Posted on November 3rd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
BANKS MAY BE GIVING IT AWAY SOON…finally! But be careful. If it is too good to be true, it generally is. There are very strict rules you should adhere to when getting a mortgage modification. For those of you not wanting to read the rest of this post, check out the YouTube version by clicking HERE.
Mortgage modifications are finally in the limelight because that is the only way out of the nation’s default and foreclosure crisis. All of a sudden, several politicians and banks have a ‘plan’ most of which will be doomed to fail from the onset. That is unless they adhere to a strict set of guidelines and essentially use modifications to undo all of the damage that was done through mortgage loan program leverage and artificial affordability over the past six years.
At Mr Mortgage and The Mortgage Lender Implode-O-Meter, we endorse Green Credit Solutions or GetGreenCredit.com. They are pioneers in this space and reports on positive outcomes I get out of there daily astound me. Before you accept a pre-packaged government or bank proposed mortgage modification that is likely not the best deal you can get, you need to get a second opinion. Green Credit will give you a free up front consultation on your specific case, so it is worthwhile to check it out. There are other reputable modification firms out there but there are a lot of frauds - be careful.
I have been telling you for a year that the only way through this mess is to re-underwrite every single loan made between 2003-2007, especially anything that is not a full-doc 30-year fixed not underwater vs. value. Currently, there are roughly $7 trillion in loans still on the book made during the years in question. Even borrowers with 750 scores who put 20% down and got a a 30-year fixed are walking due to excessive allowable debt-to-income ratios at the time the loan was made and negative equity, as values are down as much as 75% in some of the harder hit areas in the bubble states.
For all of you who ‘did nothing wrong and are being punished’, I sympathize. Unless an effective, large scale mod effort at all banks is implemented and well-received by borrowers, housing will have a decade of pain ahead that will hit you hard as well. All that a loan mod effort does is expedite revaluation and de-leveraging process so we can move on. The leverage has to be drained from the residential real estate market or the economy will not recover. If the trillions given to banks and everyone else would have been spent here in the first place, the problem would never have become this bad in the first place. You will pay for all this one way or another. Paying to de-lever borrowers and expedite the real estate revaluation process will trickle back to you to a much greater degree than any other program I have heard yet.
Mortgage modifications come in all shapes and sizes. But it is my opinion that unless the borrower is re-qualified on a market-rate 30-year fixed rate loan with a debt-to-income (DTI) ratio of 28/36 and their loan amount dropped accordingly, it has a high likelihood of failure. Remember, what makes most of the loans originated in the past six years so shaky other than exotic features such as stated income, interest only and high-CLTV is the high allowable DTI ratios. Most ‘Prime’ loan programs allowed up to a 50% DTI ratio meaning half of the borrowers GROSS income is going out every month in debt. Many added a second mortgage, cars, boats and lots of other consumer debt pushing DTI’s much higher.
Re-underwriting and reducing principal balances according to what a person actually earns undoes the past five years. At 28/36, the borrower becomes de-leveraged, is able to maintain a decent lifestyle, save money, will pay down principal and ultimately own their home one day. 28/36 is time-tested whereas 50% DTI was a product of the leverage and asset bubble years. At 28/36, if home values drop borrowers are less likely to walk away because they are not totally leveraged to their house and able to save money.
There are millions of ‘Prime’ borrowers in the nation and in a town near you, fully leveraged and not saving a penny as all of their after tax income and more is going out to pay down loans on depreciating assets.
This is all fine and dandy when your home value is going up $100k a year. But when asset values plummet the fastest way to de-lever is to lose the largest expense, which is the underwater house. All that they have to do is make the decision to rent a similar home for half the monthly amount and they get their life back. Once they make that decision they can live in their home for free for a year during the foreclosure process.
The banks and servicers finally understand all of this now that they have seen first hand that the Subprime implosion has jumped tracks to higher paper grades. Sheila Bair at FDIC finally understands this after seeing IndyMac’s portfolio up close and personal over the past six months. Now, they are all trying to get ahead of the future implosions through proactive loan modifications. A proactive modification is simply the bank reaching out to you offering you a solution. Whether that solution is the right one for you specifically is the tough question, that I suggest you seek professional help answering.
Chase released the following loan mod news today, which the market celebrated. What they didn’t tell you is a program like this could take years to get through. The FDIC has already started a proactive loan mod inititiave by sending 20k solicitations to IndyMac borrowers and only 3500 responded. That is likely because of the pervasive fraud that is not isolated to IndyMac. Chase will likely run into similar challenges.
IndyMac has gone so far as to include securitized loans, which is something that will make all mortgage securities originated during the bubble years less attractive to investors.
“Initially, the program was applied only to mortgages either owned by IndyMac Federal or serviced under IndyMac Federal’s pre-existing securitization agreements, which provided sufficient flexibility,” she (Bair) said in prepared remarks to the Senate Committee on Banking, Housing and Urban Affairs. “However, with their agreement, we are now applying the program to many delinquent loans owned by Freddie Mac, Fannie Mae, and other investors.”
It is uncertain what the Chase program entails but typically the banks only offer what’s best for them and not you for the long run. I am assuming this program is to rid themselves of WaMu’s Pay Option ARMs and Subprime loans before they implode. Remember, they already wrote these loans down substantially when they acquired WaMu so giving borrowers a 35% principal reduction for example, could actually turn out to be a profitable move. Principal balance reductions are generally tough to squeeze out of banks because it involves the bank taking a direct credit hit.
The fact is unless banks re-underwrite each loan to a strict guidelines of 28/36 debt-to-income ratios the programs will not work. If they just offer some 5-year interest only teaser rate that is the most popular loan modification currently, they just kick the can down the road and set the borrower up for disaster than. Giving a short-term teaser bailout also incents others to do whatever possible, including becoming delinquent, to get something.
If you know what you are doing you may be able to get a great deal out of any proactive loan modification offer because you hold the cards. If not, call Green Credit and let them work this out for you:
source: mr mortgage
Fort Lauderdale Real Estate Blog & Homes for Sale
Rory Vanucchi
RoryVanucchi@gmail.com
Posts
