Another day — another study.  Stan Liebowitz, professor of economics and director of the Center for the Analysis of Property Rights and Innovation at the University of Texas, writes in an op-ed piece that “the most important factor related to foreclosures is the extent to which the homeowner how has or ever had positive equity in a home.”  He says that his analysis of foreclosure data shows that subprime loans, upward resets, and so-called “liar loans” were not the primary cause of the current foreclosure crisis, and hence current government programs are “misdirected.”

It is interesting to note that Professor Liebowitz’ analysis concludes that 51% of all foreclosed homes had prime loans.  He reports that his analysis of foreclosures during the second half of 2008 shows that while 12% of the homes had negative equity, they accounted for 47% of all foreclosures.  Professor Liebowitz’ reasons that negative equity, by itself, is not an indicator of a foreclosure, but it implies that the borrower is more likely to walk away from the loan.  He argues that current government programs (i.e., Making Home Affordable), and federal efforts to keep interest rate low, are misdirected.  Driving mortgate payments down to 31% of income will not have much of an effect, since his study showed that those with higher (38%) ratios were not more likely to face foreclosure.  Reducing interest rates induce refinancing, not home purchases.  Professor Liebowitz calls for stronger underwriting standards, higher down payments, and clarifying the consequences for homeowners who simply choose to “walk away.” The good news, according to Professor Liebowitz, is that housing prices are approaching a long-term, pre-bubble levels and equilibrium.  He singles out Barney Frank for criticism for efforts to artificially increase homeownership levels, which would delay the return to equilibrium levels.

Professor Liebowitz’ analysis is one of many that will be conducted as the data becomes available, and it will be interesting to see more precisely what will actually work.  Empirical evidence suggests that while we’re still headed downhill, and the forecasts for continuing foreclosures are dramatic, it is probably too soon to know more precisely what the actual causes of the crisis were, thus too premature to fashion a realistic solution.  We know that many of the investors currently holding the notes are largely unwilling to make significant concessions in terms of rates or payments, let alone reduce principal.  We know that rising unemployment will continue to threaten the pace of recovery — if we’re even in the recovery phase at this stage.  We know that lenders aren’t lending, despite billions of dollars already spent by the Federal Government.  And, we’re starting to see the first real wave of the crisis hitting the commercial property markets, where it will be difficult to scapegoat any single demographic factor as a cause.

Professor Liebowitz is correct when he says that “Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events.”  That goes without saying.  But we just finished the first half of 2009, and studies of what happened during the last half of 2008 may — or may not — tell us all that we need to know.  We really need more analysis, more action, and less knee-jerk legislation.  Private lending has the potential to fill the gap left by the credit crunch, but there is room for mischief and abuse, and the banking industry lobby is fighting hard to protect its grip on the supply.  Ultimately, Americans have proven to be resourceful, creative and most importantly, survivors.  The current rush of legislation at the Federal and State levels are based on old data, driven by special interests, and may cause more harm than help.  We need to be a bit more patient and get better data before we inadvertently make the situation worse.

According to an article that appeared in CNNMoney on Monday, May 18, lenders are overwhelmed by a flood of applications; mortgage investors are threatening to sue loan servicers for modifying loans, and unemployment is the newest threat to stabilizing the housing market.  This article comes on the heels of an announcement on Friday, May 15 by the Obama administration, announcing a new, standardized process and incentives for short sales and “deed-in-lieu” transfers of ownership.   The newest initiative is aimed at homeowners who cannot get loan modifications. These newest actions follow by two weeks the Government’s announcement that it would provide incentives to lenders holding second liens to reduce interest rates and/or release second mortgages.

