Posts Tagged ‘foreclosure crisis’

HAMP: Borrowers Not Getting A Fair Shake From Servicers

A recent GAO report reveals what many critics of HAMP have long known  to be true: servicers are not treating borrowers fairly and uniformly when it comes to getting a HAMP loan modification.

The GAO found several areas of inconsistency that could result in inequitable treatment of similarly situated borrowers:

  • Because Treasury did not include guidelines for borrower solicitation into the HAMP program until after a year since its inception, servicer outreach to borrowers ranged from 31 days to more than 60 days into a delinquency. Similarly, there were no guidelines for borrower communication, resulting in long delays for responses to borrower applications and for information on the program.
  • Although part of the HAMP program was meant to reach out to borrowers before they fell behind on payments, no guidelines have been issued regarding what “imminent default” means. As a result, of the ten servicers surveyed, the GAO found all of them had 7 different criteria for determining “imminent default.”
  • Treasury has issued no guidelines for servicer internal quality assurance to ensure compliance with HAMP guidelines. Some servicers aren’t reviewing denials to ensure that they are just.
  • Treasury has not adequately made borrowers aware that the HOPE hotline may be used to raise complaints regarding how servicers are handling HAMP modifications.
  • Treasury has not established clear consequences for servicer non-compliance with HAMP guidelines.

I hate to sound like a broken record, here, but there is one major overriding reason why HAMP is not working out too well: it is a voluntary program with no teeth. Relying on servicers to help borrowers when the relationship between servicer and borrower is adversarial is like using a fox to guard the henhouse and being surprised when all the chickens are gone the next morning.

In a foreclosure situation, the interests of the borrower and the servicer are completely misaligned: the borrower needs payment relief to be able to stay in the home, or barring that, a way to sell the home and leave with a little money to start over somewhere else. The servicer on the other hand, primarily wants to make as much money as it can, and secondarily, it wants to ensure that the investor gets the best rate of return.

Prior to HAMP, loan modifications were rare and servicers, in general, were loathe to even discuss them. Loan modifications cost the servicer  money on the front end,  and result in a diminished rate of return for the investor. HAMP was supposed to address this issue by giving servicers and investors incentive payments to make modifications a more attractive option than outright foreclosure.

It hasn’t quite worked out that way. The incentive payments provided by HAMP remain a drop in the bucket as compared to what servicers can generate by foreclosing and considering that servicers and investors still view loan modifications as a last resort, they truly can’t be expected to willingly modify even a percentage of their portfolios.

Until the government forces banks to modify all delinquent loans, without concern for profits, either to the servicer or the investor,  the foreclosure crisis will continue to plague us and our economy will suffer the consequences.

Fannie Mae Fall Out

In a New York Times article today, lending experts sounded off concerns about Fannie Mae’s new hard line approach toward strategic defaulters.

For one, the experts say, in a time where the banks, including Fannie and Freddie, received big taxpayer bailouts, it is going to be hard to convince borrowers that they should end up stuck with the tab. For another, they wonder how Fannie intends to weed out those who strategically default from those with financial troubles.

The experts were also puzzled about just what Fannie intends to accomplish. Fannie spokespeople have said that they want to force people to work with their servicers on alternatives to foreclosure such as lender approved short sales and deeds in lieu. However, as I have pointed out  in yesterday’s post on the subject,  lenders and servicers have proven completely unwilling to work with borrowers on so called “foreclosure alternatives.”

Furthermore, this policy does nothing to address the negative equity problem, known colloquially as being “underwater,” where a borrower owes more on his home than it is worth. As the article points out:

About a quarter of homeowners with mortgages, or about 11 million households, owe more than their home is worth, and are potentially vulnerable to a strategic default. A flat or rising real estate market could encourage many of them to hold on; a declining market would suggest it was time to go.

While negative equity by itself does not cause foreclosures, it does encourage them in a down market. There are many reasons why someone, who isn’t having trouble paying his or her mortgage, may choose to walk away. One of them is because he or she has done the math and it doesn’t make sense to continue to “throw good money after bad.” Another could be that he or she needs to move because of changes in employment or other issues, and can’t sell the house because of how much he or she owes.

