Nov132015

GSEs prepare to can-kick bad loans again as loan modifications reset

Previous loan modifications and old HELOCs face reseting to higher rates and recasting to full amortization likely leading to further loan modification.

loan-modificationLenders don’t want to modify loans. They would far rather have the borrower pay in accordance with the promissory note they both signed when the loan was originated. Ordinarily, if a borrower is unable or unwilling to pay in accordance with the original terms, the lender would simply foreclose, get their loan money back, and loan that money to someone who will pay in accordance with the promissory note. Unfortunately, with so many borrowers underwater, lenders can’t foreclose and get their money back, so instead they modify loans to buy time until the resale value is higher than the outstanding loan balance.

The only way lenders can avoid recognizing losses is to avoid foreclosure and deny short sales until prices rise back to bubble-era heights were sellers can get out without taking a loss. To this end, lenders engineered a dramatic shortage of for-sale product on the MLS by stopping foreclosure proceedings and encouraging underwater loanowners not to sell, often by denying their requests by insisting on full repayment. Although lenders must accept a lower return on their investment capital while they wait for higher prices, they ensure the return of their capital at some future date; further, the restricted inventory helps hasten the reflation of the housing bubble and pushes up the date when they might get their money back.

I’ve long maintained that loan modifications are merely delayed foreclosures, but that may not be entirely accurate: Loan modifications are delayed distressed sales. When the resale value of a property exceeds the outstanding balance on the loan, lenders no longer need to accommodate borrowers requests for loan modifications. Millions of old loan modifications are due to reset to higher interest rates and thereby higher payments over the next several years. Those that are still underwater will likely be given another loan modification, but those who have equity will likely be denied.

Freddie Mac is Preparing Homeowners for HAMP Resets

BY: JANN SWANSON, Nov 9 2015, 2:27PMrejected

Freddie Mac is counting on an approach to delinquent borrowers it developed during the foreclosure crisis to forestall any new problems some of those same borrowers may encounter with their maturing loan modifications. The company is trying to be preemptive with the thousands of homeowners who had mortgages modified through the HAMP program and will soon be faced with interest rate resets. …

In other words, they know this is a huge problem, and they will have to can-kick many of these loans over and over again.

Freddie Mac then sought to inform the public about the benefits of delinquency counseling, and to motivate those homeowners who wouldn’t call their servicer to talk to one of the counseling agencies. Those agencies were also given contact lists of delinquent homeowners who had stopped talking with their servicers. The agencies then experimented with different methods to engage the homeowners, win their confidence, counsel them, and put them back in touch with their servicer who could try and help the homeowner reinstate the loan or assist them with a workout option.

squatting_until_foreclosureThey tried everything they could to get a few more payments out of hopeless borrowers. In June of 2015 I reported that 362,000 American delinquent mortgage squatters refuse loan modifications. Why pay something when they could pay nothing and live in the house for free?

Since nearly all the outstanding delinquent loans are properties worth less than the outstanding loan balance, banks are unwilling to foreclose and record the losses, so they will cut any deal possible to get some repayment until the value of the house rises high enough the bank can make a full recovery in foreclosure. Since banks are willing to give any delinquent borrower a loan modification, any borrowers who are still delinquent are delinquent by choice — they would rather squat than pay anything.

Cookson said the agencies provided a holistic counseling approach that went beyond income and expenses and also included lifestyle changes that could help homeowners succeed over the long term.

Successful loan modifications require increasing borrower entitlements. If people are not forced to cut back discretionary spending before they obtain a loan modification, bankers are subsidizing the borrower’s discretionary spending. The standards of what constitutes discretionary spending from essential spending depends greatly on the the spender’s sense of entitlement.

Personally, I really like to play golf. I don’t spend the $150 per week I would like to on golf because it isn’t an entitlement, and I can’t afford to treat it as one. However, if I were a loanowner, and if my sense of entitlement made it right, I could consider my weekly round of golf an essential. Since this entitlement creates a hardship for me, I can petition my lender for a break on my loan payments.

Given that the United States fosters a culture of entitlement, educating borrowers to behave otherwise is an uphill battle.

Developing a financial budget that reduced overall debt and increased savings allowed many homeowners to return their mortgage to good standing and prepare for any future financial road bumps.

Austerity? That’s not the American way.

middle-class1

The program, she said, had exceeded expectations every step of the way. Over a half-million homeowners have participated in the program over the last ten years and an estimated 350,000 homes have been saved from foreclosure.

This is a great success from a banker’s perspective. They delayed 350,000 distressed sales until prices were high enough to get their money back.

It has also proven to be very cost-effective. Every dollar the company has spent has returned $10 or more in benefits to it and to taxpayers.

LOL! Yeah, right!

GSE_Crash_here

Now Freddie Mac is hoping the program will work again.

Hope is always a good plan, isn’t it?

The same counseling agencies are being given lists of HAMP and other borrowers with loan modifications to contact and use their expertise to engage and prepare homeowners for the rate change. They are also providing counseling for homeowners with more recent loan modifications to ensure they understand their new loan terms and are prepared to succeed with the new payments.

humpty-dumpty_bailoutAnd if they are not prepared to succeed with their new payments, one of two things is going to happen.

  1. If they are underwater, they will be given a new loan modifications.
  2. If they have any equity at all, they will not be given a new loan modification, and they must either sink or swim.

Loan modification programs are a consistent failure. Redefault rates are very high, and very few borrowers will ever hang on long enough to sell at a time of their own choosing, particularly in the most beaten down markets. Lenders keep trying because they must kick the can. Politicians support them because it gets loanowners off their backs. Loanowners go along because the modifications help them supplement their profligate spending and support their entitlements.

Great system, wouldn’t you say?

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