Anyone involved in the loan mod process would have to acknowledge that the entire process is bogged down.  CNNMoney noted that even though it has been three months (to the day) since President Obama announced the Housing Affordability and Stability Plan (February 18, 2009), and Guidelines were issued on March 4, many (if not most) loan servicers have been slow to get up to speed to respond to the requests.  Borrowers frustrated by the lack of clear guidance and inconsistent advice are tempted by robo-call operations offering to “help” homeowners for hefty fees.  Ironically, it turns out that investor contracts arising from the securitization and sale of the loans, which was part of the problem in the first place, are restricting which loans can be modified and how.   Congress is working on a bill to provide a “safe harbor” to allow loan servicers to use the Federal mortgage relief programs, but some investor groups are lobbying hard against passage.  It is no secret that many loan servicers are using the “investor contracts” as excuses not to make prompt and effective modifications.  Unfortunately, the borrower has no way of knowing whether or not the excuse is valid.  One gets the same feeling one gets when the car salesman returns from the back room to report the General Manager’s “last, best and final” offer, but you never even see the guy behind the curtain.

Compounding the problem and undercutting efforts to stabilize the mortgage crisis, many lenders have yet to sign up for the Federal program.  According to CNNMOney, 14 of the mortgage service companies, including Bank of America, Citgroup, J.P.Morgan Chase & Co., and Wells Fargo.  Others claim to be implementing their own versions, and still others are evaluating the program.  At the application level, each lender and loan servicer appears to have their own processing requirements.  Some permit the borrower to send the required documentation electronically, while others insist the documents be sent by fax.  One loan agent told me their fax room was a complete mess, with different applications getting mixed up with others like a crazy game of 52-card pickup.  Another loan agent told me they had no way to confirm receipt of the electronic transmission of the application documents.  Still another e-mailed me within 24 hours to confirm receipt, followed up 5 days later with a request for a missing piece of information, and provided an estimated time of review and affirmed that the foreclosure status was being suspended pending review of the loan mod application.  Simply stated, there is no uniformity or standarization.

As I’ve reported before, the fact that some of the lenders and loan servicers are only now just beginning to implement the Guidelines first released on March 4, and others are still “evaluating” the program, calls into serious question any claims or reports of successful loan modifications.  Sixty percent (60%) of all reported “loan mods” approved in the first three Quarters of 2008 resulted in mortgage payments that were the same or higher than prior to the modification.   I saw one “approved” loan modification that reduced the monthly payment by 27 cents!  And that lender insisted the borrower was foolish to reject it!  This type of chaos and confusion will only serve to further destabilize the process; create additional opportunities for fraud; and worst of all, erode any sense of confidence that the Federal program might otherwise have a chance to work.

In addition to the impact of rising unemployment cited by the CNNMoney article, there is another growing threat to the Federal effort to stabilize the situation — credit card debt.  Broke, facing unemployment, and no longer able to tap their home equity for relatively inexpensive funds to make up the difference, many homeowners have tapped the most costly source of revenue remaining — their credit cards.  Unfortunately, the card companies, who reset the loan rates faster than you can say “charge it,” have started charging cardholders the highest possible default rates of 29.99%.  Behind the wave of home foreclosures working their way through the so-called “trial periods” and voluntary moratoriums is a second wave of crushing credit card debt.

Sadly, the situation is bound to get worse before it gets better.  Unless and until the loan servicers get clearance from the investors, or simply clear directions from their managment, and free up the backlog of applications, the confusion and frustrations will continue to mount.  One problem is that no one knows what will work, and therefore everything is approached with the same level of risk aversion.  It would be a great service if the U.S. Department of the Treasury could simply select a statistically significant cross-section of different types of loans, fund the modificaion, and see what would really work to increase the probability of success.  Hindsight, of course, will teach us all many lessons.  The question is whether we can wait long enough.

On April 28, the Obama Administration announced additional details on the Second Lien Program, in an effort to provide help for homeowners with both a First and Second Mortgage on their property.  It is estimated that up to 50 percent of at-risk mortgages have second liens.  (Of the number of people who have contacted me for advice or assistance, the number with Second Liens is more like 98%).

