Very Few Loan Modifications Offer Homeowners a Real Solution.
A Loan Modification by design is supposed to provide homeowners an affordable solution so they can stay in their home. This will then theoretically allow both the homeowner and the lender to avoid mortgage delinquency and foreclosure all together. Given the many people owe significantly more on their properties than they are worth you would think that lenders would be willing to do everything they can to keep people in their homes. The incentive for a lender to keep a homeowner in the home to avoid foreclosure is very significant when compared to the potential financial downside of foreclosure for the lenders.
If this is truly the case then why do only 10% of Loan Modifications provide an affordable long term solution for homeowners? Why do 90% of Loan Modifications outright fail? It’s simple. The lenders are unwilling to forgive a portion of the debt burden to provide a fair and affordable solution for the distressed homeowner. They belligerently focus on the debt in aggregate that is owed with the expectation that it is all to be repaid. Given the size of the debt burden that most people have and the law of numbers this is not a realistic position the lenders hold.
I don’t care how much talk there is in the news about modifications that will provide long term solutions. The market is only seeing short term fixes and homeowners’ that are force to leave their homes via foreclosure even after they have spent months attempting to work out a modification with their lenders. Lenders are not on board with a fair solution. They have the explicit expectation that people will mortgage their lives away and eat bread crumbs for the next 50 years to repay what is owed. I am personally tired of hearing lenders tell me. “we did lend them the money”. I always smile and reply, “yes you did and I feel for you but you are not getting it all back”. Maybe I should say that the 100-500K in debt my clients owe above their home values will be repaid in after tax dollars. Yeah right! Maybe the dumbass lenders should had respectfully stuck to the preexisting guidelines for their lending activities. Such guidelines are design to protect both lenders and borrowers from foreclosure.
Ironically, it is also common to hear lenders gripe about the costs of properties that they have taken back in foreclosure. When the lender loses everyone’s cooperation and there is no hope of a Loan Modification, a Short Sale, or any other mutually beneficial solution because they have railroaded a family into foreclosure, they normally gripe about the costs. I hear this from the realtors that specialize in REO property sales for the lenders. They market is hitting the lenders hard and when a property is in REO there is no solution other than the lender bearing the full burden until they can sell the property.
The reason this happens is that lenders are large organizations and there is little continuity in dealing with the recovery process regarding the current housing crisis. You commonly will see a homeowner that has been working with their lender for a couple months trying to obtain a modification only to have the collection department and a legal team posturing preparations for the foreclosure sale. Now if the client is working on a short sale solution at the same time, just in case the Loan Modification does not yield an affordable solution, you will also have the Loss Mitigation Department as a third initiative. All of these departments will be working independently in parallel to one another under the same roof called your lender. When I say independently I mean it literally. It’s a conveyor belt or what I call a machine and the left hand does not have a clue as to what the right hand is doing.
The lender could really care less about the homeowner. They just want their money back. When the lenders start caring about the homeowners you will see the reciprocal of 90% Loan Modifications working and only 10% failing. At this time it is the reverse so don’t be fooled.
If you owe a significant amount of debt over what your home is worth you would be better to spend some time researching our Short Sale Solution or our Hybrid Refinance options. Whatever you decide please do not sign up for anything that is not a long term solution for your problem. You owe this to yourself.
GHunter
November 4th, 2008 at 7:14 am
Great Post! I too am tired of hearing lenders bellyache about fact that they are losing money. They created their own mess out of greed. The homeowners often have an equal share of responsibility. However, many of the homeowners that I have worked with did everything right and simply got caught up in a very unfortunate set of circumstances that could have never been predicted. Life crisis issues like terminal illness or death of a spouse, sudden job loss, job related relocations and other similar issues. The point is, in either case, the lender has responsibility for their investment decision.
I invest in new ideas, marketing campaigns, employees and other avenues that are done so with an expectation of profit on a regular basis as part of running my business. In some cases, I lose money. In every situation where I lose money, I look inward for responsibility, blame, disappointment and solutions. You see, I AM THE ONE who SPENT THE MONEY with hopes that it would become a fruitful investment.
In the case of the lender, they made the decision to make the loan. If I were to ask my 7 year old son if he would loan money under some of the absurd conditions that lenders have loans over the last decade, he would laugh and say, “No way Dad”.
Some examples of lending foolishness include lending when:
1) An arm is set that wipe out the debt to income ration after the first adjustment.
2) The debt to income ration will clearly be out of whack as soon as the property taxes are adjusted to include the improvement (house) with the raw land in new construction purchases.
3) The borrower is allowed to “state” an income that clearly exceeds a W-2 and there is absolutely no evidence to support the stated number.
4) The borrower has absolutely no “skin the game”. In other words, they have asked to finance 100-106% of the value.
5) The borrower has obviously has a questionable credit history.
Another major reason for having no interest in pity for the lender is that they have compounded bad mistakes with stupid solutions. Intentionally or unintentionally, they have decided to make it nearly impossible for a homeowner to work with them and unnecessarily difficult for trained professionals to work with them. They stall, lose communications, hire untrained professionals to sit in a position of authority for the first time in their lives, create foolish hurdles that are unrelated to their need to cut their loss and more. I could go on all day. Anyone with the common sense that God gave a block of wood could walk into any major mortgage bank and implement strategies that would save tens or even hundred of million dollars.
Yes it is true that the lenders are large organizations. However, at the top, the people how are making the decisions on how to deal with the problem are the same idiots who got them into this mess in the first place. No pity here. Thanks again for the great post!
Regards,
Brad Brusenhan
Dallas, Texas Pre-Foreclosure Advocate
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