October 20, 2008, Revised November 10, 2008, November 18, 2008
"I have been giving my clients an article you wrote about a year ago
advising borrowers having payment problems how to request a modification
in their loan contract …Could you bring it up to date?"
Arrival of HOPE NOW
A lot has happened since that article was written. Very shortly
thereafter, the HOPE NOW program promoted by Treasury Secretary Paulson
began as an effort by housing counseling agencies and mortgage servicers
to modify loans on a strictly voluntary basis. Since then, the first
recourse of borrowers in trouble has been to call them at 1 888 995
HOPE. I have sent many people to HOPE NOW, with mixed feedback.
Declining Home Prices, "Upside-Down" Borrowers and Financial Crisis
House prices have declined further in the last year, turning more
borrowers "upside down" where they owe more on their mortgage than their
house is worth. This induces some borrowers to stop making payments,
which increases foreclosures. But price declines also reduce the amounts
that investors recover from sale of the house following a foreclosure,
which should increase the attractiveness of loan modifications as an
alternative.
In addition, a full-fledged financial crisis has erupted, forcing the
Federal Reserve to act as the lender-of-last-resort to a series of
weakened financial firms unable to meet their cash needs. The coverage
of deposit insurance has been broadened and money market funds are now
insured. In the works, furthermore, are plans to purchase mortgage
assets from investors, to make direct equity investments in banks, and
even to insure payment of principal and interest on mortgages and other
assets.
An excellent study by Alan M. White provides some indications of what
has happened to modifications during this tumultuous period. In a sample
of sub-prime loans he examined, the mortgage payment was reduced in only
about half the modifications and the balance was reduced in very few
cases. In many cases, the modification consisted of adding the amounts
past due ("arrearages") to the balance, which raises the payment. It is
no wonder that during the annual period he examined, the number of
foreclosures swamped the number of modifications.
Borrower Options
Borrowers having payment trouble have choices. The rational choices are
either to seek help immediately, or to take immediate action themselves.
Those who put their heads in the sand will lose their home in a
foreclosure.
Those who elect to seek help can go to HOPE NOW, or try a HUD-approved
counselor (see
http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm). Before doing
either, prepare yourself by pulling together all the data that the
counselor will need; the form at
https://hoa.mortgageinsurance.genworth.com can be used for this
purpose. I hope to have some more options soon.
Borrowers should be wary of private loan modification companies that
have sprouted like weeds in recent months. I am confident that most of
them are hustlers looking to garner upfront fees, and while there are
probably some good ones, I don't know yet who they are or how to
distinguish them. I am working on it.
If you elect to handle the matter yourself, you must get to the
servicer’s loss mitigation department, which may take some persistence.
The burden of proof is on you to demonstrate and document that, for the
reasons you lay out, you cannot any longer make the required payment.
You must also demonstrate and document that you can make a smaller
payment that you specify.
Under the new FHA program called H4H ("Hope for Homeowners"), FHA will
refinance loans of borrowers having payment problems if the existing
investor will write down the loan balance to 90% of current market
value. HUD publishes a list of lenders participating in this program. I
am not sure whether there is any benefit to a borrower contacting one of
them before the firm servicing their existing loan has agreed to pay
down the balance. But it can’t hurt to get that lender on your side.
Federal Help on the Horizon
Aside from the possible increased risk exposure under FHA, the Federal
Government has not channeled any crisis money directly to borrowers. The
new programs referred to earlier will direct $700 billion or more to
financial institutions, but none to households. A strong case can be
made that this is unbalanced.
The root cause of the crisis is the decline in home prices, which will
continue so long as the foreclosure problem isn’t solved. Arguably,
dealing directly with this problem is more effective than dealing with
it indirectly. The Treasury recently put out a request for proposals on
a mortgage payment insurance plan, which could be the perfect vehicle
for providing direct assistance to borrowers. Stay tuned.