The stated goals of the Second Lien Program is to provide relief for up to 1 to 1.5 million homeowners, to reduce second mortgage payments, provide pay-for-success incentives to servicers, investors and borrowers, and develop a payment schedule to extinguish second mortgages altogether.  The Second Lien Program provides that a second lien or mortgage will automatically be modified when a First Lien is modified.  For details, go directly to the Second Lien Program Fact Sheet.

For many homeowners, this will be welcome news, if the lenders cooperate.  The Obama Administration recognizes that even if the lender holding the First Mortgage works out a modification, many homeowners continue to face the prospect of foreclosure because they cannot keep up with the Second.  For qualifying loans, the Program proposes to

lower the interest rate on amortized loans down to 1 percent, and for interest-only loans, down to 2 percent, both for an interim period of five years.  Participating servicers will be required to forbear principal on the Second lien in the same proportion as any principal forbearance on the First lien.  There is an option for extinguishing principal under a published schedule.  Various incentives for lenders, servicers and investors are included.

Many individuals who initially contacted their lenders when the Hope for Homeowners (HFH) program was announced in 2008 and received less than satisfactory results will be pleased to know that the Obama Administration has also announced a new plan to include the HFH in the Making home Affordable program.  Even if you were turned down or otherwise dissatisfied with an initial attempt to modify your mortgage, you should be aware that the rules changed on March 4 when the Obama Administration released new Guidelines, and again on April 28 with the announcement of the Second Lien Program.

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!

Important:  This brief summary is provided as a quick guide only; a link to the official details and an online eligibility assessment tool provided by the U.S. Dept. of the Treasury is provided below.

UPDATE:  On March 5, the House passed the “cramdown” legislation, which would allow Bankruptcy Judges to modify the mortgage on a owner-occupied home, provided the homeowner first made a good faith effort to complete a loan modification with the lender.  The measure now goes to the Senate where it is expected to encounter stiff opposition from lenders.  See Washington Post article.

As promised, the U.S. Dept. of the Treasury released the Homeowner Affordability and Stability Plan (HASP) Guidelines on March 4, 2009, to take effect immediately.  There are two basic components of the Making Home Affordable plan:  refinancing and modification.  Most of this discussion will focus on the Home Affordable Modification Program, but first a quick comment about eligibility for the refinance component.

To be eligible for the Home Affordable Refinance program, the property must be owner-occupied, the borrower must establish they have income to support the new mortgage debt, and the amount of the first mortgage cannot exceed 105% of the current market value of the property.  Junior lienholders must agree to subordinate, borrowers may not take cash out, and borrowers who are delinquent will not qualify.  Details for the new refinance options for existing Fannie Mae Loans are set forth in FannieMae Announcement 09-04, released March 4, 2009.

To be eligible for the Home Affordable Modification program (HMP), the property must be owner-occupied, not vacant or abandoned, the current mortgage payment must be more than 31% of the borrower’s gross monthly income, and the borrower must have experienced a significant change in income or expenses to the point where the current payment is no longer affordable.  The borrower need not be delinquent, but they must be at risk of “imminent default.”  Jumbo conforming loans up to $729,750 are eligible for the HMP.  Participating servicers are required to follow specific steps in the Guidelines to attempt to reduce the monthly mortgage payment to as close to 31% Debt-to-Income (DTI) ratio as possible.

The modification process, referred to as a “Waterfall” process, starts with a determination of Monthly Gross Income, then validation of total First Mortgage Debt — monthly PITIA.  Servicers are then required to capitalize all arrearages, and target achieving a DTI of 31% by incrementally reducing interest rates down to a minimum of 2% for a five-year period.  (After that, the rate will increase by no more than 1% per year until it reaches the Interest Rate Cap.)  The next stage in the “Waterfall” process is to extend the term up to 40 years, starting with the date of the modification.  If this is insufficient to achieve a DTI of 31%, the servicer is expected to forebear principal, to be due upon maturity date, sale of the property, or upon payoff of the interest-bearing balance.  No interest will accrue on the forbearance amount.  Under no circumstances may the modified balance due be lower than the current market value of the property.

