The government plan announced by Treasury Secretary Paulson and Fed Chairman Bernanke fails to deal with the root cause of the crisis—families in foreclosure—-and instead is purely and simply a bailout of the lenders who created this disaster.

The problem, long and short, was abusive and reckless loans from lenders who were greedy and irresponsible. It was fueled by cheap money, essentially given away to banks by the Bush administration. If the bailout actually was designed to help homeowners, it would look completely different. 

Allowing the Federal government to purchase illiquid mortgage-backed securities (MBS) has been presented as a comprehensive solution to the economic crisis, but it has a serious flaw. This plan will NOT increase loan modifications that prevent foreclosures. Large-scale loan modifications—adjusting the terms of a loan to make it affordable—is the only way to prevent massive foreclosures still ahead.

Under the bailout proposal, the government would simply become one of the investors that forecloses on homes. Mortgages are divided into groups owned by hundreds of thousands of interests. The government will buy a portion of those interests, not individual loans. The same factors that have frustrated private attempts to modify loans will remain in place.

Loan modification is the answer to directly help homeowners. Unfortunately, at this point, that is not part of the massive proposal.

Here are the main points from the Center for Responsible Lending:

1. Loan modifications are constrained by the securitized mortgages.
2. Junior lien holders must agree to the first position lender modifying their loan, and their not.
3. Loan servicers are overwhelmed and have incentives that steer them away from loan modifications.

Source: http://www.responsiblelending.org/issues/mortgage/solutions/federal-ownership-of-troubled-securities-alone-will-not-stop-foreclosures-that-drag-down-the-economy.html

On May 16th, Washington Foreclosure Assistance (that’s us) submitted a short sale package to Litton Loan Servicing. The trustee sale was scheduled for June 13th. We were immediately told that our offer at $256,000 was too low and they wouldn’t even consider it unless it was north of $290-295K.

Some people might be thrown off by the large difference in the offer we made and their response. I considered their response a success. If the bank tells you anything, that means that they are taking you seriously. We told them we would see what we could do.

The first step was to cut the fluff from the HUD. That brought up the offer by around $8,000. We sent the HUD and the new purchase and sale agreement in. They immediately rejected it and reiterated their minimum need of $290-295k.

At this point, we were getting close to the sale date, and we asked for a postponement. Litton, true to form, rejected that out of hand as well. I logged on to nwtrustee.com the next day, and sure enough, the auction had been postponed. Lesson to all: Don’t believe the Litton phone reps, just keep plugging away.

Now that I had evidence that Litton was working this file, even though they said they weren’t, that prompted me to go back to the buyer and let them know that we were still roughly $25,000 too low, but that we had some reasons to be optimistic.

Fortunately, the buyers were able to increase their offer by $8,000. We were now at a contract sales price of $272,000. Still, quite under Litton’s demand. We explained verbally to Litton that the buyer’s had loan docs in escrow and Litton would have their money almost immediately. We told them that the buyer’s lender had an appraisal done, showing the house value at $270,000. We said everything we could, but the Litton rep just said, “We can’t even look at your file until the price comes up.”

Most short sale processors would give up about now. You’ve offered more that you were prepared to, and you are still $20,000 apart. WASHFA, on the other hand, was just getting warmed up.

We knew that Litton hadn’t done an appraisal. They would have had to schedule it through us, and they hadn’t done that. Therefore, they were going off of a computer valuation or a BPO. My guess had been that if they did the BPO, it was by now a couple of months old. That was their point of weakness that we had to exploit. I ran fresh comps and it became clear that all ‘active’ properties in the neighborhood had reduced their asking price by at least 5% in the last 90 days.

I wrote up a “Net Proceeds at REO Sale” to show them what they would get if they rejected our offer, took it to auction, had it not sell, and then had to sell it as a bank-owned property. It factored in their holding costs, including eviction, property preservation, insurance, lost interest payments, days on market, closing costs and property taxes.

In the end, I created a range of Net Proceeds, based on 1) their original BPO, which I estimated at $295,000 and 2) the appraisal value of $270,000, and 3) their BPO minus 5%. I included the appraisal and the supporting comps as evidence. In an attempt to leave no stone unturned, I included a screen shot of the local sheriff’s sex offender database page, showing 11 sex offenders living in the zip code. Also, I included a screen shot of the nwtrustee.com website showing that the majority of upcoming foreclosures in this city were located in the subject properties zip code.

