Friday, June 13, 2008

Aggressive loan mod, the future of severely depressed markets?

This thread on Broker Outpost caught my eye:
The borrower is upside down in the property and just wants to walk away. Foreclosure has been in the works and should meet the steps of the court house soon, until....
My borrower received a FED-EX package from Countrywide. Countrywide sent a loan modification writing the second mortgage off and reducing the first mortgage. The new loan is a 4.5% Interest Rate for 40years and the borrower does not have any payments until July 1st. His new payment is now reduced a total of $1,000.00 making his payment affordable.

Why would this happen? The second could easily just given up or the mortgage insurer come to a deal with the second (some seconds bought insurance protection) in the recognition that the second lien is now worthless. The first might do this willingly, but I think a more likely scenario is the first just sold the note and someone probably bought a non-performing note for 50-60 cents on the dollar. Throw in a 40 yr amortization and they have a pretty good note if it performs.

Here is the simplistic math, I'm just going to do Interest Only to make things simple.
$100,000 total = $80,000 first , $20,000 second
If the borrower has a blended rate of 7% that would be $7000 a year.
Second goes to zero. First gets sold for 50 cents on the dollar ($40,000) new rate is 4.5% * $80,000 = $3,600. That is a 9% note to the new holder. Borrower gets a deal, new note holder gets a deal, original lenders liquidates and moves on.

I don't think the lenders are doing this out of generosity or compassion, there are places with severe oversupply like parts of Florida, Arizona and central California that will take decades to resemble normal housing markets. Once the foreclosure values start getting near what they can get for the notes on the secondary, things like this will happen.
Penny Mac is a company organizing to buy non-performing loans cheap, get them performing and then sell them off. At some point I don't the moral hazard aspect (if borrowers starting hearing the lenders are giving out a deal they'll start defaulting) even is a factor if prices have fallen far enough.

1 comment:

Dan said...

I was Googling loan modification and wound up here. Truly a great subject at this time in the market.

My experience is that the lenders LOVE the idea of a homeowner trying to do their own loan modification without the benefit of an education. It gives them the opportunity to offer a truly lackluster deal to the borrower and stick it to them.

Countrywide will modify a loan for a homeowner lickety split. They offer great rates on these for unsuspecting homeowners. Why, they will even let a homeowner roll the back payments into the new principal balance. How benevolent of the big bank!

Their customer service reps are trained to do this well. I have seen them send a loan modification agreement at 7.5% at the drop of a hat.

And the added bonus for the bank besides working with WC Fields "sucker" they get the homeowner to sign away all of thier rights to remedy any damage done on the prior loan.

No, I for one do not recomend a homeowner try this on their own without alot of research and education. Lest they be taken advantage of by the lender.

I would never accept the lenders 1st offer, and never accept anything that is not a realistic long term solution.

In full disclosure myself I own & operate a full service title and escrow settlement agency in NY, and we do negotiate loan mods for a fee.

I have also written a "Do it yourself" book on the subject.

There are many charlatans out there charging clients and not doing the job. They come in all shapes and sizes, there are former LO's, loan mod companies, and yes even attorneys.

If you choose to hire a professional ask for references, make them show you examples of successful loan mod agreements. Check with the BBB, consumer affairs, negotiate your fees and most of all call your lender at least once a week to keep track of what activity is going on on your account.

Your lender will tell you who has called, when, what the conversation was and what progress is being made. Even though you are not negotiating yoursefl you should still make sure the person you hire is in constant contact with the bank.