No principal reductions are required under the HMP, but lenders may, at their option, elect to reduce principal if necessary to achieve a 31% DTI.  The program will reimburse servicers for a portion of the cost of a principal reduction.  Each borrower will undergo a 90-day trial period.  No incentives may be paid until the 90-day trial period has been completed.  Lenders may not charge the borrower any fees or charges for this modification process.  Junior lien holders will be required to subordinate to the modified loan, and the HMP provides an incentive payment up to $1,000 to pay off junior lien holders, and an additional $500 incentive payment for efforts to extinguish  second liens.

If, after going through the process, it is determined that modification is not an option, the Guidelines suggest that all loss mitigation options be considered, including any possible refinancing options available outside of the program, and if homeownership retention is not possible, program counselors should discuss short sales and deeds in lieu of foreclosure as ways to help the borrower transition to more affordable housing.  Incentives for participating services are available for alternative approaches, and borrowers may be eligible for relocation expenses to effectuate short sales and deeds-in-lieu of foreclosure.  The ultimate objective is to minimize the impact of vacant and abandoned properties on local communities.

Foreclosure actions will be suspended during the process.  Therefore, it is important that any person facing foreclosure initiate all steps necessary to start the process immediately.  Persons in this situation are advised to contact their lender, and to call the Homeowner’s HOPE Hotline at 888-995-HOPE.  To find out if you may be eligible for a refinance or loan modification under the Program, you can go online determine whether or not you are eligible.  This self-assessment tool is made available by the U.S. Dept. of the Treasury at www.financialstability.gov.

President Obama has announced his new initiative to provide relief for homeowners caught in the mortgage crisis.  Summaries have been posted by the WSJ and the Washington Post.  What is clear is that President Obama is attempting to walk a thin line between arresting the foreclosure spiral while trying not to upset those outraged by bailout abuses.  The focal point of the Homeowners Affordability and Stability Act (HASP) is to help the homeowner who has been trying to meet payments but cannot qualify for refinancing because their home values have been shattered by falling housing prices.  What the Act does NOT do is address what will be done for those already behind in their payments or who have already entered the final phase of the foreclosure process.  It will be interesting to see what happens when the current foreclosure moratorium announced by several lenders expires next month.

Clearly, the mortgage relief is NOT aimed at “the unscrupulous or irresponsible speculators who took risky bets” or “dishonest lenders.”  However, in the text of President Obama’s speech, he makes it clear that the Administration will continue to “support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value — as long as borrowers pay their debts under a court-ordered plan.  That’s the rule fo rinvestors who own two, three, and four homes.  It should be the rule for ordinary homeowners too, as an alternative to foreclosure.”  In other words, the newly announced Act will not provide any direct relief for homeowners or investors facing bankruptcy, but President Obama has send a strong signal that his Administration supports the authority of Bankruptcy Judges to reduce mortgage debt by court order.  The Lending industry will undoubtedly see this as incentive to continue to negotiate loan modifications.

Yogi Berra said it’s tough to make predictions, especially about the future.  The Plan announced today will be followed up by the release of guidelines which will go into effect on March 4th that will affect the entire mortgage industry.  As the President said, “Any institution that wishes to receive financial assistance from the government, and to modify home mortgages, will have to do so according to these guidelines.”  The target is to get lenders to reduce interest rates and make other adjustments so that the mortgage payments will be no more than 31% of a borrower’s income.  If you’re a mortgage broker, you’re going to be very, very busy.  If you are a Lender, you will be looking closely at how you can conform your program to the new guidelines.  If you are a homeowner who is behind in payments and trying to negotiate a loan modification, you may find a more cooperative attitude.

I will post updates as the picture becomes clearer.  One tip from the Washington Post — if you are already involved in a loan mod workout, notify your lender or loan mod representative that you want to be considered for eligibility under the terms of the Homeowner Affordability and Stability Plan.  If nothing else, this should buy you some time while everyone attempts to sort it out and figure out what it is.

