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What’s next if Obama’s loan mod plan fails?
October 21st, 2009, 11:35 am · 26 Comments · posted by Mathew Padilla
Kate Berry, a reporter for American Banker, writes:
At the mortgage industry’s biggest gathering of the year, servicers went out of their way to lower expectations for the government’s loan modification program.
A common refrain was that many of the 500,000 borrowers who have begun trial modifications may not make the cut for a permanent modification because they have not submitted all of the required paperwork.
“Ninety-nine percent of the loan mod packages that get returned to servicers are either missing some of the documentation necessary or have errors in them,” Michael W. Young, the chairman of Cenlar, a Ewing, N.J., subservicer, and the vice chairman of the Mortgage Bankers Association, said at trade group’s convention in San Diego last week.
Similarly, Jerry McCoy, the vice president of business development for national servicing at Fannie Mae, called “borrower engagement” a major challenge for the Home Affordable Modification Program.
“There are still a great many borrowers that would qualify if they would just call back,” he said. “How do we improve pull-through rates?”
Much is at stake in the next two months. The Treasury Department is expected to report the results of the first trial modifications in early November and early December. If the pull-through rate is low, the industry may face another backlash. That may help explain why servicers are talking down expectations for the program now.
“The servicers are very concerned about performing under HAMP, but nobody knows what’s going to happen if the mods fail,” said Chris Sabbe, an executive vice president at Sterling Home Retention Services, a provider of loss-mitigation services in Altamonte Springs, Fla.
For example, though the mortgage industry defeated bankruptcy cramdown legislation in April, there is a sense it would be revived if modification efforts fail.
“I think there is still a concern that bankruptcy cramdown is going to be revisited,” said Michael Waldron, a partner at the law firm Patton Boggs LLP. “No one takes comfort that it won’t be raised again and will be attached to the failure of these efforts.”
I took the above from National Mortgage News.
In this case, cramdown refers to giving a bankruptcy judge power to change the terms of a mortgage, such as by lowering the debt owed to current market value. Cramdowns could help eliminate the risk of another credit fiasco and keep some homeowners in their homes.
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- Biggest mortgage insurer reports loss, 14% dud loans
- Buy now, refinance later at your own risk
- AG Brown to enforce ban on advance fees for mortgage aid
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- Obama program mostly delays foreclosures, firm says
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I have been consulting recently with some servicers who shall remain nameless and the HAMP program is not working. The BK cramdown would help but it is not something they will depend on. Now the next best thing is Short Sales. This is on the way to becoming the best way to dump all the bad loans as mods just will not work. A mod can be done today, but it will be useless tomorrow if the person does not have a job tomorrow!
Lou Pacific
Real Estate and Mortgage Company Consultant
Serving the Industry and OC for over 30 years.
Regardless of whether it is “working” in terms of getting people approved for modifications, it is NOT working in terms of rescuing borrowers that are in over their heads. The high re-default rates on prior modifications are proof.
People should just attempt a short sale or accept foreclosure and move on with their life. We can’t bailout everyone.
http://www.beyondthemargin.net/2009/09/keynesian-economics.html
Lou,
You hit the nail on the head. Treasury has already said it will offer a short sale program, paying folks $1,500 for moving expenses. I posted on that:
http://mortgage.freedomblogging.com/2009/10/03/here-come-the-short-sales/19015/
Since short sales aren’t that much better for homeowner’s credit, a short sale program is to help the banks clear bad loans off their books more quickly and for less of a loss than foreclosure.
Are the banks willing to accept those short sale offers more quickly now, or do they still expect buyers to wait 6 months?
At least we can claim that the next wave of foreclosure is not going to materialize. Hopefully, with short sales, the properties will be in much better conditions since the owners are still occupying them.
Well that should be interesting ,a 16 month supply& building ,4 to5 months to short sell a house , ( System Over Load ! )
wait.. all those people with stated income loans cant actually verify they made as much as they stated?!?! say it isnt so! I’m shocked and horrified that people could possibly LIE on a loan application!
It ought not to be the Govt’s position to meddle, if they had not tried to “increase home ownership” in the first place there would be no mess to mop up. Poor people can’t save money and typically skip paying bills and virtually always end up renting. I think the tax dollars of the upper classes are wasted enough on them without creating yet another costly “intervention” that will do little to alter the realities of this.
Has anyone given any thought to decreasing foreclosure timelines? I mean… since most agree that mods are not working as planned, why not get the garbage out sooner rather than later. Isn’t that how you get on the path to recovery? Plus it would be quicker and involve less guesswork than with a short sale.
Alabama’s FC Timeline is 30 days… I’m just sayin…
Cramdowns or outright principal reductions (whether or not someone lied on the application) are coming next - whether you like it or not.
It will cost hundreds of billions, if not trillions in taxpayer money to bail out the lenders that hold the paper, or the Fannie/Freddie/Ginnie bond holders that would otherwise take it in the shorts.
You and I as taxpayers will pay significantly higher taxes to pay for it. Or the Fed will just print the money and everyone’s standard of living will go down due to hyper-inflation.
Stop using logic and/or fairness in your arguments - it is only holding you back from understanding what is coming…..
