Sep142013

FHFA: No income on your loan modification application…no problem

It’s not a secret that loanowners, especially if they have little or no equity, have been able to squat in their homes without paying their mortgages.  The FHFA through Fannie, Freddie, FHA has been encouraging the banks to refinance these loans through an alphabet soup of government sponsored programs.   In addition to these programs, Federal Reserve has pushed mortgage rates lower to encourage these defaulters to modified their loans instead of abandoning their homes in default.   The affect has been keeping these loanowners in their homes and thereby their homes off the market.  Without these efforts the banks have foreclosed on these defaulted mortgages and these homes would flood the market, pushing home prices lower.  The end result would have been greater losses to the banks.  So, the banks are trying everything they can to keep these loanowners in their homes even if the banks collect only a small fraction of the scheduled mortgage payments.

Streamlined Modification Program Helps Struggling Homeowners Overcome Administrative Barriers

July 1, 2013 marked the implementation date for mortgage servicers to begin offering a new program to help borrowers avoid foreclosure. Under the new Streamlined Modification program, borrowers who are at least 90 days delinquent will be given an explicit trial modification offer that includes the full details of their trial period plan payment. They can begin paying under this plan immediately without documenting their hardship, income, or financial circumstances. After making the new reduced payments for a period of three months, the modification becomes permanent. Reduced payments result from the combination of extending the term on the loan and potentially a reduced rate and partial loan balance forbearance.

Our number one goal in Credit Portfolio Management is simple: keep more homeowners in their homes, which also helps improve the quality and value of neighborhoods, reduces the number of foreclosures, and returns greater value to taxpayers. For homeowners and communities in need, Fannie Mae’s loss mitigation solutions have helped 1.3 million borrowers avoid foreclosure since 2009. Importantly, Fannie Mae has instituted safeguards against fraud and strategic defaults in conjunction with the streamlined modifications.

Despite our efforts to collect documentation and provide modifications, we found that a significant portion of our loans that became 90 days delinquent were still ending up in foreclosure. Our research showed that providing income documentation was a significant barrier to getting a homeowner into a foreclosure prevention alternative. As many as one in three borrowers in the application and modification process said that providing all of the servicer-required documents, including income documentation, was a major obstacle.

The sort of people I want in my neighborhood are ones that can pay their bills, didn’t cashout their equity, and then leave the tax payers to pick up the pieces.  Also, the buyers would purchase these homes (if they were allowed to default), would maintain the homes better then loanowners that currently occupy these homes and are not paying their bills.  Ever see a loanowner pay for repairs on their house or do they let repairs become a deferred maintenance issue for the next owner?  Let the hungrier and more responsible homeowner take ownership of the house.

At the end of  article above there is more commentary on the loanowners not being able to fill out the modification paperwork so they can’t be access to the FHFA programs, so it’s really not their fault.  Well, if you don’t document your income then how can you possibly be qualified for a loan modification, and I can’t believe the paper work is that complicated.  The only solution is default, but that would hurt the banks bottom line. The FHFA by promoting these programs to loanowners, causes everyone else that is paying their rent or mortgage support these loanowners.  Does that seem right to you?

The next article concerns employment, types of income,  and loan modification.  It’s a slightly different issue then undocumented income but related that these borrowers don’t earn enough income to qualify for a loan modification.

Even the unemployed deserve FHA mortgage modifications

Policymakers are taking to their soapboxes, pointing out unfair lending requirements listed in the Federal Housing Administration mortgage modification policy.

Under the current eligibility criteria outlined in the Mortgagee Letter 2012-22, which discloses the revisions to FHA’s loss mitigation home retention options, borrowers must be currently employed to qualify for a loan modification.

Sens. Tim Johnson, D-SD, and Elizabeth Warren, D-Mass., sent a letter to FHA Commissioner Carol Galante, urging the agency to eliminate the requirement for loss mitigation policies.

“While verifying employment is an understandable requirement if a borrower’s income source is employment, the currently employed requirement discriminates against the many Americans who have stable and verifiable sources of income apart from employment,” both Senators explained.

The group of Americans that would be prevented from participating in FHA’s loan modification program range from seniors with personal retirement accounts to single mothers receiving child support to veterans with benefits.

“There is no good justification for restricting access to the loan modification program based on the source of one’s income, and there is certainly no justification for doing so in a manner that systemically hurts our seniors, veterans and single mothers,” the Senators argued.

Some market experts are confident the FHA will reevaluate the currently employed criteria and ultimately publish an update mortgagee letter altering its current employment threshold for modifications.

“While it is difficult to project the overall impact a change to this provision could have on the market, there were 655,000 seriously delinquent FHA borrowers as of June so every little tweak to the FHA’s modification guidelines can help,” explained Compass Point policy analyst Isaac Boltansky.

The initial problem is that a lot of these borrowers were only able to purchase their existing house by using an affordability product.  The borrower knew it and so did the lender who gambled that borrower would be able to refinance into another affordability product in the future.   So, now the current loan modifications are based on fixed rate fully amortized mortgages not affordability products, these borrowers don’t earn enough income to qualify.  That’s one of the reasons why 1 of 2 loan modifications fail, they just can’t afford to payback the principal balance on a loan even at ultra low mortgage rates.

Loan modification term information has been difficult to obtain.  Usually smart investors would look at the  disclosure documents when these loan mod were resold to Fannie and Freddie.  It was suspected that loan modification had unrealistic terms and now these investors have information confirmed it.  The Debt to Income ration on these loan modification are sometimes over 50%, compare to with new buyer that can’t go above 45% for all their debt.  So, its infuriating FHFA, which is the government, now is opening trying to push more loan modification to loanowners.  Modifications that they know will end up failing.  The renters and the homeowners that pay their housing costs now have to support people that trying to game the system with free handouts.

The banks love these loan modification programs because they can transfer the risk to the taxpayers.  But the main reason they love it is that loan modifications discourages short sales.  The borrower maintains false hope they will be able to loan mod forever. However, the bank will unload the property in the future when it makes financial sense, the loanowner is just living on borrowed time.  So much housing supply is kept off the market that it actually creates a shortage.  The Fed then plays it’s role by lowering mortgage rates and creating excess stimulus (money printing) to increase affordability.  Finally, the interest rates are so low that savers became investors as they purchased homes for rental income, this has happened to such a degree that there are now even rental income backed securities.  All of these policies had effect of keeping homes off the market, but if homes made it on the market there was an investor, an flipper, or a hedge fund trying to purchase it.   This the basic definition of cloud inventory.

Down the road this policy will come back hunt the banks and the tax payers.   In the next recession a greater number of homeowners will stop paying their mortgage hoping for a loan modification or principal reduction.  There is less of an attitude that by the borrower to keep up their end of the mortgage security agreement and pay their mortgage.   I think you are already seeing attitude in the City of Richmond eminent domain theft proposal, but the banks and the FHFA never cared to considered the effect of their policies in the long term when they allowed borrowers to squat.

Mike

PS after I wrote this article is now seems that San Francisco is sending out feelers to jump on the eminent domain bandwagon.