Mortgage Modification

Mortgage Modification

Back in December of 2008, I decided to put my thoughts in writing regarding “the mortgage mess”.  It seemed to me then, as it does now, that the solution was simple: make mortgage payments affordable so that less homes are foreclosed.  So I started to write an article which was on point, showing how a matrix/chart/interest table could explain in financial terms what was required.  That article I have included here, and I suggest you read it for background on the issue of mortgage modification.  See The Mortgage Crisis

The question I pose in that article is quite simple:  why are we forcing foreclosure to be the “one size fits all” solution, when homeowners want to keep the home, and lenders want to keep being paid?  What are the creative ways we can use to slow down the foreclosure crisis?  Is there a way to stop the loss of neighborhoods, investments and homes?

Why should lenders go to the trouble of modifying mortgages?  What is in it for them? Why bother?  The answer is quite simple:  lenders modify mortgages to make money, and to avoid losses that are certain in foreclosure.  Yes, that is right…….to make money.  Studies by lenders, the American Bankers Association, and mortgage servicers show that foreclosure is no way to a quick profit……….it is actually a dead loser, with the lender losing 50% or more of the loan value, with deteriorating real estate, legal and realtor fees, and loss of mortgage payments.  All commentators agree: foreclosing on homes will not make a profit.

Many lenders blame the current mortgage crisis on foolish consumers borrowing too much money.  They are quick to forget the lender’s role, and the huge sums made in the structuring of loans for 125% of equity, thousands of dollars in hidden charges, floating rates of interest, misrepresented payment structures, false appraisals, prepayment penalties, and making loans beyond the ability of the consumer to pay with no proof of income.  Much lending activity has been subject to investigations by state and federal authorities and condemned as less than honest.  Truly, the mortgage community has talked consumers into many a foolish loan for excessive short term profit.  As a primal cause of the current mortgage crisis, the lending community can see their mistakes have created a bad result.  Yes, the consumer is also to blame, but which came first, the chicken or the egg?

Lenders and moneychangers can be a cynical lot, with little willingness to take blame for their own mistakes, and little trust that the homeowner will pay.  Many are like adolescent “sore losers”, disheartened and threatening to “take my ball and go home”.  The assumption was that they should have been able to profit handsomely from bad loans to more consumers, with no downside risk.  But it didn’t work out that way, and now bad loans must be adjusted to more reasonable terms in the present circumstances.  The times have changed, and they call for a change in approach.

Both parties are to blame, and both must “give a little to get a little”.  Even acknowledging that some real estate deals will never work out, lenders and borrowers all profit when a homeowner pays consistently and foreclosure is avoided.

Of course, workouts don’t work in every situation.  Some homeowners just can’t stay caught up with mortgage payments.  But when loans are adjusted to levels where they can and do perform, everybody wins.  Adjusting mortgages is good for the lender, the investor, the servicer, the homeowner, neighbors, businesses nearby, and the town where the neighborhood is situated.  When homeowners do not pay mortgage payments steadily, everyone loses.  And most importantly, the economic picture becomes bleak:  depression sets in. That is bad for the whole country.

The economy runs on consumption, and consumer spending is 70% of that consumption.  If the consumer is evicted from his home, he spends less, works less, and gets disoriented and detached from community and friends.  His job performance may suffer, as he works through his personal crisis.

Do we want to save the economy?  Then save the consumer’s peace of mind, and his home.

What is Indiana doing to protect homeownership?

There has been much talk in the media in recent years, quoting prominent Indiana political figures who are determined to assist homeowners in saving their homes.  Unfortunately, the effort made has been mostly just a public relations effort.  Very little progress has been seen, in spite of much discussion, to protect consumers in danger of losing their homes.

Lenders continue to stall, and refuse to cooperate in modifying mortgages, even where legally obligated to do so under federal law.  Law in the state of Indiana continues to allow foreclosure without meaningful discussion of other options.  The state run website, telling consumers “you can get help for free” is merely a forms gathering service for lenders, sending forms back and forth from consumer to lender.  Once the lender has the forms, all too often he tells the consumer he is not qualified for any help.  Thus there is no assistance, from any source, at any time, to tell the consumer what his rights are and how to get what he is entitled to receive in mortgage modification.

Our new Indiana statute was passed in the Spring of 2009, effective July 1, 2009.  In essence, it provides for a “settlement conference” should the consumer elect to bargain with the lender instead of passively allowing foreclosure.  The bill which is now law is contained in Senate Bill 492 as enacted .  The theory of the statute, on its face, is to give the homeowner a chance to ask and be educated on alternatives to foreclosure.

