Loss Mitigation Isn’t Working
One of the things that I love about my job is when I get to talk to people that are on the “inside”. What I mean by the “inside” is someone that is working for the banks. A disgruntled bank employee. A pissed off loss mitigator. Someone who decides whether or not to pursue you for a deficiency judgment. Each of my conversations have many commonalities. Some are upset that the government is over promising and obviously… under delivering. Others are happy to have a job, however are quite sick of feeling like they can’t get anything done because of the basic lack of resources. I mean come on? Mr. CEO of XYZ Lender… after all that government bailout money…can’t you afford to get a new fax machine or use efax so you stop losing all our faxes?
After a long conversation with this particular head of loss mitigation for …………. Mortgage lender, I asked him to email me his thoughts on what he has been seeing and feeling. Enjoy.
DUMP The HAMP
President Obama had big aspirations on bringing America a much needed change, yet “change” seems to be all that’s left in our bank accounts each month. We were promised a new modification program that would help between 3 to 4 million at-risk homeowners – both those who are in default and those who are at risk of imminent default – by reducing their mortgage payments to a more affordable rate. It sounded pretty good to me, until I found out how everything works.
First of all, there are 4 different versions of the Home Affordable Modification Program;
Non-GSE (loans owned by your lender)
The Treasury wrote this version in 3 weeks after Obama introduced his financial stability plan and has been continually revised since.
Fannie Mae
They took the Treasury’s version, rewrote it and took many things out of its original context (such as defining common definitions differently, thus causing massive confusion and ultimately making your lender’s job a heck of a lot harder…)
Freddie Mac
They say you have to be more than 60 days behind on your mortgage payment or you are considered current… and ineligible for this program…thanks! Fannie Mae will be implementing this by June 1st as well.
FHA
They will deny you if you have non-mortgage expenses that are over 24% of your total gross income, lame.
You can find out if your lender is participating by calling, or by visiting the Making Home Affordable website.
The one major pet peeve I have about this program is how it doesn’t help the average family man as mush as it helps a bachelor or someone who is single. Shouldn’t it be the other way around?? Let’s say you have a family of 4, a mortgage payment of $2,000, average monthly expenses around $2,000, and your total gross income has been dropped from $6,500 per month to $4,000. Will this program help you? The answer is NO! This is because the program multiplies your current monthly gross income by 31% to achieve your target monthly mortgage payment. In this case, $4,000 x 31% = $1,240. This would save you $760 per month. However, when you factor in the car payment, the kid’s clothes, food, insurance, utility bills, etc., you are left sailing toward the same iceberg you feared from the beginning ($1,240 + $2,000 = $3,240 subtracted from a net income of $3,200 = -$40/month). All it would take is one unexpected event to cause you to fall behind and be right back where you started. This brings me to my next point. If you happen to be lucky enough to receive this modification and face a new hardship 1 year later and you to fall behind, forget about asking for this HAMP again. You only get one shot.
I could go on and on about how terrible this program is, but I want to tell you about what is going on inside of your lender’s Loss Mitigation Department.
In the early 2000’s a typical lenders had about a 1% delinquency ratio. In 2007, after investors on Wall Street quit backing high-risk mortgage loans, your lender’s delinquency ratio’s began skyrocketing from 3 to 4% to up to 8% or more in other cases, and foreclosure ratios have jumped up to around 3 to 4% for stable lenders who never even originated high risk ARM loans! For your lender to keep up with the amount modification requests they receive, they would need to quadruple or even occtiply (yes, an octomom reference…) their Loss Mitigation Department to keep up and comply with investor modification guidelines. There lies the problem. How do you fund your loss prevention department if your sales department isn’t making as much money? The answer is they have to convert the HAMP trial plans into actual modifications, so they can receive their pay for performance incentives from the government. But they can’t… The problem is the underwriting requirements.
Completing a HAMP modification is like originating a brand new loan, except your loan officer is unable to contact you by any other means than mail, and his/her processors are quickly (or inadequately) trained, robotic associates who have to keep up with rapidly changing, loosely defined guidelines from Fannie Mae, Freddie Mac, and FHA. It is almost impossible to ever finish one of these things correctly! Not to mention, loan modifications are so much like a originating a brand new mortgage loan that the government wants all Loss Mitigation employees to be licensed. This is a good idea for training, but a bad idea for lenders because this will be very costly and time consuming to complete (this will ultimately have to happen though…). It’s just another daunting task for your lender’s loss mit department, which will ultimately slow down your modification.
Probably the most difficult thing your lender has to do is build calculators, use cumbersome excel documents, and report to numerous sources to correctly implement this modification. The HAMP is such a hassle, people who work at Fannie Mae don’t even like it and are praying it ends in 2012 like it’s suppose to. We need a better solution. DUMP the HAMP already, and give us something that works NOW!
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Conclusion
We have been getting calls non-stop from homeowners who are DONE. If you are DONE, you know what I mean. Tired of spending countless hours trying to save your home, when quite frankly it doesn’t seem like it’s worth it anyways. You feel like your lender doesn’t give a crap. Even if you get a modification, they won’t reduce your principle so… you’re still stuck with a home that’s not worth anywhere near what you owe on it. Values are stagnant or dropping. Credit is still contracting. Banks like Citi and Wells have new incentive programs designed to lower your credit card limits and get you to pay down your principle. It’s clear to me that lenders don’t want to lend and won’t resume common sense lending anytime soon. Ask a local loan officer. They are still having trouble getting great credit loans done. I agree. Dump the Hamp and start re-appraising homes, cut the principle balance down to 94% of the value (so people can sell their home if they’d like without being punished), give the same rate to anyone who accepts the program, whatever the 30 year fixed rate is at the time and revenue share on the upside 10-20% of the equity when they sell the house. Another idea would be allow short refinancing. This will not happen because the banks don’t have to “mark to market” their loans. They are better off just leaving them delinquent. Which is what we are seeing. Lenders continuing to postpone auction dates. 14-18 month foreclosure timelines, where the lender should take only 8 months to foreclose.
Wait a minute here. If bankers got to “mark to market” when values were going up… thus taking HUGE bonuses based on those profits, and now they don’t have to “mark to market” when values are plummeting, so they can still take big bonuses…isn’t that called CHEATING? Uh let’s see… Isn’t that is exactly like heads I win, tails I win? Hmm… So wouldn’t that be similar to a homeowner buying a house, value goes up, they take out all the cash, then when the value goes down, they walk away without recourse? Government, can you please change the recourse laws in all the other 40 or so states to make it fair? Since you are taking care of your banking buddies, don’t forget about the people who pay taxes that you’re supposed to be WORKING FOR. We want the same rules for us. Please share your thoughts below…
Jon Maddux, CEO
www.YouWalkAway.com
I can’t stand that all the bankers are heavily against “mark to market” – which really is just code for “the real f-in price.” It’s like you said, they want to profit when things are good, but don’t want to suffer any consequence when things are bad. When it goes down, they don’t think they should have to write down their loans in case the value goes back up. You’ll never hear them cite that when prices are going up. The oil companies do the same thing…if oil futures jump, it’s reflected at the gas pump within 12 hours, but if they go down, it takes 2 weeks.
I’m gonna try that with my stock portfolio next time we have a crash. “It’s really worth twice what the balance says.”
As someone who is responsible with their money, and could afford a house if prices were at normal levels, this whole thing is extremely frustrating. All these stupid gov’t programs are just delaying everything, which means more time I have to wait to buy a house.