May182013

Defaulting on your home includes automatic enrollment into a loan modification program

The desire to push defaulting homes into shadow inventory and keep them off the market is manifesting itself into new programs.  Let’s briefly review, remember when banks didn’t want borrowers to default and when the borrower defaulted, banks had very strict guidelines to get out default and back into the good graces of the bank?  Banks didn’t even want to publicize the fact they were having defaults or foreclosures to give appearance of financially soundness of their institution.

Now banks in conjunction with Fannie Mae and Freddie Mac are giving defaulted loanowners virtually an automatic enrollment into a new loan modification process.  So, why is it opposite from a few years ago, because it’s in the best interest of the banks to keep these borrowers in their homes.  1) the banks can keep the 5,000,000 defaulted loanowners off the market. 2) they don’t have to potentially record the over $1 trillion in underwater debt losses after the foreclosure sale 3) Hopeful that these loanowners will pay some sort of payment on a underwater mortgage but with a lower payment. 4) the banks want to perpetuate the false assumption to the loanowner that not only will their homes will be above water but will appreciate and generate a return for the loanowner.

GSEs Make New Simplified Mod Program Available Immediately

Fannie Mae and Freddie Mac are offering the new Streamlined Modification Program to distressed borrowers before the effective date of July 1.

Rather than delay assistance to borrowers, Freddie Mac stated it is making the program immediately available to all eligible borrowers across the country, according to a release. In an email, Fannie Mae also confirmed the program is already available.

So, this is going to scare people into paying their loans, if you don’t pay your mortgage the evil bank will enroll you into program assistance?    Loan modification is the new and middle class form of welfare in the form of a food pellet.

As part of the program, Fannie Mae and Freddie Mac borrowers who are at least 90 days delinquent but no more than 720 days past due may be eligible for a modification that does not require the borrower to submit financial or hardship documentation.

Again, there is no encouragement to stay current on your loan.  If you are going to 30 days past due then you should just become 90 days, because then you will be automatically eligible for the program.  It gives the borrower an incentive not to pay your mortgage.

The Federal Housing Finance Agency (FHFA), the GSEs’ conservator and regulator, first announced the program in late March.

The program requires servicers to send modification offers to all eligible borrowers. The solicitation letter will include details for a three-month trial period plan. In order for the modification to become permanent, the borrower must make on-time payments for the three-month trial plan to prove ability to pay.

The borrower just needs to make three payments then they are in a permanent program.  After they are in the permanent program can they default again and get another loan modification?  Doesn’t this demonstrate this program will never get people to pay their mortgages.  It’s the circle of life everlasting debt.

“Today, Freddie Mac is giving a green light to its mortgage servicers to speed up financial relief for potentially thousands of families with delinquent mortgages across the nation. Now mortgage servicers can send eligible borrowers their Streamlined Modification trial period terms as soon as they are ready and borrowers can modify their loans by making the three trial period payments on time…Freddie Mac is focused on adding momentum to the housing recovery by giving distressed borrowers more options to avoid foreclosure,” Freddie Mac stated in a release.

To be eligible, the loan must also be a first-lien mortgage that is at least 12 months old with a loan-to-value ratio equal to or greater than 80 percent.

This means Fannie Mae and Freddie Mac is designing this program not to help out the borrower, but really help out the banks.  If it was meant to assist the borrower then ALL borrowers regardless of their Loan to Value ratios would be eligible for the program.  If the bank has loan to value of less 80% on an a outstanding  loan they could foreclose on the recoup their losses.  This program is helping banks.

Fannie Mae and Freddie Mac revealed details of the Streamlined Modification program in separate announcements.

I believe the HAMP and HARP programs were controversial several years ago, but now it’s almost a part of housing process.   Hopefully, this won’t be the norm for the future of housing, but the banking lobby is in the driver’s seat and tax payer sponsored bailouts might be here for the near term.

Larry also posted yesterday detailing the psychology of the underwater loanowner.  These programs not only feed into their false hopes that loan modifications will be here forever, and equity extraction of anticipated future appreciation is just a few years away.  It wasn’t a bad financial choice to purchase this house, it was just a rough patch and it will all be better in the future according these loanowners..   Well, the suspension of financial realities can only be delayed for so long.  At some point the bank will foreclosure or encourage short sales if they can unload the house with a minimal loss.  However, in the mean time the bank will be able to induce some payments, they will be irregular, from the borrower.   This is the real propose of this program get a few payments from the borrower and sell the house in the future when hopefully values have increased. In the end the borrower will lose the house to a bank or someone who can afford the mortgage.