According to RealtyTrac’s U.S. Home Equity & Underwater Report for the fourth quarter of 2014, over 7 million homeowners (13 percent) still have combined loan amounts exceeding their property’s worth by at least 25 percent. In many cases, their credit cards are maxed out, a missed payment can result in interest rates as high as 28 percent or more, and they can’t obtain a loan modification because their credit scores or the value of their home is too low. What are the realistic options for climbing out of a credit mess?
When you find yourself in a financial mess due to circumstances beyond your control, you have a number of options. Do you walk away from your home when your mortgage exceeds its value? Do you default on your credit cards and/or declare bankruptcy? Alternatively, do you stay the course and do your best to climb out of the mess?
Even when people can show hardship, however, obtaining a loan modification can be a daunting proposition.
Cleaning up the mortgage mess…
The jumbo loan market had dried up completely in the summer of 2007 just as many homeowners were completing construction on their new home. In cases like this, the lender couldn’t sell the loan on the secondary market. Thus, even people had an 800 credit score, 20 percent down and a written pre-approval, the lender tried various maneuvers to avoid funding the loan. Two weeks before closing, the lender can give one choice of accepting its predatory loan terms or lose the entire down payment that had been advanced to the builder.
Over the last five years, many homeowners continue to pursue modifying our predatory loan. They are bounced from department to department, all with the same answer: This has to be handled by a different department. Then, they finally learn that the loan was part of a group of mortgage-backed securities and supposedly could never be modified.
A consumer attorney advises many that they have a strong case against the lender for predatory lending. The challenge was that many were past the five-year limit for filing a case. Enter the Consumer Financial Protection Bureau. Homeowners filing a complaint with them brought various lenders to the negotiation table.
Then you are referred to the lender’s Home Preservation team, but, despite the reams of documentation, the underwriter couldn’t qualify many for a 2-3 percent loan modification. The reason? It couldn’t make loan payments “affordable” since many Homeowners were self-employed. What’s laughable is that current payments can more than double what the “affordable” payment would have been. I suspect part of their challenge is that many have never fallen behind on our payments.
To top this off, the underwriter requires Homeowners to set up an escrow account to collect property taxes monthly before it would consider the modification. That can raise monthly payments by 45 percent without the benefit of the loan modification. Moreover, one is unable to remove the impound account.
Submit more documentation; and then receive another rejection. Apparently, the underwriter doesn’t understand the permanent changes that were made that directly impacted your profit and loss statement (P&L); its drive-by appraisal is also low; and the third issue is that many need to pass something called the NPV, or net present value, test.
According to a story on Bankrate.com: “Mortgage servicers use an NPV test to decide which action is more profitable (or less unprofitable) in the long run: modifying the loan and accepting lower monthly payments,” or “not modifying the mortgage and possibly tipping the borrower into foreclosure.”
Besides the redefault rate, the NPV calculation makes guesses about the length of time until a default, the self-cure rate (i.e., the borrower brings the loan current), the current property value, as well as the projected value a year from now. The NPV also estimates how much it will cost the lender to foreclose, including everything from legal fees to utilities.
Two factors in this equation — the home’s projected value in a year and the real-estate-owned discount — must be calculated using the guidelines established by Fannie Mae and Freddie Mac.
The Home Preservation team advises that it would resubmit the loan if the Homeowner had more income, if its drive-by appraisal was too low, or if there were some other change in our circumstances.
Like most short sales during the downturn, persistence is the name of the game. Many will appeal and ask for a different underwriter who hopefully has a better understanding of our business P&L. Even so, I suspect their merry-go-round ride is nowhere near being finished.
Resources to protect homeowners…
The first thing that homeowners who go for a loan modification must understand is that any error in your submission package will result in a denial.
Second, you must carefully document everything. Any discrepancy can result in a denial.
Third, the lender will most likely do a drive-by appraisal that will probably be low. You will be charged for a second appraisal. The hurdles are partially due to federal regulations, but the lender does control all but two of the factors on the NPV test as noted above.
If you find yourself in dire financial straits or have become victims of predatory lending, here are two additional resources:
1. NACA.net…
The National Association of Consumer Advocates has been helping homeowners to keep their homes and to fight predatory loan practices. One of the current causes is urging a ban on forced arbitration that it feels prevents consumers from having their day in court.
2. Consumer Financial Protection Bureau…
As noted above, many had no luck with our lender until they filed a complaint with the CFPB. As one mortgage professional put it, “The CFPB has aggressively pursued lenders who engage in predatory loan and credit practices. It’s the one agency they actually fear.”
Credit problems often go hand-in-hand with mortgage problems. For those who are having serious financial challenges, did you know that credit card interest rates can sometime be negotiated to zero without the help or the expense of a credit agency?