Starting on March 1, 2009, Fannie Mae will allow individual real estate investors once again to refinance up to ten (10) properties, relaxing the stranglehold limit of four that kicked in during the Summer of 2008.  According to the Announcement (09-02) issued February 6, 2009, the borrower will be subjected to some new requirements, including no history of bankruptcy or foreclosure within past seven years, no delinquencies on any mortgage loans in past 12 months; rental income must be fully documented; and borrowers must have six months reserves on the subject property and on each other financed second home or investment property.  In addition, the real estate investor or borrower must have a minimum credit score of 720, and the maximum LTV will be 70%.

Fannie Mae is expanding the definition of “reserves” to include all components of the monthly housing expense (PITIA), including principal and interest, insurance premiums, property taxes, special assessments, association dues, and any monthly cooperative corporate fee.

The Effective Date for multiple mortgages up to ten financed real estate properties will be March 1, 2009.  Fannie Mae has encouraged all lenders to implement the reserve requirements immediately and will apply them to all whole loans purchased by Fannie Mae on or after June 1, 2009.

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Upside down on your home loan?  Real estate investment property vacant?  Don’t know what advice to follow?  Should you walk away or let it go to foreclosure? File bankruptcy?  Hire a loan mod specialist?

Homeowners and real estate investors are scrambling to cope as the economic crisis hits home — literally.  Even in California, property owners are waking up to the harsh reality that their homes and real estate investments are worth less than what they owe on their mortgages.  Add the misery of a layoff or news that an investment has gone sour, or the fact that your 401(k) has suffered a 30% drop in value, and you cannot make the payments.  What can you do?

Three steps to get out of the muck

First, CALM DOWN, don’t panic.  The threat of losing one’s home is certainly grounds for concern, but if you panic, you are more inclined to do do the wrong things.  People who panic tend to listen to bad advice, especially when it comes in the form of a promotion making ridiculous promises.  Most of this advice comes from people who are trying to make money, not people who are trying to help you.

Second, GET BUSY!  The process of working through a loan modification takes time, and requires a lot of hard work on your part.  You will need to demonstrate that you will be able to make the payments if and when the real estate loan modification is approved.  This will require you to make some tough financial decisions, get your financial records and documents in order, and probably make some adjustments to your plans.  Don’t blame yourself — or others.  It only serves to waste time and energy that you will need to develop a solution.  Instead, make a Plan.  Ask yourself, “What do I want to do?”  “Where do I want to be?”  Chances are, if you are facing the prospects of a layoff, or have been unable to make mortgage payments, or are facing the prospect of foreclosure, you’ve been caught up in the chaos of the moment, and haven’t taken time to focus on the future.  Working through a loan modification process only makes sense if you have a clear idea where you want to end up.  In the end, it may make sense to short sale a property, or let it go into foreclosure, but only if it helps you to get where you want to end up.

Third, take ACTION.  Get help now!  Consult with a professional and explore your options.  I recently received a call from a distraught individual reporting she had been evicted that morning by the Sheriff from the home she had owned for 20 years.  Not an ideal time to start getting legal help!

Before you sign up with someone advertising loan modification services, find out exactly what they will do for you. Look for a real estate attorney or a specially registered real estate broker.  Pursuant California law, in many instances real estate brokers cannot charge you a fee in advance unless they have been approved by the Department of Real Estate (DRE).  Attorneys licensed to practice in California are exempt from this requirement, but make sure they are experienced in real estate law. For more information, see the Consumer Alert by the DRE: http://budurl.com/DREAlert

Fourth, reread step three and take ACTION.  Too many individuals become paralyzed by worry.  Your circumstances will not improve without action.  So, take a deep breath and pick up the phone. Contact a professional experienced in loan mods who will get started right away.  The sooner, the better.  It may cost you some money, but with the right help, you will be able to avoid even more costly mistakes.