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Modifying Loans: Getting to True Success
BY Janice Ramocinski
Modifying Loans: Getting to True Success
The demand for loan modifications, largely driven by the Obama administration's Home Affordable Modification Program (HAMP)' has grown beyond what mortgage servicers can handle on their own and beyond even what affected homeowners can understand, leaving some to assume they are entitled to a payment reduction that will keep them in their homes.
While HAMP may be well intentioned, the compliance details for servicers are not always understood and so, servicers are unsure what is expected of them. As a result, they sometimes fall short of properly determining what modification(s) will require, (Even some government administrators admit they have a hard time making heads or tails out of all HAMP's nuances.)
What is needed is a totally new approach that goes beyond traditional underwriting, debt-to-income ratios (DTIs) and credit scores. Without that fresh thinking, a loan modification may only delay the inevitable foreclosure, And that is one of the unpleasant secrets of this entire saga.
Let's look behind the Wizard's curtain for a moment Trial modifications, when made, cover three- or six-month periods that, even when successful, sometimes do not become permanent for a number of reasons. For example, in some instances overworked and under-resourced servicers can lose track of these interactions. Other trial mods fail because they lack sufficient underwriting. Or in the past, some have failed when, at the end of the trial period, servicers had added so many fees and other costs to the loan principal that it had actually risen, often on properties already underwater.
A trial mod often means a monthly payment reduction-no principal reduction (write-down). The servicer, when making the modification permanent may forgive some of the accrued interest; maybe not. The servicer may forgive some of the principal; maybe not. If not, the borrower owes more than he or she did before the trial modification, because accrued interest, corporate advances, insurance, legal fees and property taxes have been tacked on to the loan balance.
That can mean, on a house worth $175,000 the borrower who had a mortgage of $200,000-owes $225,000. And what's more, the servicer has now collected three or six months of the borrower's money (which may have gone toward repayment of corporate or tax and insurance advances). The borrower, however can only afford a $150,000 loan. Is it likely the servicer is going to write off sufficient principal to take the loan balance down to $ 150,000, even if it has the authority under its servicing agreements to do so? And how is the borrower going to make payments to the Internal Revenue Service (IRS) as a result of the large 1099 IRS form arriving in his or her mailbox next January for the cancellation of debt, if the servicer does cancel some of the principal?
An alternative approach
We have an alternative approach that does not add any costs to what borrowers already owe, because my company absorbs them. We do not charge the borrower for anything. Even when there is a deed in lieu of foreclosure, we bear all costs. We determine if people should allow their homes to go into foreclosure or whether there is a way to reconstruct the loan so they can afford to stay.
I believe that a better approach is to skip the whole trial loan-modification limbo and do a permanent loan modification that makes sense. Fully underwrite the borrower and, if economically feasible! create a loan modification when the borrower qualifies for a fully documented and fully underwritten alteration to all loan terms, principal and-interest provided the net present value of the modified loan exceeds what the holder of the loan would be entitled to if it exercised its rights under the law. Prudent loan modifications require the borrower to document income, meet some reasonable combined debt-to-income ratio and show sufficient disposable income on which to live.
With this approach, we are not just looking at DTI ratios; we also peer into borrowers' lifestyles, What do they actually spend money on? And what are all their financial obligations? For example:
• Are they supporting aging parents?
• Do they have working college students or high-school students living at home?
• Are there ongoing medical expenses?
• What other obligations do they have that are not typically captured on credit reports or on a form loo3?
• What are their actual living costs? For example, Dallas and San Francisco are wholly different places to live in terms
of cost of living; that must be taken into account.
This kind of thorough examination-setting reasonable expectations for borrowers-is more realistic.
The problem in today's environment! to put it plainly, is that the government has not set reasonable expectations around loan modifications. No wonder, then, that we repeatedly encounter borrowers who feel that they should get a modification (because the government says they are owed one), even if they lose a job, they're underwater-either by property value or residual income-or they just bought too much house or took out too big a loan.
The sad truth often is that, for many people, nothing can be done to modify their loans and keep them in their homes, They truly are victims of the economy. We recognize this] and we endeavor to offer them an exit strategy at no cost to them-not a trial mod that will cost them hard-earned cash, but still fail and leave them in the same (or worse) position six months from now.
Janice Ramocinski is chief operating officer of Kondaur Capital Corporation, Orange. California.
The company acquires, manages, services and liquidates distressed mortgage loans.
She can be reached at jramocinski@kondaur.com