But it IS logical to say that principal reduction sucks and will not work in the long run. If the government forces banks to reduce principal, then everyone would just go out and buy a million dollar home because, hell, the government will lower my principal to nothing.
I’m actually ok with principal reductions on one condition: its registered as an MLS sale and usable as a comp.
“Ninety-nine percent of the loan mod packages that get returned to servicers are either missing some of the documentation necessary or have errors in them,”
This statement is melodramatic and an outright lie. Since it came from an MBA spokesman, there’s definitely an agenda involved.
In answer to the question, most borrowers that don’t finalize through the Obama program will be offered mods outside of the program, simply because they will be easier to close once you remove the administrative hurdles involved.
I disagree with Lou about mass short sales. If that was the answer, lenders could have implemented that policy more than 2 years ago.
Principal mods are the only palatable solution for the Feds Liar Loan……..
I hope you don’t make more than $30k-$40k per year, because your taxes are going to go way up to pay for them…..
Focusing on principal reduction alone is short sighted because property values may continue to fall. A short sale is preferable to a principal reduction mod because the end result is the same, except the loan is off the books and no further losses will be incurred.
There are not nearly enough people to buy all of these “short sales” that you speak of - at least not without prices coming WAY down. Prices have dropped anywhere from 25-50 percent and sales have hardly increased!
The Feds know the score…….why piss off a bunch of voters by making them sell their home and then have to bail out the lenders/Fannie et al. They have to bail out the lenders anyway, so you might as well let millions of voters keep their homes and cut the principal in half.
If values go down, they’ll just do another principal reduction and print more worthless money.
If you do it your way, then all you do is anger the home debtors and further depress prices.
Not.Gonna.Happen
“If you do it your way, then all you do is anger the home debtors and further depress prices.”
If prices go down when that happens then maybe they are too high in the first place. It seems to me that if prices were correct for the economy, then healthy buying would be taking place. Anything that distorts this only induces inefficiencies into the market. Almost 3 years after the bubble started popping and we’re still in the middle innings….we could have been out of this crap by now.
Liar loan the statement has a great amount of truth. I work at a bank doing various audits. So I audit loans to make sure that the business unit I am auditing is doing what it needs to do per regulations.
I have done audits for loss mitigation and I can tell you for fact that a large majority of potential modification never come to pass because of borrowers sending in incomplete Mod docs, filling them out wrong (because they dont know how to follow directions) and failing to pay any $ that a mod may require as a down payment or payment of fees (legal or otherwise)
So incomplete mods are a big part of the problem. I mean its not that far of a reach when people never read things before they sign them let alone reading written instructions and following them.
If principal mods were to become common, then we will see defaults en masse. People will lie through their teeth to get a reduction in their interest rate; if they think they can reduce their principal as well, then the system will burst. (It may be bad now, but it could become dramatically worse.)
Yep!
By the way, even when the HAMP mod “succeeds”, in my opinion they are mostly big failures.
I personally have run the NPV where (based on income provided by borrower) we are lowering the P&I payment from ~$1000 to $179/mo. So that the total PITI is no more than 31% of their “income”.
How is this fair to the investor? How is this fair to the rest of the taxpayers that will one-way-or-another foot the bill?
Government programs are inherently flawed and create anomolies like this since it’s one-size-fits-all.
Matt,
Please define “fail”. Do you mean “not work”, “ineffective” or “have unintended consequences”?
These programs work very well. They are not meant to stop foreclosures just as “cash for clunkers” didn’t have anything to do with saving the environment. These programs are meant to take from those who work/save and give to those who are connected.
These bailouts are thefts. They must be stopped before we are all economic slaves.
Unfortunately, all of you robots will go to the ballot box and vote democrat or republican because that is what you did last time.
The following criminals should be in prison: Ben Bernanke, Hank Paulson, Alan Greenspan, George Bush, John “Bailout” Campbell, Barak Obama, Nancy Pelosi, Dianne Feinstein, Barney “Tax Cheat” Frank, Timothy “Tax Cheat” Geithner and every other politician who voted to devalue our nation for their own gain.
Republicans are TRAITORS but if that happened who would be running our country? There would be no one left.
Well, at least we know that whoever stepped up to fill the void would have the fear of God in them.
High levels of over priced inventory relative to income means lower prices and continued rounds of foreclosure waves.
Homeowners need help keeping their homes — they didn’t create an economy that is continually laying off good/loyal workers. This economic crisis has forced layoffs and it is disgusting that some people on this forum don’t see that many people in crisis would not be here if the economy hadn’t gone by the wayside. Have you not been seeing the people that are needing assistance..smart, professional, able, personable people. If we just let everyone go into foreclosure, where will that really leave the US? We already don’t have healthcare and now we want to throw good people on the street. Remember, these are people that are trying to get employment. Instead of wanting to throw families out in the street, why don’t we stop bailing out corporate giants who are getting bonuses and living the good life.
Remember in this economy, you could be next. You may want to help those in need so that you won’t be in the same position.
Is there any help for trial loan mod customers who want to sell but can’t even get a $50K mortgage? Our credit reports say: “30-60-90 days past due” and “repeatedly past due” and “recent payment zero” from unfair reporting to credit bureaus. Never missed a payment, never late, and never moving on….
Fannie Mae should read the Fair Credit Reporting Act.