Saturday, January 3, 2009

More About Foreclosures & Mortgage Modifications


2009 - a New Year! A better year for homeowners and mortgage owners? NO!, unless there are significant reforms made quickly. While I have explained the issue of modifications to mortgages in earlier posts, little if anything, is actually happening.

The Wall Street Journal on the last day of the year, December 31, 2008, published an excellent article by Michael Corkery entitled "Mortgage 'Cram-Downs' Loom as Foreclosures Mount". Mr. Corkery described in detail the failure of the loan modification programs instituted by various Federal agencies: The HOPE program which was supposed to help 400,000 homeowners facing foreclosure is less than limited success. As of his writing, only 357 people have signed up. HUD (the Department of Housing and Urban Development) admits that the program has, quoting Mr. Corkery, "been encumbered by high fees and narrow eligibility requirement". Another program FHASecure which was supposed to help 80,000 people facing foreclosure get help, has only met 5% of its goal, 4,100 homeowners. The program stopped taking new applications from desperate homeowners, those who are delinquent and facing potential foreclosure in the near term, as of the 1st of this new year.

The mortgage industry is, on its own, doing loan modifications with borrowers. They report that 37% of those modifications fail within 6 months. According to the chief lobbyist for the Mortgage Bankers Association, an organization with which I am familiar, claim that "Our members have modified 2.8 million loans". NOBODY IS DEFINING "MODIFICATION"! The Mortgage Bankers Association is counting ANY modification, even if it is to defer one payment, let one payment be late.

A mortgage is a contract between a borrower and the lender, or the lender's representative/agent, often the servicer (the folks who send out the bills, collect the checks, and order the foreclosures). A modification is simply ANY CHANGE IN THE TERMS OF THAT CONTRACT - ANY CHANGE!. I can say with certainty, because I deal with getting modifications for my clients and reviewing lender offered and accepted modifications for many clients, who are facing a foreclosure and a bankruptcy to stop it, that the mortgage industry's idea of a modification and everyone else's are at variance.

The industry, very ofter servicers, will typically offer to allow 1 or 2 payments to be put at the end of the mortgage, or might allow an "interest only" payment for a few months, or even lower the interest rate, until the next adjustment, by 1%, like from 9.875% to 8.875%. It might be a big concession for the servicer, and on a temporary basis help the borrower make another few payments, but is doesn't address the real issues with the loan. The problem loans are, by a huge majority, ADJUSTABLE RATE MORTGAGES "ARMS". Many have a base rate, called the index, and a margin which is the amount above the base rate that the lender is charging the borrower. In a sense, it is the lender's profit.

As an example, the typical ARM in trouble today is a 2/28 or 3/27, 6 month LIBOR ARM. Translated, the loans have a fixed rate for 2 or 3 years, and then adjust every six months for 28 or 27 years. The adjustment is determined by the London Interbank Rate for US dollar-denominated deposits - the rate that banks charge each other for money when it's borrowed. The typical 1st adjustment has a maximum of 2% or 3%; adjustments follow every 6 months thereafter, moving up or down by no more than 1%.

I know the next paragraph is numbers intensive, but it shows a real example of why suddenly people cannot pay their mortgages:

Concrete example: Date - May 2004; $125,000 mortgage; 2/28 loan (2 year fixed rate then changes for the next 28 years); interest rate set at the LIBOR plus margin of 6.5%; starting rate 4.5%, (the rate the borrowers payments are based on) which was a "teaser rate" because it was below the rate as determined by the actual formula; formula states 6 month LIBOR which was 1.3862% (April 2004 - always use the prior month), PLUS the MARGIN of 6.5%, equaling a rate by the formula of 7.8862%. The starting payment at the teaser rate was $633.36, plus taxes and insurance. The rate per the formula would have been $907.31. That is $273.95 higher. For 2 years the borrowers are happily paying the $633.36 monthly payment, plus their taxes and insurance, let's say $200, or a total of $833.36. At the 2 year mark, May 2006, the rate changes. The formula calls for the LIBOR, which is at that time, 5.2879%, PLUS the MARGIN of 6.5%. The total is a staggering 11.7679%. The borrowers are saved a little, because the formula also has the 3% maximum rate increase provision. BUT, the increase maximum is taken from the formula rate, not the teaser rate. So, the true formula rate when the loan was signed was 7.8862%. It can only go up 3% on the first adjustment; that means 10.8862% or a payment of $1,179.67 plus $200 for taxes and insurance for a total of $1,379,67 per month, compared to the first 2 years at $833.36. That is a 65% increase!

The figures above are real and the formula is real and they came from a real mortgage. Please understand that not all adjustable rate mortgages are that heavy-handed. Many adjust the same way but the margin is 2.5%. That would lower payments by $280.88 per month. That is one of the modifications that should be made, along with possibly making the loan a 30 year fixed rate loan. IT HAS BECOME ALL ABOUT GREED. Everybody wants what he/she is "entitled" to receive. Unfortunately, these mortgage owners, who are large investors, may get nothing if the house is sold at foreclosure. If we do not get the ability to force modifications, the housing market will continue downward because more and more foreclosed properties will be put up for sale by the lenders.

Some of the why no one will really modify a loan in the next post.

Author's Copyright by Richard I. Isacoff, Esq, January, 2009

No comments: