Loan Modifications in Today’s San Diego

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…