Keepin' It Real Estate: Do Loan Modifications Work?
With millions of homeowners falling behind on their monthly payments, one in 6 underwater, and countless more struggling to keep up, politicians and banks alike are jumping on the loan modification bandwagon.
A modification -- or “mod,” as it’s known in the industry -- is simply the bank agreeing to change a borrower’s loan to make it more affordable. Mods usually result in a lower interest rate, principal forgiveness or some combination thereof.
For banks, adjusting loan terms is a way to keep cash coming in the door - even if it’s less than they’d been hoping for when they originally wrote the loan. For troubled borrowers, mods can provide an alternative to default and eventual foreclosure. It’s for these reasons that FDIC Chairman Sheila Bair and big banks like JPMorgan (JPM) and Bank of America (BAC) are aggressively promoting mods as the best way to fix the housing market.
The flood of troubled mortgages has also fostered a cottage industry that caters to distressed borrowers. Some are honest folks aiming to help struggling borrowers by using their mortgage expertise and contacts to negotiate better deals on behalf of their clients.
Others, however, are less upstanding.
According to Mandana Nejad, a real estate attorney and founder of Silver Lining Legal Group, a loan modification firm based in California, troubled borrowers have a lot to be wary of. 
"Most loan modification companies are compromised of former lenders and brokers who put homeowners in these horrible loans in the first place," says Nejad. "Meanwhile, credit repair and debt consolidation firms are simply out to collect fees, regardless of whether or not they can actually successfully modify a loan."
Last year, the Bush administration formed HOPE NOW, a government-led effort to get banks and the loan servicers who collect payments on their behalf to step up loan-modification efforts. By most accounts, results were underwhelming, as HOPE NOW counselors often asked for too much, and banks gave too little.
Data show that mods done at the outset of the mortgage crisis ended up in default, despite the lower payments. Without proper screening criteria, mods simply delay the inevitable.
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http://www.nytimes.com/2008/11/02/business/02gret.html?_r=1&em=&adxnnl=1&oref=slogin&adxnnlx=1225994463-rtGvLuklgS5LP/WMjXCDEA
Dig a little...I've read a few articles from insiders who tell it like it is. Of course now I can't locate them, this one took about five minutes to locate and it is fairly new from Saturday.
This is JUST WAMU, the largest S&L in the country before implosion. Do you think NO ONE else was involved? The whole reason a large leader like this gets dirty is competition. The regulatory landscape was completely lacking and the door was open for profit margins to implode per deal as competition reduced your irate over the last five years. Lenders were forcing each other to take a closer step to the edge until the marginal lender fell off.
There is no silver bullet that wraps this "problem" up neatly. There are levels of analysis and fraud is one and it was pervasive. Talk to your local ghetto and tell me it wasn't fraud. Get in touch with the street and see actions, not thoughts and ideas.
The $8 Billion settlement against Bank of America is a start. There countless stories of it, but my statement about fraud comes primarily through my own experiences, and the loans I saw during the boom.
Whether it was falsifying income, inflated appraisals, straw buyers, or just outright fake loans, fraud wasn't just prevalent, it WAS the mortgage business. Not every loan was fraudulent, to be sure, but fraud existed at every step in the process.
Andrew
The Lender should allow the loans to go into default and then foreclosure. At foreclosure the existing homeowner should be offered the rental of the home at market prices. He has no equity anyway so he is not out any cash.
The lender should take possession of the property and contract with a management company to manage the property. If the existing home owner cannot afford the rent then he is replaced by someone who can.
The lender then has a real asset on the books that is performing although not as well as before. If the asset inceases in value the the lender recoops part of his investment and if it eventually is worth more than the lenders cost it can be sold for a profit. This keeps the home from being vacant and the asset deteriorating.
The lenders don't really want to be in the rental business, but in this case it is the only way to preserve the asset.
If the home sits vacant it with be trashed and its value reduced to nothing. This has already happened in many cities.
Clyde
I think you're idea is a good one, it makes sense for all parties -- except possibly the banks. As you point out, they are not set up to rent out properties, they don't have the infrastructure and the return is much lower than the mortgage (usually).
That's one of the reasons banks until now like to trade these delinquent mortgages away to hedge funds and other investors.
But you are exactly right that one of the problems with delinquent mortgages is that homes often get trashed, compounding the problem.
Appreciate the comments!
Andrew
Consider the lesson it imparts to promote bailouts to the reckless. City by city, neighborhood by neighborhood, people who live beneath their means and manage money carefully will see more careless neighbors supported by federal decree. And what about the 30 percent of this nation who were smart enough to rent? Or how about the large percentage of us who have been giving warnings out to these same people the government now wants to redistribute my taxes to so they can stay in a house twice the size the home I live in. Those who are current on mortgage payments, but still squeezed, may be tempted to let two or three payments slide, so they can negotiate money-saving terms on their own mortgages. The backlash to the 700 B bailout package was not only because of the bailout of wall street but also the bailout of the reckless homeowners and their relentless ATM/HELOC spending. As it is now these people can live in their home for over a year rent free while they find a home they should have been living in from the start.
We are becoming a nation of people who feel it is not only okay but justified to cheat, lie, and swindle each other and the rest of the population. Personal responsibility is discouraged by the government and the mainstream media. White collar crimes are rarely prosecuted because FBI is so stretched. Our nation is eating ourselves from within just to keep a facade of prosperity. Hope is being replaced by anger and desperation. Welcome to the new dawn.
mortgage fraud blog:
http://www.mortgagefraudblog.com/
chick who wants a bailout but has foreclosed on 7 homes already..
http://www.nbcsandiego.com/news/local/Woman_Fights_Foreclosure_Chains_Herself_to_Home.html
The other problem is that the banks are not being proactive..again..like our goverment instead of fixing the dam before it burst, they are putting fingers into the leaks hoping to stop it..when we still have a TON of arms adjusting which will be peaking in 2011...they are ONLY willing to TRY TO ASSIST homeowners who are behind in their payments. Banks should be looking at their records, seeing who will adjust in the next 12 months and set up call centers to contact those homeowners to offer assistance. The way we are handling this situation, I expect Loan Mods to become a semi permanent part of our vocabulary till 2012...
