Aug052015

Banks reject 72% of loan modification applications

Banks reject most loan modifications because they really don’t want to modify loans, and in many cases, the applicant doesn’t deserve a break.

If they had it to do over again, lenders wouldn’t have made so many loans to weak borrowers during the housing bubble. Underwriting standards were nearly non-existent late in the bubble, and delinquency rates ran so high that lenders needed to reevaluate these borrowers after the loan was already made.loan_application

The problem with underwriting after the fact becomes apparent when lenders reject three quarters of the reviewed loans. At the peak of the housing bubble, about three quarters of marginal loans to spotty borrowers probably shouldn’t have been funded at all.

The real reason for loan modifications

Lenders give loan modifications to desperate borrowers ostensibly to keep them in their homes, but more importantly for lenders, loan modifications keep properties off the MLS and force buyers to compete for diminished inventory driving prices higher.

Loan modifications are not an entitlement, and banks don’t want to make them one, but that’s not how borrowers see it. Borrowers consider loan modifications a birthright, and they believe lenders will always accommodate their sob stories and allow them to remain in houses they can’t truly afford.

Lenders hope they can sustain loan modifications until prices near the peak when lenders can rescind the loan modification entitlement, push the borrowers out, recover lender capital, and loan that money to someone who will pay in accordance with the promissory note terms. Lenders are in the business of loaning money and maximizing the return on their capital; they aren’t a charity providing lifelong subsidies to borrowers who want to remain in houses they can’t afford.

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A Slack Lifeline for Drowning Homeowners

JULY 31, 2015, By GRETCHEN MORGENSON

After Lucy Circe became disabled and could no longer work, she applied to Bank of America for a mortgage loan modification on her Vermont home.

If she could no longer work to make the payment, why should the government force a lender to modify her loan to keep her in a house she can no longer afford?

Andrea Egizi 72

Like the story of the single mother who can’t afford her home on a single income, owning a home explicitly demands the ongoing ability to make payments for the full term of the loan. If a borrower or borrowers experience a change in their life circumstances and can no longer make the payments, shouldn’t they be required to sell their home and downsize?

Why do banks or taxpayers have to cut these people a break? And if they people like this are entitled a break, then I plan to buy a very expensive house just before I retire and petition for a loan modification so I can afford it in my retirement. Wouldn’t you?

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Think about this scenario: Many young couples get married and buy a house counting on both their incomes. Invariably, they want to start a family, but they can’t afford to because they need both incomes to make the house payment. Let’s say the wife gets pregnant and quits her job anyway. Should the family be given a loan modification and be allowed to keep the house they can no longer pay for? If loan modifications were permitted under those circumstances, wouldn’t everyone do it? Isn’t giving them a loan mod crowding out a family who lives within their means?

Over more than two years, starting in 2012, the bank repeatedly requested copies of documents that had already been provided, asked for proof that she was no longer married to a man she did not even know, and made other errors, like asking why Ms. Circe had indicated that she didn’t want to keep her property when she had actually told the bank she did.

None of it made sense. …

No, it makes perfect sense. Loan modifications are not an entitlement, and banks don’t want to make them one. Once you accept this reality, the behavior of banks makes perfect sense and becomes quite predictable.

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But the report, by Christy L. Romero, the government official with authority to monitor the program, shows that six years later, just 887,001 borrowers are participating in loan modifications — deals that reduce the costs of mortgages.It appears that the program has allowed big banks to run roughshod over borrowers again and again.

Instead of helping some four million borrowers get loan modifications, the report noted, banks participating in the program have rejected four million borrowers’ requests for help, or 72 percent of their applications, since the process began. …

Banks are not making the process any easier; in fact, the Loan modification entitlement is curtailed as prices rise. Banks never wanted to modify these loans, so it shouldn’t be surprising that a vast majority of these applications were denied.Bank_of_America_debt_forgiveness

The banks say they have good reasons for rejecting loan modification applicants. In 38 percent of cases, the banks blamed the borrower for either not completing the paperwork or failing to make the first payment under the program. …

Realistically, if people are offered the opportunity to petition for free money, many more people will apply than could possibly qualify.

“We’ve always known that a lot of people were being denied for loan modifications,” Ms. Romero said. “When we started looking at these numbers — 80 percent or more at the larger servicers — it’s so telling that something is not right in these operations.” …

bankerFrom the bankers’ point of view, an 80% denial right is a clear sign that the program is succeeding.

“Virtually never does one get a loan-mod application properly evaluated the first time,” said Jacob Inwald, director of foreclosure prevention at Legal Services NYC, which provides legal representation to troubled borrowers. “We deal with these issues every single day. It requires constant pushback and challenging wrongful denials.”

So only the most patient or the most lawyered-up will ever get a loan modification. To see just how determined some unqualified borrowers can be, please read Ten Lessons learned from a real estate coach.

It is never wise to exclude incompetence as a reason for the trouble that borrowers may be having with loan modifications.

tomorrows_bankersDon’t overlook the value of willful ignorance. If a lender is forced to implement a program by the government, but they want it to fail, the easiest method is to employ people with poor skills and bad work habits, then train them poorly and let nature take its course. It will look like incompetence, but it’s really failure by design.

But Mr. Inwald said there could be a financial motivation as well. Delaying a borrower’s loan modification request can be profitable for a bank; extra time for the bank means more interest and fees can be charged to the borrower, increasing the amount owed on the mortgage.

Banks never had incentive to modify these loans. The banks only recover more through loan modification on the most hopelessly underwater squatters. The only people with a chance at a loan modification are those borrowers who weren’t making payments, had no assets, and couldn’t sell for enough to cover the outstanding mortgage balance. That group had leverage on their lenders because they had nothing to lose. The banks can tell the rest to go pound sand.

“It’s kind of stunning when they come back with all these strange reasons for denials,” Ms. Radbord said. “What really bothers me is, how on earth would a homeowner be able do this on their own?”

They’re not supposed to be able to get through the process on their own: They’re not supposed to be able to get through the process at all.

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