situation Now?

It’s been about a year now since the Obama administration introduced its loan mod program, HAMP, so what’s happened?
What have American homeowners been getting for our government’s $7 billion?

Loan Mods One Year Later

Aw, come on, you know the answer–not much. As usual, the big banks don’t want to play. Always ready for a handout, they pretend to go along, but never really deliver. At this point, one year later, we now have about 299,000 permanent loan mods as of April 2010, according to the US Treasury. That’s about 25 percent of the 1.2 million who started the program since its March 2009 launch. They are paying, on average, $516 less each month.

Terrible Loan Mod Results Compared to the Problem

Placed in its proper context and you will see how measly that is. We’ve already had more than 3 million foreclosures. Estimates are that about 7.5 million mortgages are in the 90-day-late situation, meaning they are most likely heading into foreclosure. So, that 299,000 doesn’t seem like much, does it, for a whole year?
But wait, it gets worse. The number of people who failed to get loan mods rose dramatically in April, up 79%, in fact. About 270,000 or 23% dropped out at some phase of the process.

Why would this be happening?

I’m sure that banks would like to point the finger at deadbeat homeowners, but that would be a lie, a big, fat lie. Having been involved in a few of these mods and receiving many calls from anxious homeowners, I can say categorically it is not the fault of homeowners. It is the fault of the big banks who make the task so tedious and so long and drawn out that anybody would get frustrated and quit.
Here are just a few of the comments I’ve heard lately..One that particularly galls me is Maria who cannot get CitiBank to give her the time of day. Why would that be? Why, she’s current in her payments, so unless there’s already a fire, this company has no interest in preventative maintenance. Then, there’s Monica who owns several investment single-family homes she was hoping would help provide her retirement. They’re all upside down now and the bank will not even talk to her because she’s also current.

Only Solution Now: Short Sale

Talk to Mike. AMHSI told him point-blank it had no interest in doing loan mods. So, he stopped making his payments and put it on the market as a short sale. Is that a better solution? Folks, that’s about the only solution left. We can all stop dreaming now that the banks will actually do these “workouts” whether they have support from the government or not. They will pretend to do them, but make the process as onerous as possible. Then, too, many who actually produce all the paperwork and wait the 3 to 6 months of processing time are refused a loan mod anyway. Why? Well, if you’re unemployed and really need one, you can’t get one because there’s no income to pay it. If you’re employed, you, like Goldilocks, need to make just the right amount of money or you’ll make either too much or too little and you won’t qualify…

I don’t think I want to write about loan mods anymore. They are a complete crock.

B of A’s Principal Reduction Plan: PR Phony Baloney

Maybe you’ve heard by now that B of A came out with a new plan to help distressed homeowners by reducing their mortgage principal. Wow, that’s sounds so great. Really, that’s what everybody thought the banks would do with loan mods. In fact, true to form, the big banks refused to drop the principal 98% of the time, preferring to add 10 years to the loan [40 year loans, enslaved for life] or to forebear collecting on part of the principal for 3 to 5 years, but never actually lowering the principal–no way, Jose!

So now, Big Bad B of A is going to be the first to do this? Yeah, right. Check the fine print and you will see that it’s mostly smoke and mirrors. B of A has gotten such rotten press in the past couple of years that they are apparently desperate for some positive commentary in the news media. And, this move has gotten some very good press.


What is B of A Principal Reduction Plan?

Simply put this plan would reduce the principal for homeowners who are at least 20% underwater on their loans. If you owe, say, $300K but your home is now worth $200K, the bank would reduce the principal to $240K and call it good. That’s what a cursory reading of the “pilot plan” would have us believe.
That’s fantastic, right? I have a B of A loan, you might be saying to yourself, how do I get in on this great deal? This is what I’ve been waiting for.
Hold your horses there, cowboy. Take a look at the fine print. First, this is a pilot program of 45,000 borrowers who have adjustable mortgages originally underwritten by Countrywide, purchased by B of A in 2008. Second, these few loans are being written down to 31% of household income or possibly to a very low interest rate such as 2% with a 40-year term.
And, borrowers would have 20% of the forgiven debt applied per year for 5 years when the lower amount becomes permanent unless the home value at that point is higher.
Are you with me so far? It’s a complicated plan, as is everything B of A does, and it would surprise me very much if it took less than 6 months to activate even one principal reduction.

