Homeowner Workouts Reach Record Level

Mortgage servicers provided loan workouts to approximately 183,000 homeowners in April 2008, the highest monthly amount since the program was begun in July 2007. This is an increase of 23,000 from the number of workouts in March 2008. Since July 2007, the industry has helped almost 1.6 million homeowners avoid foreclosure through workouts which include loan modifications and repayment plans. Approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications. Approximately 603,000 subprime loans were scheduled to reset between January and April 2008. 5.0% of these loans have already been modified. Nearly 63% of these modifications are for 5 years or longer. 45% of the subprime adjustable rate loans that were current at reset were paid in full when the homeowner refinanced the loan or sold the property. A limited amount - 0.3% - of the loans that were current at their date of reset have started the foreclosure process.

Persistence Pays Off When Loan Modification Saves House and Credit

A loan modification is a change in the loan contract agreed to by the lender and the borrower. The modifications getting attention now are those designed to reduce the payment burden on borrowers faced with impending interest rate increases that will make monthly payments unaffordable to them. Many are subprime borrowers.

Homeowners faced with this prospect, whether they are delinquent or not, should request a modification.

You are unlikely to get such a change if you don't ask, and you should make the investment required to make the case. The stakes are very high: your house and your credit.

In most cases, the decision on a modification is not made by the firm that owns the loan. It is made by a firm servicing the loan under contract to the owner. The owner could be a single lender, or it could be a group of investors who own pieces of a mortgage-backed security collateralized by a pool of loans.

Whoever owns the loan, the servicing firm is contractually obligated to find the solution to payment problems that will minimize loss to the owner. If the lowest-cost solution is a contract modification, that's great -- everyone involved prefers a modification instead of a foreclosure. But if a foreclosure would generate lower costs for the owner, the decision will be to foreclose. The cost of foreclosure to the borrower does not enter the decision.

Yet the decision is far from cut and dried, and it can be materially affected by whether and how the borrower presents his case. I discussed this issue with Warren Brasch, a lawyer who represents borrowers seeking loan modifications. Our combined observations:

Equity: Perhaps the most important factor affecting the modification decision is the amount of equity the borrower has in the property. If the borrower has enough equity in the property to pay any deferred interest plus foreclosure expenses, foreclosure is almost bound to be the lower-cost solution.

Equity depends on property value, which the borrower is much better positioned to know than the servicer. The borrower knows or can easily find out how many houses in the neighborhood are for sale and what the trend has been in recent sale prices. In a weakening market, it is easy for the lender to overestimate value, and the borrower must prevent that.

Moral hazard: Servicers fear that if they are liberal in granting modifications, borrowers who don't need a modification will seek one anyway. They protect themselves against this by entertaining modification proposals on a case-by-case basis, while placing the burden of proof on the borrower.

Borrowers must accept the burden of proof. In addition to the data on property value, they need to document that they cannot afford the payment increase that is pending, and they must document what they can afford.

To do so, borrowers should calculate their total debt ratio: the sum of mortgage payment, other debt payments, property taxes and homeowner's insurance as a percent of their gross (before tax) income.

This number should be calculated as it stands now and as it would be after the rate adjustment. It should also be calculated to demonstrate what the borrower can afford. On the last, Brasch suggests that a servicer may be willing to accept 45 percent as a reasonable maximum.

Servicing cost: Servicers have an interest in minimizing modifications because they add to costs. They try to keep costs down by computerizing the servicing process to the greatest degree possible and standardizing customer support procedures so that low-paid and easily trained employees can perform them.

Modifications must be handled by a special group who are more highly trained and better-paid, and the increased cost of expanding their number cuts into the bottom line. Hence, there is a tendency to be nonresponsive in the hope that the borrower will go away.

Borrowers have to be persistent. Brasch said: "If a servicer says they will call you back . . . forget about it. You need to call them and call them constantly. They will lose your paperwork, fail to return calls, put you on hold and then hang up. It's what they do. Keep fighting, calling, faxing. This does work!"

In deciding whether a modification would be less costly than a foreclosure, servicers usually ignore an asset possessed by the borrower that could tilt the balance toward modification. This is the right to future appreciation in the value of the borrower's house.

In exchange for a modification that might otherwise be more costly to the owner than a foreclosure, the borrower could pledge a percent of the future appreciation, which could shift the balance to modification.

Distributed by Inman News Features

Loan Modification Secrets Uncovered

Want to save thousands of dollars when changing loan terms? "Modifying" a mortgage rather than "refinancing" can put big money in your pocket and eliminate complex and costly closing rituals.

