Loan Mods and Unicorns

I am going to repost this mostly because in my experience this is dead on.



The Loan Mod Myth 


What do Successful Loan Mods and Unicorns have in common? They are both mythical creations.  The difference is that Successful Loan Mods did exist at one time before HAMP, but now seem to have gone the way of the dinosaur.  Although there is that rare individual that receives a "permanent" modification, there are also rare individuals that win the lottery.  Even if a homeowner does get a "permanent" modification there is about a 50/50 chance it will result in an increase in their monthly payments. 


The MSA's (Mortgage Servicing Agreements) and PSA's (Pooling and  Servicing Agreements) between the lender (servicer) and investment groups, defines the number of loans that can be modified in a portfolio.  Typically this number is less than 5%, which is why the lenders allowed some modifications and then stopped.  There was no consideration that AAA rated securities would have the default rates occurring today and therefore there were no provisions to handle the mess we are in now.  Most of the residential loans were securitized into mortgage backed securities and pieces sold to junior tranche owners that get paid only after the senior tranche owner has been paid in full.  The effect of MBS distributions and any funds paid by Mortgage Insurers have created a situation in which investors are typically receiving 95% of market value from a foreclosure of a property.


You may notice that we have used quotes on the word "permanent".  That is the term used by lenders as it is defined in HAMP.  The reality is that these loans in almost every modification are not permanent; meaning they are not fixed for balance of the term of the loan.  Rather, the loan is modified for 3 to 5 years and then adjusts or returns to an increased interest rate.  The 3 to 5 year period is just long enough to get the homeowner past the 2012 deadline for the Mortgage Debt Relief Act.  This means that the homeowner could miss their opportunity for an exit without tax consequences by accepting a modification. 


Another reason that the term "permanent" is illusory as it relates to loan mods is that many of the lenders will repeal the modification that was supposedly approved and granted.  This leaves the homeowner unable to pay off the accrued, unpaid payments, interest and fees to prevent a default and the home will usually be taken in a foreclosure.


Even if the homeowner is extremely lucky and gets a loan modification, that lowers their monthly payment, the issue of negative equity has not been addressed nor resolved.  Unless and until the homeowner receives a loan modification that includes a reduction of the principal balance so as to eliminate or appreciably reduce the negative equity, the primary problem faced by the homeowner will continue to exist.


The reason it is important to understand the fallacy of a loan mod is that homeowners spend months or in some cases even years playing this game with the lender and may miss their best opportunity for a clean exit from the property through short sale.  As a Realtor you may already be explaining this to homeowners, but we hoped that this information may help the homeowners you consult with to better understand their options.


Below are some other tools that can help a homeowner separate their emotions from what should be a strictly financial decision.


For questions or comments about this or other articles please visit our blog.