What’s Not to Like About B of A’s Principal Reduction Plan?

As indicated, right now it’s merely a pilot program announced with a big fanfare–front page on the L.A. Times–geared to garner the most good PR for the worst of the big banks. Here are just a few of the many issues involved in the effort to lower principal.
Mainly, I would say this bank is trying to protect itself from the barrage of forensic loan audits now in the pipeline which show these types of loans—stated income, adjustable, negative amortization, etc—were actually fraudulent. To avoid lawsuits, if the bank can change the terms of the loans, it becomes lawsuit-proof.
Another major issue concerns secondary liens. What are the second lien holders going to say about principal reduction which essentially wipes out their stake in the property?During the heyday of these loans [about 2002-2007] most of the adjustable loans were 0% down, a first loan of 80% of the purchase price and then at a higher interest rate a second loan at 20%. That eliminated the dreaded PMI [private mortgage insurance] on the 20% value and also set us on our way into the present loan morass. Most of the seconds around Southern California done in this way are already essentially wiped out as home values have dropped 30% to 50% almost everywhere. But, in a short sale, for instance, the second loan holder typically gets something. Now, B of A would just tell them—“Sorry, you’re out of luck. We’re reducing the loan and wiping you out”?
To add to the mess, most of the second loans and many of the first loans were sold in pieces through the so-called mortgage-backed securities bundled up by the big Wall Street firms and flogged all over the world. It’s difficult to see how simply wiping out this debt obligation would be acceptable.
Have a B of A loan and hope is surging? Don’t hold your breath.

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Obama’s Housing Plan: Problems for California

Obama’s recently announced Housing Stabilization Plan is good as far as it goes, and it goes $25 billion worth. California will get a good chunk of that taxpayer dough, but many homeowners here will not be able to benefit from the plan.

Refinancing becomes an option for some because Obama’s plan allows for refis up to 105% of equity. Say you owe $300,000 on your home. You could borrow up to$315,000. That’s a better deal than the normal 80% of equity allowed for a refi, but it’s hardly going to help much in California where prices have tumbled 25% to 50% or even 70%, depending on the area,   in a bit over a year.   Plus, of course, anyone who refinances must have the income to qualify.

Then, there’s the loan modification option, also sweetened considerably by Obama’s plan. For one, borrowers who have struggled to stay current are now eligible for loan mods as well as those who have missed payments. Here’s the problem, though, if you want a loan mod, you need to show income and unemployment is not acceptable. With California’s zooming unemployment rate, many who need loan mods won’t be able to get them for lack of income. Across the country, nearly 12% of homeowners are in arrears on their mortgages or already in foreclosure. This is a disaster not only for the homeowners, but for all of us . In California, the latest figures show 13% in arrears or in foreclosure as compared to, say, Florida where 20% are in that position. .

Besides job loss, another huge factor is loss of value. Estimates of homes  with  negative equity vary, but it’s around  12 million homeowners, about 25% of all homeowners in the U.S. either now owe more than their homes are worth or are within 5% of being so. Almost 2 million Californians are in that unfortunate situation with about 300,000 in the L. A. area. A research firm, First American CoreLogic, estimates that 723,000 California mortgages are in “severe” negative equity with loan amounts 125% or more of the home’s value. That’s about one-third of the country’s 2.2 million such loans.

house-in-watersmall

Other states have greater percentages of loans in trouble, but smaller populations and so fewer loans. Nevada, for instance, has 330,000 underwater loans, very similar to the L.A. area, but that represents an astounding 55.1% of all loans in Nevada. Michigan, economically sick for a long time, has 459,000 such loans or 40% of all loans in the state. Arizona has 31% of its loans underwater or 407,000. Florida, far more populous, has 30% of its loans in negative territory, but that’s 1, 284,000 loans. California, as mentioned, has 1, 900,000 or 29.5% of its loans underwater. Thus  the Big Four which  account for almost half of all the foreclosures in the nation. Rounding out the top ten are Georgia [23%, 335,000], Ohio [23%, 435,000] Colorado [21.5%, 225,000], New Hampshire [20%, 33,560] and Virginia [19.6%, 219,282].

Obama’s plan will help California, but, clearly, with our gigantic population so many cannot be allowed to go under. Obama and company need to come up with more creative ways to help California’s underwater homeowners.

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