Whatever the reason, businesses make such choices all the time. Why is Fannie Mae trying to punish people for engaging in rational economic decision making? The answer is that neither Fannie nor any other large lender out there wants to come to grips with the reality that all they’re holding on to is worthless paper.

HAMP Still Not Making The Grade: Geithner Refuses To Consider Alternatives

By almost every measure, the HAMP program continues to underperform in its effort to address the problem of mortgage foreclosures. Since its inception a year and half ago, only 340,000 homeowners have received permanent modifications and 436,000 have been dropped from the program. Last month alone, 155,000 homeowners were kicked out of trial modifications as opposed to only 30,000 who received new trial modifications. Accordingly, it appears the HAMP program is helping fewer and fewer homeowners as time goes on.

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New Class Action Suits Could Create Precedent To Enforce HAMP Modification Agreements

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By most measures, the Making Home Affordable Modification Program has had lackluster results in permanently averting foreclosures and dampening the effects of the foreclosure crisis. The main reason HAMP has been so ineffective is the fact that at its core, it remains a voluntary program on the part of mortgage loan servicers and lenders. In other words, HAMP has no teeth.  Servicers may choose to participate or not and even if they choose to participate,  nothing in the program language states that they must modify any loans.

Therefore, we have a situation where homeowners enter into trial modification agreements and comply with each and every condition of the agreement, only to have the servicer delay responding or continue to ask for more documents. All the while, the homeowner continues to make his or her trial payments. Worse, it is all too common for the borrower’s home to be foreclosed upon while the trial modification is pending, even though HAMP prohibits any foreclosure sale while the borrower is in a trial period plan.

Four class action suits, filed  by the Boston based non-profit  National Consumer Law Center, in the state of Massachusetts aim to give HAMP teeth it lacks. The lawsuits  claim that the trial plan is a contract that the servicers have breached by failing to modify the loan once all conditions have been met. The complaints go even further by suggesting that the signed agreement the servicers have with the U.S. Treasury represents a contract to mitigate the foreclosure crisis by offering assistance to homeowners at risk, and that by failing to modify enough loans, the servicers have breached that contract as well.

Should a judge rule in favor of the plaintiffs in these cases, a precedent will be established that renders both the trial plan and the agreement to join the HAMP program enforceable contracts.  This would mean that servicers would be required to give permanent modifications to those homeowners who comply with the terms of the trial plan, and furthermore,  be required to actually render assistance and prevent foreclosures per the HAMP agreement.

Show Me The Note Rule Slowing Foreclosure Filings In Florida

“Show me the note” has become a foreclosure process rule in the state of Florida.  The new rule, handed down by the Florida Supreme Court, requires that lenders prove that they own the mortgage, and therefore have the right to foreclose, before starting the process.

During the housing boom, when mortgages were being issued left and right and later bundled together and securitized for sale on Wall Street,  it became an all too common practice to lose track of the original note, which is evidence of the debt that the borrower is required to repay. 

The problem with this is that without the note, lenders really have no way to prove that they are owed the money and have the right to foreclose on the property. This is important because if a lender were allowed to foreclose on a property without proving their legal claim, the true holder of the note could initiate a new foreclosure proceeding and leave the borrower on the hook for the money a second time, and with no home to forfeit.

As a result of this new rule, the rapid pace of foreclosure filings has slowed somewhat. This can only be a good thing for beleaguered homeowners as they try to save their homes from foreclosure.

Scare Tactics From The Mortgage Bankers Association On Strategic Defaulters

It seems that the Mortgage Bankers Association is very afraid these days. See, more and more homeowners who owe more on their homes than they’re worth are choosing to walk away rather than continue to pay, even if they can afford their payments.

Why should this scare the Mortgage Bankers Association? It is simple: if homeowners walk by the thousands, the banks will be forced to realize  immediate losses on their balance sheets when they take possession of the houses.  This is because the minute they take possession of the house, they can’t keep pretending that the value of the property is anywhere near the face value of the note.  Call it an unintended principle write-down. Banks don’t want this…they really don’t.

