About the Author
Michael Nazarinia is Principal of REST Report Matters and covers loan modifications and other alternatives to foreclosure at restreportmatters.com and loanmodhelpcenter.com. He has personally seen over 1000 modifications, 1000 stop sales, several hundred forbearance agreements and 2nd lien settlements since 2008, and speaks to homeowners, advocates and attorneys regularly about their unique cases from both a hard numbers and problem-solving perspective. He has worked on the mathematical analysis of several thousand modifications with attorneys and brokers since 2007 using net present value (NPV) comparative analysis (since 2010) using the R.E.S.T Report Matters Loan Modification Disposition Analysis Platform.
Mr. DeMarco, who is the head of the FHFA and is a Republican, sees such a large moral danger in people cheating by going late on their mortgage to get a principal reduction and applying for a loan mod while lying about their hardship to get a principal reduction that he does not favor principal reductions, even though nearly a million homeowners with Fannie or Freddie as the investor, with current real hardshipswill be helped by it.
The NPV is higher on each and every loan disposition analysis we see at the REST Report Matters by doing this under the HAMP PRA Home Affordable Modification Program Principal Reduction Alternative – a program that Fannie and Freddie are not participating in but they should – despite the higher NPVs for these types of mods.
It is my opinion that the hardship requirement for a mortgage modification on a home with an LTV of 75% or higher and FICO of 750 or lower should be completely eliminated.
If Fannie and Freddie can make loan mods at 2% and 40 year term, that is fixed for 5 years and that goes up to today’s 30 year fixed rate of 4%, as they are doing every day, then that should be a program offered to all people seeking a refinance with a loan to value of above 80% who are not delinquent and do not have a hardship.
Its already bad enough that there is so much paperwork in the mod process and now they are making it harder to apply for a mod by requiring proving more of a hardship (see Chase’s new forms for loan mods, page 5) and leaving the decision of a hardship up to the same people who make the most money in a foreclosure sale (they collect all fees for foreclosure and delinquent servicing first before the investor gets the remaining money).
If you have no hardship and can “afford” 2% and 480 month term on the full principal of your loan by current income documentation requirements and are ok with the loan moving up to 4% after 5 years, then you should be FAST TRACKED to approval while you are current or delinquent. The only leniency should come from not having to prove more than 3 to 6 months of documented income that is stable and consistent and the “right” amount per my example below.
All that would be required is income validation and verification under current guidelines in my proposal and negative to near negative equity, a loan to value of 80% or higher, as most people with less than 20% equity have a difficult time selling their home with enough money left over to move laterally or upward to another home.
For example, if your loan is $200,000 and the home is worth between $160,000 or greater, then the principal and interest on this at 2% and 480 month term would be $604.64 and assuming $400 a month for HOA, property taxes and insurance, your PITIA payments would be $1,000.47 so you would need $3,227.32 in proven monthly income per month to qualify ($1,000.47/$3,227.32 = 31%). NO homeowner hardship should be necessary since the homeowner would be keeping a home with negative equity and the real hardship is the investor losing the $40,000 plus another 30% of the $160,000 from the foreclosure process, a total loss of $88,000. Even if foreclosure recovery yielded a 20% discount from $160,000 market value, that is still a loss of $72,000 for the investor and that is a huge hardship for the investor I would think if it were really their money they loaned out.
And don’t get me started about the investors buying and selling these mortgage notes that are worth 50% to 60% of the loan amount… that further aggravates me as that creates an incentive to generate cash by buying the mortgage at less than face value and then selling the home and getting cash because the investor only paid 50% to 60% of the principal balance to get the loan from the other investor. If an investor can buy the loan at 50% to 60% of the market value of the loan from another investor, then the homeowner should be given the option as well.
As for the mods and dropping hardship requirements, Typical HAMP or in house mods at 2% last for 5 years only then revert up to today’s 30 year fixed of roughly 4% rate over years 6 to 8 in “stepped up” manner there is already an incentive to show a hardship for a mod at the expense of borrowers who are “responsible” and keep up with their debt obligations.
Dropping the hardship requirement for mods, along with allowing the same program, at 2% and 40 year amortization, fixed for 5 years with a ceiling rate of today’s 30 year fixed, to those seeking a refinance without a job loss or underemployment that caused the hardship, would be a huge move in the right direction in housing recovery and a fantastic show of leadership.
If you want principal reduction, then the “true” investor of the loan should be happy to give that to you down to 115% to 125% of market value, maybe with a sweetener of future appreciation of some percentage if the principal were brought to 100% of market value by an appraisal.
It sure would be nice to have the servicer actually show they requested a principal reduction from the investor, if they say to the homeowner or the homeowner’s advocate “that is against investor guidelines” since those same “guidelines” were made when home prices were going up!
Servicers don’t really seem to want to get investors involved on a case by case basis when it comes to principal reductions and if you have Fannie (look up your loan on their website) or Freddie (look up your loan on their website), then… well.. write into Mr. DeMarco and let him know you are one of the nearly million people who could be helped by principal reduction (full transcript from his speech yesterday at the Brookings Institute) because you can prove your hardship and you owe more than 115% of the value of your home and you deserve some of the $20,900,000,000 left over in TARP funds that Mr. Obama wants to use to help the homeowners who are can’t refinance and/or delinquent on their underwater mortgages.
Federal Housing Finance Agency (FHFA)
400 7th Street, SW
Washington, DC 20024
Each homeowner is doing a “favor” to the investor by paying on a mortgage that is underwater by more than 115%-125%, in addition to being a responsible debt payer, since the investor would lose the most in a foreclosure sale.
Mods for LTV of 75% or higher should not be hardship driven (but still remain this way as a mod is a loss mitigation option that is also considered a home retention option) and should be treated like refinance loans, but with less restrictions and less documentation due to decline in income, since a short sale or foreclosure will wipe out the principal or equity through fees, and eill be marked down for sure once the home goes to a third party buyer after becoming a REO.
The current accounting treatment set by the FASB allows loans held in REO status by the servicer to be kept there at full loan value, not market value of the home when the home goes to foreclosure. The investor/bank doesn’t need to account for the loss until the home goes to third party through a sale.(real estate owned bank property).