Loan Modifications in Today’s San Diego

by on January 26, 2011 · 7 comments

in Civil Rights, Culture, Economy, Health

Editor: This occasional column by our financial whiz Dave Rice will give us snippets of views of the world of mortgages, finance, loan modifications and ….

To many borrowers trapped in ‘upside-down’ loans and struggling to make payments, getting a loan modification sounds like an ideal solution—you keep your house, if you’ve missed any payments they’re tacked onto the back end of the loan, and your interest rate is lowered—significantly and often permanently. The only thing between you and your modification is the application package that requires as much input as (if not more than) when you applied for your loan, the lender’s review process (and its phone-tree labyrinth that must be navigated whenever you want to leave a message you hope someone in the modification department will eventually receive), and the extended waiting period, during which the lender will continue to attempt to harass, cajole, and bully you into continuing to make your old payments and abandon the modification attempt altogether.

This is where professional modification assistance firms step in. They can review your paperwork to ensure it goes to the bank correct the first time, and can even help submit it. And if you sign one extra document with the package, your negotiator can speak with the bank on your behalf, navigating that phone maze for you, taking the returned calls that normally roll over to your voice mail while you’re at work, and translate whatever the bank’s saying into simple English before it reaches you. But all modification assistance outfits are not created equal. Things to watch out for (boring but necessary legal disclaimer – this should not be construed as legal advice, which I am prevented by law from providing and required by law as a licensed real estate broker to inform you I’m prevented from providing):

Upfront fees—it’s actually now illegal to collect a fee for modification help before a service has been provided, as at the outset of the financial crisis many operations were collecting $1,500 or more to start modifications, then failing to follow through and more often than not providing no service to their customers. Some firms with a lawyer on staff will still attempt to collect a fee by calling it a ‘legal retainer,’ or something similar. You don’t need a lawyer to get a loan mod, and you certainly don’t need to pay for one.

Mortgage payments—you may be asked to make your mortgage payments to a third party instead of the lender as part of some agreement the negotiator says has been arranged or is in the works. You may also recall the dozens of stories in local papers over the last few years where borrowers do this only to discover after several months their mortgage hasn’t been paid and their money has disappeared.

Title transfer—some outfits tell borrowers that they need to transfer their home to another individual, a corporation, or a trust in order to get the bank to work with them. This is almost always a scam, no legitimate bank would ever even request this—essentially what you’re doing is giving a con artist license to borrow even against your (well, technically ‘their’) home, or to sell it to someone else without your knowledge or consent.

Snapshots of Financial Disaster

  • The number of sellers having to reduce the price of their home at least once in order to sell is up 24% compared to last year…
  • Half of all homeowners who currently have a mortgage say they’d consider walking away from their home of they owed more than what it was worth. That’s up from May 2010, when 41% said they’d consider abandoning an underwater property…
  • Zillow reports that the total decrease in the value of real estate in the US is expected to be $1.7 trillion dollars for 2010, up from about $1 trillion in 2009. San Diego, however, was one of 31 markets in the country to show a gain in value, with the county as a whole worth $10.2 billion more than two years ago. The only way I can justify this is when considering the house flippers who’ll buy a house for $150,000, spend $50,000 painting, carpeting, remodeling, and making needed repairs, then re-selling for $250,000…
  • Continuing the optimism in the construction industry noted with several significant local land purchases a few months back, the U.S. Census Bureau and HUD announced that new building starts in November were up 6.9%, and permit applications for further new projects increased 3% as compared to November 2009. How this will apply to San Diego, given our abundance of vacant real estate and dearth of water remains to be seen…
  • Changing the mortgage interest tax deduction is still high on many deficit hawks’ wish lists. Proposals to decrease the maximum amount of loans covered from $1,000,000 to $500,000 or scrap the current system in favor of a new one that would allow a simple percentage tax credit are both gaining traction…
  • The bipartisan Congressional Oversight Panel that is monitoring the bank bailouts and the Home Affordable Modification Program is about ready to declare failure. They say this is due to poor supervision of the banks offering the modifications to ensure they were processed efficiently and fairly. Yes, the group tasked with watching the banks is stating the program is failing due to failure to watch the banks. They project that instead of helping out 3-4 million borrowers as planned, the actual number receiving modifications will be close to 700,000, out of an estimated 8-13 million foreclosures expected by 2012…
  • Foreclosures are up once again—after a dip due to the ‘robo-signing’ scandals, final numbers on new foreclosure filings in 3Q 2010 totaled 382,000, up 31.2% from the previous quarter and 3.7% from last year…
  • Wells Fargo and California have reached a settlement that will provide $32 million to former ‘pick-a-payment’ borrowers subjected to foreclosure, and make modifications available to borrowers on as much as $2.4 billion in existing loans…