Since the old memes about the immorality of walking away from a mortgage and the threat of a damaged credit score haven’t been playing all that well lately, the Mortgage Bankers Association is trying a new scare tactic: Jay Brinkmann, its chief economists warns strategic defaulters that “it could be well over seven or eight years before [they] are able to obtain a mortgage to buy a home again.”

As property values continue to plummet as the result of the unabated foreclosure crisis, more and more homeowners are willing to walk away from their homes if they owe considerably more than the property is worth. Since lenders and servicers remain largely unwilling to do principle write-downs,  many homeowners believe they have no other choice but to walk away. After all, businesses do this all the time, including the Mortgage Bankers Association!  Yes, that’s right…just this past February, the Association short sold its headquarters which it bought in 2007 for $79 million, $75 million of that financed.  It sold the property for $41.3 million, well short of the amount it owed. “Do as I say, not as I do” much, MBA?

The reality is that no one knows where mortgage underwriting will be in the future. Right now, according to Fannie Mae and Freddie Mac standards, a person will not be able to qualify for a mortgage up to three years after a foreclosure. This may well change in the future, but I highly doubt that lenders would shoot themselves in the foot by refusing to lend to anyone with a foreclosure.  Foreclosures are too endemic now to carry the stigma they once did and the ravages of an out-of-control lending industry will be felt for some years to come.

More Foreclosure Assistance Provided In Financial Reform Bill

As the financial reform bill continues to make its way through Congress, at least one measure has been hammered out: a plan to combat mortgage foreclosures styled after the Pennsylvania HEMAP program has been approved by both the House and Senate.  I wrote about the HEMAP program in an earlier blog post.

The plan, called HEMA, would take $3 billion from unused TARP funds to provide assistance to homeowners in financial distress.  HEMA will require servicers and lenders to inform homeowners of the program availability before starting the foreclosure process.

If the homeowner is accepted into the program, he or she would make a small payment, based on what is affordable to the HUD and HUD would remit the full payment to the homeowner’s servicer. Payments would continue until the homeowner’s financial problems were resolved, whereupon he or she would resume making the full mortgage payment to the servicer and would also need to repay HUD for the payments advanced.

It is unclear how closely the HEMA program mirrors the HEMAP program, but if it is fairly close, any repayment of advanced monies would be over a long term period of time and capped at a level that is affordable for the homeowner.

The inclusion of a foreclosure assistance program within the financial reform bill is welcome news. Unlike HAMP, the HEMA program will carry the full force of law, which means that servicers and lenders can be forced to comply.

HAMP Loan Modification Program Results Continue To Be Underwhelming

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The Treasury released its latest set of numbers today for the Home Affordable Modification Program (HAMP) through April, 2010.  According to the Treasury, 300,000 American homeowners have received permanent loan modifications under HAMP. This number has grown in recent months and that is good news. However, in light of the fact that foreclosures have continued at a rate that exceeds 300,000 for the 14th month and counting, the number of homeowners who have received help remains miniscule when compared to the number of homeowners who have lost their homes.

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Shocking News: Banks Fight Against Principle Write-Downs

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During Congressional  hearings last week, the heads of several big banks, chief among them, David Lowman of JPMorgan Chase,  argued strongly against writing down principle balances. In a line all too often spouted by the executives of the very firms responsible for the current crisis, Mr. Lowman stated that principle reductions would invite homeowners to spend more than they could afford and raise the cost of financing for future homeowners.

The House had convened this hearing to discuss the Administration’s latest efforts to put a tourniquet on the hemorrhaging housing market by coaxing lenders to write down mortgage balances.  According to the latest Congressional Oversight Panel report, one in four mortgages are underwater.  Apparently, despite all of the incentives Treasury is throwing their way, the banks remain unwilling.  

It is time to stop coddling the banks and get serious about addressing the foreclosure crisis.  There is a way that would give the government’s loan modification program the teeth it needs to make the banks cooperate and it won’t cost the taxpayer another dime. Amend the bankruptcy laws to allow judges to modify mortgages on primary residences.

House Of Cards

CNBC did a great documentary this past February about the mortgage meltdown and what caused it.  It tells the story in easy to understand terms and is a must watch for everyone, so I am sharing it here.

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