In practice, certain critical flaws have become apparent:  1) the government website is of no help to consumers in transmitting forms; 2) courts are not supervising settlement conferences and what actually takes place at those conferences; 3) lenders are refusing to obey the federal law on mortgage modifications and often do not attend settlement conferences or offer any alternatives to foreclosure.  These problems can be tracked back to the major flaw in the 2009 Indiana legislation:  it is permissive, not mandatory.  The statute says the lender may offer alternatives, but it does not say that he must offer alternatives to foreclosure.  The statute was created with the appearance of helping the consumer, but it was created “without teeth”.

Thus, the Indiana law is form without substance.  It creates a brief delay in the foreclosure process, but without giving the homeowner substantive remedies.  It is the purpose of this webpage to discuss the substantive remedies, and guide the consumer away from meaningless conferences and hearings, towards a fuller understanding of his rights under federal law.

What is the federal government doing to protect homeownership?

Many of us don’t know it, but the federal government is by far the “biggest player” in the mortgage market, on a national basis.  Very few mortgages are made or paid today on a local basis, that is, the money doesn’t come from or go to Terre Haute or Kokomo, Indiana.  We have a variety of players now, in place of what used to the just one lender holding the loan he wrote; we now have lender correspondents, wholesalers, mortgage brokers, securitizers, investors, servicers, insurors, and packagers, all with a stake in the document, information, and payment stream of the American home mortgage.

It is not untrue to say that we have created even a global market in US home mortgages; but who is in charge?  The federal government owns, buys, sells, and insures the vast majority of US residential mortgages.  As such, the power of the federal government to affect foreclosure over time is immense.

But federal regulation is tricky; one rule conflicts with another, complex procedures and paperwork rule.  How to wade through the swamp of authorities and paper?

Fortunately in the mortgage market, two federal buyers and traders of mortgages are preeminent: the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).  Since they process a majority of American home loans, the government picked these two entities to be “point men” in the initiative to stop foreclosure, lowering mortgage payments if necessary to keep homeowners in their homes.

Since “Fannie and Freddie” have become involved, loan modifications are happening on their loans, even though the pace is slow.  In addition, almost 30 lenders have promised to work on loan modifications (loan mods) using the same guidelines for “qualified” loans.  Further, the federal government is taking steps to help as mentioned to: “help 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments.  Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury…..announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications.” For all details and a good general introduction to the topic, see the Make Home Affordable guidelines_summary .

The federal law creating the “Make Home Affordable” program is of recent passage, and took effective March 4, 2009.  Per the estimates listed in that program, 75% of residential US mortgages will “qualify” for mortgage mods under this program.  For the sake of this analysis, we will refer to those loans as “qualified loans”.  As mentioned in the last paragraph, it may be applied by lenders in the other 25% of mortgages which are “not qualified”, but it is not yet mandatory that lenders apply these new federal guidelines to “nonqualified loans”, in considering whether and how to modify mortgages.  In my experience, even lenders who hold “nonqualified loans” will agree to loan mods if the facts make sense.  Certainly for all lenders and homeowners, it is wise to be educated on these new standards.

In defense of the ignorant lender, many of them simply have not studied the program, and are unaware of possible obligations under this new law.  But certainly the homeowner needs to know his rights under law, and he needs to make sure the lender foreclosing knows the homeowner’s rights under law.

The links in this section are the official explanations of the “Make Home Affordable” program.  To have the most detailed explanation, one should start with the federal Make Home Affordable modification_program_guidelines.  In terms of defending against a lender’s refusal to modify, this is the primary document to explain your rights as a consumer.  In essence, the homeowner who has a qualifying loan must submit proof of income, and he is entitled to a payment which is no more than 38% of his household income.  Past due payments are rolled into the loan, and the homeowner keeps paying and staying.  It is as simple as that.

For those who are interested mainly in the “big picture”, the highlights can be skimmed  in more simple form.  The program is summarized well in the mentioned Make Home Affordable guidelines_summary, and I encourage anyone going to court next week to take a copy of this document with them.

If you relate better to a FAQ format, a simple question and answer text is used to clarify these more complex documents.  I recommend reading this as an adjunct to other documents.  I confess, by the 3^rd time I read it in a different form, I think I finally get it!  This explanation can be found at: Make Home Affordable borrower_qa.

The overall impact of the program is forecast to impact millions of home mortgages.  The scope of the program is impressive, as specified in Make Home Affordable housing_fact_sheet.  Nevertheless, consult with the guidelines first, the summary second, and the “borrower qa” third, for a good description of details upon which you can rely for mortgage modification of qualified loans.

Do I really need an attorney?

Given the clarity of the federal law, no.  Given the resistance, fear, and ignorance of lenders and others, yes.  Although the process should be simple, it rarely turns out that way.  Want examples?  Just read my blog week by week as I grind through foreclosure defense cases in the state courts.

I hope this information has been helpful to you.  It is my sincere desire that you have all the tools to do a great job in protecting yourself.  But if you are a worrier, just give us and call, and we will be happy to serve your needs.

Note: We are a debt relief agency.  We help people file for bankruptcy relief under the Bankruptcy Code.