Jul262013

Lenders benefit from loan modifications, homeowners not so much

Every aspect of government policy toward housing is geared to benefit banking interests. For need to placate the public, many of these programs have been sold as a benefit to struggling borrowers loanowners. Since some people actually believe the false rhetoric about helping borrowers, politicians and bureaucrats have to feign surprise when these programs serve their banking masters and fail the general public.

New Defaults Trouble a Mortgage Program

By SHAILA DEWAN — Published: July 24, 2013

Banks and other mortgage servicers have accepted $815 million in taxpayer-funded incentives for helping homeowners who have since redefaulted on their home loans, a watchdog for the Treasury Department’s Troubled Asset Relief Program, or TARP, reported on Wednesday.

The banks found a way to get some income out of these government-backed loans through modifying loans.

More than a third of homeowners who received loan modifications under TARP’s mortgage modification program have since stopped paying, but servicers kept the money they received for modifying those loans, according to a report by Christy L. Romero, the special inspector for TARP.

Sweet deal for the banks. They get to rake in for fees, and they can abdicate any responsibility for the outcome of their work.

Many of the homeowners received scant relief, with a large majority benefiting from a reduction of less than 10 percent on their monthly payments, according to an analysis by Ms. Romero’s office.

The Treasury has spent only about a fifth of the $38.5 billion allocated to help homeowners under TARP. Any TARP money not spent by the end of 2015 will be returned to the general fund.

“Treasury took extraordinary action to bail out the banks,” Ms. Romero said. “They still have to do the same for homeowners. The idea was not to put money into the banks and then have them fail later, and the same is true for homeowners.”

LOL! Really? The idea was always to bail out the banks. If a few loanowners managed to survive, that was a bonus, but the real goal was to delay foreclosure long enough for the banks to be able to absorb the eventual losses. Or in a perfect world, prices would go up, and the bank would be made whole. The fate of the loanowner was never a real consideration.

Treasury officials have defended the mortgage program, called the Home Affordable Modification Program, pointing to data showing that loan modifications under its rules have been longer-lasting, and more favorable to homeowners, than private loan modifications. …

So for as dismal as these results are, the private loan modifications are doing worse.

Each bank has its own pressures for survival. The bigger and stronger banks don’t have to be as accommodating on their loan modifications, so they have higher failure rates. The smaller and weaker banks cut better deals hoping to get a few more payments before they too have to take action. All loan modification measures are designed to maximize bank revenues, not actually help out a borrower.

At first, servicers received $1,000 for every loan modified. Now they are paid $400 to $1,600 for permanent loan modifications, depending on how many months in arrears the homeowner was (a modification made at the first sign of trouble is more effective than one made after many months of failure to pay). They can receive extra money if they reduce the monthly payment more or the loan modification lasts longer.

This does provide incentives for the services to keep borrowers in their houses longer. So I suppose that’s a good thing. But more importantly, it provides servicers with more money over a longer period of time. That helps the banks.

Timothy G. Massad, assistant Treasury secretary for financial stability, said the loans in question already posed a high risk of default. “While the housing market and the economy are improving, it is important to acknowledge the variety of challenges homeowners faced during the economic crisis, including unemployment and underemployment,” he wrote in a letter to Ms. Romero. “These facts limit the ability to achieve a very low redefault rate by program design alone.” …

This is bullshit layered upon bullshit.

The challenges facing loanowners stem from the basic fact that they can’t afford the houses they occupy. The false assumption in his statement is that homeowners could afford their mortgages before the financial crisis, they became unable to afford their payments due to a temporary loss of income, and they will be able to afford the payments in the future. This basic idea is nonsense. Most of these borrowers never could afford their properties, so even if given some kind of temporary assistance, they will not be able to afford their properties at some later date. This explains why loan modifications programs fail at very high rates, yet nobody is willing to admit this truth.

The Home Affordable Modification Program was initially supposed to help three to four million homeowners, but only 1.2 million received permanent modifications, of which about 27 percent have defaulted again.

The report found that the smaller the reduction in payments and overall debt, the more likely the homeowner was to redefault. Those who had low credit scores, owed significantly more than their home was worth or had mortgages less than five years old were also more likely to stop paying.

No kidding? Someone actually had to conduct a study to reveal the obvious?

Ms. Romero said that Treasury had not collected enough information about what was causing loan modifications to fail.

Let me save them the expense of another worthless study:

THESE BORROWERS CANNOT AFFORD THEIR HOMES!

It is not more complicated than that. There is no mystery here.

“We’ve been focused on trying to get more people into the program, and Treasury has too,” she said. “And all of a sudden we were thinking, how many people are falling out of the program?”

Of the 865,000 people who have current loan modifications, she said, more than 10 percent are one or two payments behind. Those people may be eligible for help from other federal programs.

“Treasury should require, at the very least, the servicers to reach out to the homeowners,” she said, “and ask ‘What’s going on?’ ”

Government loan modification programs have been another source of fee income for the banks. They would be happy to continue modifying these mortgages over and over again.

Private loan modification programs are a method of can-kicking while banks wait for prices to rise enough to cover the outstanding loan balance.

In neither case does anyone really care if the borrower benefits in the long term. As long as the banks survive, these programs will be deemed a success, at least among the people that matter.

They couldn’t afford it

Not everyone in Orange County makes a huge salary. Some people are ordinary workers struggle to stay afloat in a very expensive place to live. The former owners of today’s featured property bought this modest condo for $240,000 on 5/30/2002. The borrowed $232,703 and put $7,293 down. In 2005 they refinanced with a $348,750 first mortgage and extracted over $100,000. The 50% increase in their mortgage was apparently not offset by a 50% increase in salary. They defaulted on the property and lost it in foreclosure.

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29566 BROOK Ct San Juan Capistrano, CA 92675

$309,900 …….. Asking Price
$240,000 ………. Purchase Price
5/30/2002 ………. Purchase Date

$69,900 ………. Gross Gain (Loss)
($24,792) ………… Commissions and Costs at 8%
============================================
$45,108 ………. Net Gain (Loss)
============================================
29.1% ………. Gross Percent Change
18.8% ………. Net Percent Change
2.3% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$309,900 …….. Asking Price
$10,847 ………… 3.5% Down FHA Financing
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$299,054 …….. Mortgage
$94,677 ………. Income Requirement

$1,492 ………… Monthly Mortgage Payment
$269 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$65 ………… Homeowners Insurance at 0.25%
$336 ………… Private Mortgage Insurance
$284 ………… Homeowners Association Fees
============================================
$2,446 ………. Monthly Cash Outlays

($267) ………. Tax Savings
($403) ………. Principal Amortization
$17 ………….. Opportunity Cost of Down Payment
$59 ………….. Maintenance and Replacement Reserves
============================================
$1,851 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$4,599 ………… Furnishing and Move-In Costs at 1% + $1,500
$4,599 ………… Closing Costs at 1% + $1,500
$2,991 ………… Interest Points at 1%
$10,847 ………… Down Payment
============================================
$23,035 ………. Total Cash Costs
$28,300 ………. Emergency Cash Reserves
============================================
$51,335 ………. Total Savings Needed
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