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.

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!

Get ready for a perfect storm — a Category 5 foreclosure tsunami.  The first wave was launched on February 17 when FannieMae announced an extension of the temporary halt to foreclosure sales (Lender Letter) to March 6, 2009.  The second wave came on February 18 as President Obama announced the Homeowner Affordability and Stability Plan (HASP).  This Plan included the start of the third wave of this storm — the announcement that Guidelines will be released on March 4, 2009.  When these three events collide on or around March 4 - 6, hundreds of thousands of homeowners, investors and tenants are going to wake up to find themselves adrift in a stormy sea of chaos with no life preserver.

Unless the Federal government comes up with a miracle when it releases the much-anticipated Guidelines on March 4, we can anticipate a sharp increase in the number of foreclosures that will be filed and/or processed.  Moreover, the sheer number of foreclosure actions currently pending in the nations’ State courts will have to be processed off the books.  The same day as President Obama announced his plans for mortgage relief, the WSJ carried an article about a Judge in Lee County, Florida, running a “rocket docket” to clear the backlog of pending foreclosure actions.  He only had two questions for the homeowners:  Are you current?  Do you still live there?  For those who answered “No” to the first and “Yes” to the second, he gave them 60 days to work out a deal or move out.  President Obama, in his Feb 18 speech, pretty much left only one option for those who were not current on their payments — Bankruptcy court.  Although lenders generally would like to avoid this option, borrowers have little hope that the results will be any more favorable.  There is very little sympathy for the borrowers in these situations, and therefore very little political will to launch a rescue effort.

Adding to the chaos of this bleak forecast is the fact that hundreds of thousands of borrowers are being swindled by loan modification scams promising to “stop foreclosure now” and “save your home.”  Although these so-called “loan mod experts” have been around for years, their business took off in the past couple of years as the Federal government put pressure on lenders to voluntarily work out new terms in order to keep people in their homes.  Unfortunately, approximately 60% of the loan modifications that were worked out have gone back into foreclosure.  The blame seems to fall evenly between the lenders’ meager concessions and the economy’s continuing decline.   It doesn’t matter what new terms you agreed to in January if you got laid off in February!

Unless the HASP Guidelines includes a miracle and not just a placebo of unrealistic conditions, and unless Fannie Mae and the lenders extend the moratorium on foreclosures, we can expect foreclosure hell to break loose in early March.  Sadly, the impact will be devastating on families, neighborhoods and communities across the country that are already suffering from the blight of foreclosures.  The Obama Administration must recognize that this situation is akin to a Category 5 economic storm that will rage across the entire country, and must respond accordingly.  Failure to do so will make the Bush Administration’s response to Katrina seem benign in comparison.

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.