HAMP loan modifications will become permanent housing subsidies
HAMP loans were bundled into mortgage-backed security pools purchased by the federal reserve with printed money, making foreclosure politically impossible.
Borrowers were granted loan modifications either through HAMP or through a private program. Most borrowers don’t realize the loan modification program matters a great deal. HAMP loan modifications will become a permanent entitlement; private loan modifications will become a future foreclosure. Private loan modifications are tomorrow’s distressed property sales.
The path of a HAMP modification
When a borrower can’t afford their payments, they may be eligible for a HAMP modification. As Mike noted last year defaulting on your home now includes automatic enrollment into a loan modification program because the Obama administration broadened the parameters so much that nearly everyone qualified. There is a catch, and it’s a big one: not all servicers participate in HAMP, and if the borrower’s servicer didn’t participate, they were likely stuck with a private loan modification, or none at all.
Once a borrower got into the program, their loan was packaged into a mortgage-backed security pool and made available to investors, but the federal reserve was the only investor willing to purchase these obviously terrible loans that redefault at rates north of 30%, so the federal reserve holds most of this toxic paper. The strategy is widely known as a “good bank, bad bank” strategy, and it worked.
The federal reserve absorbs these losses better than any other investor for one simple reason: they print the money to buy the bad loans. If these loans go bad, and most of them will, nobody cares because nobody is harmed by the destruction of printed money on the federal reserve’s balance sheet.
Given this reality, it’s very unlikely many of these loans will be foreclosed on. Can you imagine the political fallout when everyone realizes the federal reserve was the foreclosing entity trying to get back printed money? Since almost none of these loans will be foreclosed on, anyone in the HAMP program can apply for a loan modification, and they will get one. People will quickly learn to game the system and look poorer than they really are to maximize their newfound housing subsidy. For as appalling as I find that, it’s hard to get too upset because it really is being paid for by free money. This is no taxpayer subsidy; it’s just a lucky break for those foolish and irresponsible enough to obtain it.
The path of a private loan modification
When the borrower’s servicer doesn’t participate in HAMP, the borrower faces very different circumstances. First, their loan modification isn’t subject to any pre-defined terms, so some loan modifications are more borrower-friendly than others, and many are not friendly at all. Unlike HAMP loans, most of private loan modifications don’t amortize, so the borrower isn’t reducing their loan balance while making their modified payments. Unless house prices rise, borrowers aren’t getting any closer to an equity stake. Since private loan modification terms aren’t as favorable, and since they don’t amortize, the path to equity is much more difficult, and most borrowers probably won’t make it.
The loan modification entitlement will be rescinded as prices near the peak. Lenders will be less generous in granting modifications regardless of a borrower’s circumstances. Lenders will want their money back to loan to a more qualified borrower who will pay in accordance with the original note terms. Contrast that to the HAMP modification owned by the federal reserve that printed the money, and the difference between how these borrowers will be treated is obvious.
Bad Mortgage Loan Modifications
(LoanSafe.org) – There are bad loan modifications out there …
The example in this case is a real world case of a modification granted by Wells Fargo Bank, N.A on behalf of investor HSBC Bank USA, National Association as Trustee for Wells Fargo Asset Securities Corporation, Mortgage Pass-Through Certificates Series 2006-AR12.
The borrower was asked to sign this modification back on February 26, 2010 on a loan amount of $721,478.83 with a capitalized past due amount of $7,879.33.
The existing rate was dropped from 6.5% to 4.375% for a term of 12 months.
The payment dropped from $3,865.33 to $2,601.66 during this period of time due to the interest rate reduction.
The borrower is not sure if she was approved for HAMP or not at the time and at this point has given up hope at correcting this bad loan modification.
The servicer and the investor believed they would make more money keeping the loan rather than turning it over to HAMP, so like B of A, they steered the borrower toward a loan modification that served their interests over the borrowers.
She made her payments on time for a year at $2,601.66 and when she went to re-apply for help because of the scheduled payment increase, she was told that she could not get another modification as the investor only allowed one modification through the life of the loan.
Most likely the value of the underlying collateral rose to the point the lender could recover most, if not all, of their outstanding loan amount, so they weren’t motivated to bargain. The HAMP servicers will continue providing modifications until they become a permanent housing subsidy; the private servicer will not.
The payment for the borrower jumped 48.57% from the payment she was making on time and this caused her to miss her payments again.
She was told when she accepted her modification that after a year, she could re-apply if she could not afford the payment adjustment since the payment shock was going to be so high as to put her debt to income ratio above 51% of the income the servicer had verified.
She signed a “Notice of No Oral Agreements” which she obviously did not understand would make whatever she was told, no longer valid. …
People who sign documents they obviously do not understand are foolish, and they deserve whatever misfortune comes to them. Claiming ignorance to the terms of financial agreements can’t become a viable excuse, despite the left-wing politicos insistence on making it a reason people can back out of any contract.
Why would Wells Fargo Bank, N.A allow this to occur and not at least seek out the investor and ask for a long term solution that would allow the borrower to retain their home?One possible reason could be that it would not make financial sense since now, the home prices have gone up enough to warrant liquidation of the property.
These kind bad loan modifications cause people to give up hope and walk away from their home or list it for sale.
That loan modification accomplishes everything the lender intended: the borrower made payments rather than remaining delinquent while prices rose high enough for a sale to make the lender whole. Remember, no lender cares whether or not the borrower stays in their home; the lender is only interested in recovering their capital.
Bank of America, J.P. Morgan, Citi, Wells Fargo Provide $20.7 Billion in Mortgage Relief
The nation’s four largest banks have exceeded their required share of financial relief to struggling homeowners under a landmark settlement reached two years ago, a compliance monitor for the deal said Tuesday.
Lenders have one less reason to grant loan modifications.
The vast majority of the relief Mr. Smith announced was provided through principal forgiveness on first-lien mortgages, which accounted for 37%, or $7.6 billion, of the credit amount. The second-largest bucket, which includes short sales, or transactions in which lenders allow borrowers sell their homes for less than they owe, accounted for 31%, or $6.4 billion of the credited amount.
These lenders forgave some principal on deeply underwater loanowners leaving them somewhat less underwater. Lenders believe this gives borrowers hope they will have equity again in their lifetimes, prompting the borrower to make payments while they wait many more years to get above water. This was not a magnanamous move by lenders, but a loss minimization procedure they were going to institute anyway.
It’s a travesty that lenders were allowed to write off short sale losses. This is money the lender was certain to lose anyway, but the settlement allowed them to count it as borrower relief.
Private loan modifications are bombs waiting to explode
During the housing bubble, housing bears wrote often about the ticking time bombs of teaser-rate mortgages and adjustable-rate mortgage resets. The bears were right as most of these blew up and became the shadow inventory which ultimately became the loan modification inventory we have today. Many of these bad loans became bad loan modifications, and they haven’t been completely removed from the system or permanently resolved. Is the Mortgage mess resolved or foreclosures merely delayed? The answer is delayed, in the form of private loan modifications.