Will the Real Federal Mortgage Relief program please stand up?

Two stories in today’s financial media tell two different stories:  “Banks Ramp Up Foreclosures,” and “Up to $9.9 Billion to Modify Mortgages.”  (WSJ).  The first article details how many lenders have simply abandoned their voluntary moratorium on foreclosures and have gone ahead where borrower were delinquent.  The second details how the Administration has reached agreements with six lenders, including Chase Home Finance (J.P. Morgan Chase & Co.); Wells Fargo & Co.; GMAC Mortgage Inc.; CitiMortgage (Citi Group); Select Portfolio Servicing; and Saxon Mortgage Services, Inc., to provide up to $9.9 Billion in

mortgage modification assistance in line with the Guidelines released on March 4, 2009.  As noted in the article, many of these lenders have been taking applications and hopefully will now be able to process them.  According to the Guidelines, any loan modification agreement reached under the new terms must go through a 90-day trial period before the lender will be entitled to the incentive funding being made available.  The article noted that the Administration hopes to work out similar agreements with other lenders.  Noticeably absent from this first list of lenders is Countrywide.

So, where does this leave the situation?  If some banks are ramping up foreclosure sales at the same time as others are getting ready to receive large amounts of federal funding to modify or even refinance their loans, it won’t surprise me to see homeowners receiving two very different notices in the mail, given the propensity for the lending institutions to have a right hand and a left hand that do not know what the other is doing.  In my recent efforts to assist some homeowners with loan modifications, I have not heard much to give me much confidence that the process will be under control anytime soon.

As I have stated before, the most important step for a homeowner to take is to contact their lender if they feel they need to be considered for a loan modification or refinance.  Eligibility criteria is available at www.financialstability.gov, but I continue to urge any homeowner who is struggling to make ends meet to see if their lender will process an application, even if the lender will not be eligible for incentives under the Administration’s program.  Be prepared to submit a letter explaining your hardship, and documentation of your income and expenses, including W-2s, tax returns, pay stubs, bank statements, etc.

A quick word about the many so-called “loan mod specialists” claiming they will save you from foreclosure — for a fee.  The California Department of Real Estate and the California State Bar have issued ethics alerts concerning the ground rules for brokers and lawyers to charge fees for assisting homeowners.  Many services that use robot calling devices claim to be working for law firms or claim an association with an attorney in order to justify charging fees in advance.  Many of these companies are operating illegally and in violation of the Rules of Professional Conduct that govern the practice of law in California.  For a detailed but concise statement of the applicable rules, see the State Bar’s release at http://calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf.  As a homeowner, you are free to contact your lender on your own.  If you desire professional assistance, contact a licensed Real Estate Broker that has been cleared and listed by the State DRE, or contact a licensed attorney directly.

A report released on April 3 concludes the obvious:  a study shows that loan modifications that reduced monthly payments had a lower rate of redefaults.  The good news is that the Office of the Comptroller of the Currency and the Office of Thrift Supervision directed the banks and thrifts that provide data for the Mortgage Metrics report to assess their criteria for loan modifications woudl result in affordable and sustainable modifications.  The OCC and OTC included loan modifications already made in 2008 in their direction.

The study confirmed what had been widely reported earlier — a high percentage of borrowers with approved loan modifications had fallen behind or defauted.  What had not been reported was that almost 60% of the loan modifications approved in 2008 resulted in either no change to the borrower’s monthly payments, or an actual increase.  Reasons for this included the fact that in many cases, the lender merely froze the rate on an adjustable loan (ARM), and in some cases recapitalized the past-due amounts, resulting in a higher monthly payment.  These modifications achieved the goal of avoiding foreclosure, but not for sustained periods.  According to the report, loan servicers said their flexibility to reduce payments was constrained by servicing agreements with government-sponsored entities and private investors that restricted the type and amount of loan modification permitted.  Recent changes in both government and private servicing standards should provide greater flexibility to loan servicers.

The report covered mortgages serviced by nine large banks and four thrifts that constitute two-thirds of all outstanding mortgages in the United States.  One interesting revelation was that the biggest percentage jump in serious delinquencies was in prime mortgages, which account for nearly two-thirds of all mortgages serviced by the reporting institutions.  Delinquencies in this lowest loan risk category more than doubled in the fourth quarter of 2008!  The subprime mortgage category continued to have the highest level of delinquencies.  Possible reasons for the re-default rates included the worsening economy, excessive borrower leverage, or poor initial underwriting.

Real estate investors, business entrepreneurs and homeowners recognize that the most critical element of a sustainable transaction is cash flow.  Modifying loan servicing standards to allow lenders to make loan modifications that work with a borrower’s cash flow will go a long way to avoid redefaults and foreclosures.  The report provides strong support for the Administration’s loan modification program, which is primarily based on lowering monthly payments in order to achieve sustainable modifications.  Since the OCC/OTS report reflects servicers for about two-thirds of the nation’s outstanding mortgages, we can only hope the message gets out quickly!