{ 7 comments… read them below or add one }

avatar annagrace January 26, 2011 at 10:42 am

Dave- great information. Do you have an opinion on how to make the Home Affordable Modification Program functional? Having it proclaimed a failure and then all parties walk away should not be an option.


avatar dave rice January 27, 2011 at 1:52 pm

Two suggestions: one, lenders need to staff up. They’ve known for years now that this is coming, and they still don’t have staffing levels sufficient to handle it. A lot of times a customer will submit a package, and by the time it gets reviewed the paystubs, bank statements, or other documents the lender requested will be outdated. The file then goes to the back of the line until the consumer updates them, and by the time they get back to the front of the line…

The second is a little more difficult: the rules that govern modification practices need to be thrown out and completely rewritten. Modifications are not approved or denied based on the likelihood that a borrower will be able to get back on their feet and eventually make good on a loan. They’re not based on whether the borrower’s hardship is real or imagined. They’re based on whether the bank could expect a greater profit from offering a modification or denying it and foreclosing. This is the single greatest problem with the entire modification equation.


avatar Patty Jones January 26, 2011 at 8:11 pm

It seems to me that ending the mortgage interest tax deduction will cause more people to walk away from their underwater properties.


avatar dave rice January 27, 2011 at 1:53 pm

It certainly would – it’s the only thing that makes ‘owning’ appealing at all when you’re upside down, paying through the nose on your loan, and have no landlord to call when the plumbing backs up…


avatar RB January 27, 2011 at 5:18 pm

First now is the time to be buying not selling or walking away.
“Be fearful when others are greedy, and be greedy when others are fearful.” Warren Buffet

On idea I came across is for the government, banks, and system to allow the loans of those underwater to be split. Most of the loan and an amount not underwater should be allowed to be refinances at the current low fixed rates. The portion of the current loan that is underwater would not be modified in the new loan and would be treated as a second smaller loan with the government offering some portion of protection. When the real estate market improves the bad or underwater portion of the loan could be retired or sold on a secondary market. It is in every ones interest to keep people in their houses.


avatar dave rice January 29, 2011 at 2:09 pm

There are programs out there to refinance loans that are underwater, but the fees are so high it rarely saves the consumer enough money to justify the cost, unfortunately…what I’d like to see is a program where borrowers who can document ability to pay refinance their homes at 100% of current value at a true market rate, with the underwater portion restructured as a second loan requiring no payments but collecting a nominal interest rate of 2% or so, with the balance and deferred interest due on sale, which would hopefully be possible in the next 5 or 6 years as the market begins to recover.

Right now isn’t a bad time to buy because interest rates are so low, but unless people are secure in their jobs and ability to make mortgage payments on a place they really want, I’m telling them not to be worried about jumping in – there’s likely some more downside to values, so even if rates rise the net cost for a home won’t be going up dramatically in the next year or two.


avatar Dave Beekman July 18, 2011 at 2:23 pm

Good info… I am sorry to say I just discovered it… Must have had my head in the sand at OB near that new powder room you blogged about last year…: )

BTW, Dave, has the idea ever come up regarding ‘underwater’ mortgages where people are actually asking for a principal reduction…. for the lender to take a fractional ownership in the property… eg. “an undivided 1/4 interest”… as compensation for reducing the loan balance and hence the monthly payment amt. ?

As you mentioned above, values will increase sometime in the future for sure… (hey, this is Kalifornia…: ) and the lender woud get their due when the property eventually changes hands.

Anyway… Keep up the good work Dave…


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