Truths, Lies and Loan Modifications, by Dan Cooper

December 22nd, 2008 · 1 Comment

Written by Dan Cooper, Senior Consultant, Mortgage Banking Solutions

There has been an inordinate amount of press lately concerning the viability of loan modifications and whether they really help borrowers. The theory behind modifications is that by helping a distressed borrower stay in their house, a new foreclosure is avoided, thus helping the overall real estate market stabilize faster and allowing the US economy to recover sooner. This discussion is being played out as part of an ongoing soap opera between Sheila Bair and the pundits who feel that loan modifications are a waste of time.   This is a discussion about the lies and truths concerning loan modifications along with some ideas for improving the process.   Also click here to watch FOX Business interview with David Lykken, Managing Partner with MBS, about loan modifications. 

*Accounting Rules discourage loan modifications. Sheila Blair can push all she wants for loan modification programs but as long as the accounting rules, both GAAP and regulatory guidelines, penalize companies for modifying a loan they will not do it on a large scale. Companies can spend hours and hours and hundreds of thousands of dollars trying to get the accounting correct only to be second guessed by regulators and accountants who really don’t understand the mortgage market, collections and what it takes to get a borrower to start paying their mortgage on time. Simplify, clarify and update the rules!! It really will help make the decision easier for those who have to implement the program and those who have to account for it correctly.

*Poor performance of past modifications ignores the fact that all loan modifications are not created equal. Traditional loan modifications actually raised a borrower’s payment or, at best kept them the same. They essentially rolled past due interest into the loan amount, and neither the rate nor the terms changed and so the payment had to go up. So the borrower, who could not afford their payments before the modification, was not going to be helped by these programs and subsequently, defaulted again. Current modification programs try to actually fit the payment to the borrower’s real income giving them a fighting chance to make their payments and improving the overall performance of loan modifications.

*A global modification program will never work in this environment. There are simply too many issues that need to be addressed for a global solution to work. Each modification needs to be processed as a new loan with the needs of the borrower and the concern for the end investor given the appropriate amount of weight. New values, borrowers correct income, the second lien, and their real debt load needs to be used in coming up with an acceptable modification. Any write-down in the mortgage should be addressed by having a shared appreciation component between the borrower, the second lien holder (if applicable) and the first lien holder for the day when residential real estate starts to increase in value again.

*The issue of loans that are in private mortgage backed securities will have to be addressed and solved. The odds are that a loan modification that falls outside a security’s allowable parameters will have an adverse effect on at least one of the tranches in that security. This leaves the servicer with no choice but to follow the strict letter of the contract even though it is not in the best interest of the other investors or in the best interest of the entire market. After all, a contract is a contract and violation of a contract will lead to lawsuits. A combination of legislative action and a minimal allocation of TARP money could solve this issue by guaranteeing that an investor will not be negatively affected by a global modification mandate. While complex, solving this issue would allow for the proper modification of hundreds of thousands more distressed loans.

*The FDIC likes to tout the success of deploying over 5,000 loan modifications in the IndyMac portfolio. This is really just a drop in the bucket. Success will mean tens of thousands modifications, not 5,000.  (Click here to watch David Lykken’s FOX Business interview on “Happy Hour” about Sheila Bair’s “IndyMac” solution.)

*The mortgage business has always been very entrepreneurial. Loan modifications are just another item that proves this point. Companies are springing up that help distressed borrowers negotiate a favorable loan modification. The firms usually have a team of attorneys standing by to help anyone that is willing to fork over $2,000 to $5,000 (upfront of course). The firms hire former and current mortgage loan officers to source business, charge them a flat fee, and allow them to mark up the fee based on what the market will bear. This system is ripe for additional fraud and needs to be regulated but signifies an issue that must be solved in order for modifications to work on a macro scale. Simply put, the mega-servicers cannot handle the number of phone calls and will not pay for the manpower necessary to effectively modify a significant number of loans. Completing a loan modification is a labor-intensive endeavor and in many cases requires more face time with a borrower than completing a brand new loan. For a borrower to make it through the maze of VRU’s and customer service personnel that do not have the skill set or the authority to help anyone is virtually impossible except for those few that have a tremendous amount of time, persistence and motivation.

In conclusion, modifications can be a tool that can really help borrowers stay in their homes. While, it is not the Holy Grail that will fix the US economy, it is certainly a viable weapon in the fight to stabilize real estate values. The problem is that the system that is in place today will never work until some of the fundamental issues are addressed and solved. It will take a coordinated effort between the regulators, accountants, legislators and servicers in order to develop a process that works for all the stakeholders.

“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.” - Abraham Lincoln

Dan Cooper can be reached at (713) 893-5219 or by e-mail [email protected]

Tags: Commentary · Mortgage Market

1 response so far ↓

  • 1 PaulMolinaroEsq // Dec 31, 2008 at 4:38 pm

    Words from a Very Outspoken and Opinionated California Litigation Attorney

    Here in California, our Department of Real Estate website (dub dub dub dot dre dot gov) lists the companies that have DRE “permission” to modify loans… add to this list any licensed California attorney, and that is where you should begin your due diligence search when you seek help in California. Other states probably have similar laws, so check with your own state DRE and state bar.

    My law firm has been getting more and more calls recently from homeowners that were victims of predatory lenders who put them into an unaffordable loan and now fell into the hands of those same people who sold the toxic loans but profess to be saviors… DON’T BE A VICTIM TWICE! What’s that they say, “Fool me once, shame on you, but fool me twice, and I’ll sue your butt!”

    Do your homework and THOROUGHLY investigate any firm before hiring them to save your biggest asset and the place you call “home.” Scammers are popping up like dandelions on a freshly mowed lawn in April. They advertise on the Internet, freeway billboards, radio, television, and print media everywhere, not to mention spamming your email box with those third-world widows needing someone to receive three million dollars for them. Make no mistake, in many cases, these “loan modification experts” are the exact same loan officers and mortgage brokers who fleeced homeowners the first time around. After losing their jobs with the crash of the mortgage industry, they have found a new way to make ill-gotten profits from hard-working homeowners through loan modifications.

    In California, with very few exceptions (and attorneys are one exception… no coincidence there… attorneys make the laws), it is against the law for anyone to take money up front for helping a homeowner who is in default. Don’t trust a company that begins its relationship with you by breaking the law.


    Hire an attorney – and not just any attorney either - one with experience in mortgage law, not just one with real estate law experience but one with experience in both FEDERAL and STATE litigation against mortgage companies, one who doesn’t also do family law, criminal law, admiralty law, and immigration law as well, one who limits the practice to mortgage law (or at least a great majority of it), one who has the experienced staff, training, and know how to take on the big lenders and their top notch lawyers (lenders have attorneys – and darn good ones – check out their counsel on the web – big names top schools, shouldn’t you have a lawyer too?).

    We are not talking about a refund on your broken television here, we are talking about hundreds of thousands of dollars and your HOME – if you don’t think this is the time to hire a highly educated and experienced professional instead of a weekend schooled, almost out of work, broker slash loan officer slash “expensive water in a wine bottle with alleged magical curative powers” salesperson, I don’t know what would make you take things seriously.

    Of course, this is one obnoxious lawyer’s totally biased opinion, but one based on many many distressing calls to my office every day. And, yes, my firm loves taking cases against loan modification companies who have violated laws. This field is quickly becoming one of the fastest growing sections for our mortgage law firm.

    - Paul J. Molinaro, Esq.

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