With a loan "modification" you take the mortgage you now have and change the interest rate and payment requirements -- just like an ARM. And just like an ARM, a change in rates and payments does not result in the need for a new closing, legal fees, survey, appraisal, or taxes. In contrast, if you "refinance" a loan you'll be required to have a closing and forced to pay a variety of fees and taxes.

Last week's column discussing modifications resulted in many requests for additional information, so here goes:

Question: Can all loans be modified?

To modify a loan requires the agreement of both lender and borrower. Since a loan modification request typically results in less interest, many lenders -- if not most at this point -- have little incentive to just say "yes." However, as the concept of loan modifying becomes more widespread, lenders can be expected to increasingly approve modification requests.

Question: I borrowed $100,000 several years ago and would now like to increase the loan amount to $150,000. Can a loan modification work in this case?

When a loan is recorded there's typically a tax based on the mortgage amount. Thus if a loan is modified and the interest rate, monthly principal, and loan length are changed, there is no event to tax. But if the mortgage amount increases above the original principal, then a state government will likely see "new" financing and something to tax.

A second reason that loan amounts likely cannot be increased with a modification is this: Suppose a home has two loans, a first loan used to acquire the property and a second mortgage, perhaps a home equity loan. In this case, if the size of the first loan increases, the security of the second lender declines.

When a home is foreclosed all money is used to pay off the first loan holder. Any remaining money is used to settle the claims of the second lender, and then the third lender, and so on. If there is little or no money left over after the claims of the first lender have been satisfied, the other lenders lose.

If we increase the size of the first mortgage, we also unfairly increase the risk of any second or third lender.

Question: I can refinance with no closing costs so why should I look for a loan modification instead?

There is a difference between "no closing costs" and "no costs." In your situation, the lender is paying your closing expenses. The lender must get that money from somewhere, and that "somewhere" is your loan in the form of a somewhat higher rate than might otherwise be available, a larger loan amount, a prepayment penalty if you quickly refinance, and perhaps all three.

Question: My lender will allow me to modify my loan, but only if I get a new appraisal. Why should I pay this cost?

Because it's not unreasonable, it's cheaper than refinancing, and it assures the lender that the property has sufficient value to justify continuing the loan.

Question: If a borrower can ask for less interest when rates go down, why can't lenders ask for more interest when rates go up?

They can -- and you can say "no."

The goal of the lender is to make more loans and generate more income. The goal of the borrower is to have less debt with less cost.

The reason for a lender to accept a loan modification request is to continue the loan and the stream of interest and servicing revenue it represents. If a modification request is not accepted, perhaps you'll refinance elsewhere.

Borrowers have different motivations, and since a fixed-rate loan agreement is in place and favorable to them in a rising market, consumers have no incentive to accept higher rates -- unless a lender would like to make some concessions.

Question: Other than money, why do lenders prefer "refinancing" rather than a loan modification?

Replacing an existing loan with a new mortgage can substantially impact lender risk. For example, if you live in California and buy a home with a new loan, your financing is generally considered a "purchase money mortgage." If you're foreclosed or go bankrupt, the lender gets back the house but cannot sue you for any shortfall. However, if you "refinance" you no longer have a "purchase money mortgage" and a lender can seek a deficiency judgment if you're foreclosed.

Question: I have a lender who will agree to a mortgage modification. Do I just write them a letter to create the new terms?

You want your attorney to review any proposed loan changes before signing anything.

Question: Are loan modifications a new concept?

The The Common-Sense Mortgage (HaperPerennial) in 1994 and in later editions discussed the concept in detail -- and surely there were other sources which earlier described loan modifications

by Peter G. Miller

Analysis: Home Values Fall in 84% of Markets

Global Insight, an economic forecasting and analysis firm, has reported that home values fell in 84% of the nation's housing markets during the first quarter. The company said home values declined nationally for the third consecutive quarter, dropping at a 6.7% annualized rate. Of the 330 markets covered by Global Insight's housing analysis, 262 saw values decline in the first quarter. Markets in California, Florida, and Michigan saw the steepest losses in the analysis. The company said a slowdown in the sale of expensive homes, the sale of a large number of foreclosed homes at a discount, and tighter mortgage underwriting standards have all contributed to the national price decline. On the bright side, Global Insight's James Diffley, a group managing director, said that fewer markets are now overvalued. "The large price adjustments we have seen are precisely what was required before we could begin to talk of recovery," he said.

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