I wrote a clear, concise cover letter explaining our points, which boiled down to the fact that they should be grateful to be receiving an offer on this property, that they definitely don’t want to have in their portfolio in six months.

So, we sent all of that in a couple of weeks ago. We followed up with our contact the next day, and guess what they said? No. “We aren’t even going to look at your offer until it gets over $290-295k.”

I wasn’t undaunted. However, we backed off and gave this dish some time to simmer. That is all you can do, at this point. Our only next option, would be to stridently uplevel the matter through the ranks of supervisors, but in my opinion, since they had postponed the sale, I felt that on some level, they were going to find the time, on their schedule, to review our file, no matter how low it was.

Well, finally, the good part! Today, we get a call from our agent, informing us that a BPO was done today. That’s huge! That means that we convinced them to take a second look. The entire process has been them saying ‘no’, but, in the end, doing what we needed them to do. I love this business, and I can’t wait to call Litton tomorrow.

We would love it if you would share your positive experiences in the comment box below. Together we are more powerful.

While a step in the right direction, the main thrust of Hope Now is misguided. Hope Now touts that in April 2008 that 60% of their loan workouts were repayment plans. The bulk of the additional loan workouts were short sales and deeds-in-lieu of foreclosure. All three of those programs end in the borrower being forced to leave their house. That isn’t exactly the definition of a ‘workout’ in the eyes of a distressed homeowner.

The repayment plan is always the first choice of the lender when their borrower gets behind in their monthly mortgage payments. That isn’t surprising. The lender wants the borrower to come up with the missed payments and get back on track.

The challenge with the repayment plans are that the borrower was unable to make their monthly payment. That is a structural finance issue. Plain english: they don’t have enough income to support their mortgage payment. Encouraging the buyer to borrow money from friends and family, withdraw money from retirement accounts, or attempt to re-finance into another exotic mortgage product is frankly unethical.

At Washington Foreclosure Assistance, we do not encourage re-payment plans unless the borrower has had a one-time income disruption and has the current income to support not only the previous mortgage amount but the additional monthly payments required from the repayment plan, and any future projected mortgage payment increases due to interest rate resets.

What typically happens is that a homeowner comes up with some money that they can send to the bank to put a hold on the foreclosure process. The bank then temporarily stops the foreclosure sale date. Within a month or two, the homeowner runs out of money before they run out of bills, and the payment for the mortgage is either late or simply can’t be paid in full.

The lender then has the right to immediately resume the foreclosure process where it left off. This could be only weeks or days from the foreclosure sale, giving the homeowner few options to save their house.

The bottom line is that the lender knows that the vast, vast majority of borrowers do not fulfill the terms of their repayment plans. With this knowledge, it is unethical to take additional money from the borrower when they are sure to lose their house a short time later.

On the positive side, on May 11, 2007 a Washington State bill - House Bill 1805 - was signed that increased the amount of the state homestead exemption against creditors from $40,000 to $125,000.

The government last year, in their one consumer-oriented initiative, launched a voluntary, industry-comprised group of top lenders and services under the banner of Hope Now. Through today, the initiative has been widely proclaimed a flop, as the top banks could not agree on any meaningful steps.

That may change a bit tomorrow as a new set of servicing guidelines will be released by Hope Now

Here are the main ideas of the new agreement:

• uniformity among lenders
• specific timetables
• promise to stay in contact
• automatic subordination of second liens to allow loan modifications
• expansion of forbearance, repayment plans and loan modifications
• includes short sales in the agreement goals

In no way is this agreement legally binding. The organizers suggest that all Hope Now participants implement the new standards within 60 days.

The challenge here is that the current administration does not tell the truth. They claim that Hope Now has resulted in 1.6 million loan workouts since July 2007, even though policy makers and legislators, and even the Office of the Comptroller of the Currency, which oversees national banks, suggested a lower figure of 167,000 loan workouts.

While the government drags it’s feet, foreclosures continue to run rampant. For May, one is 438 households received a foreclosure filing.

The term “Distressed Home Consultant” went into effect in Washington State on June 12, 2008. It is part of the new “Distressed Properties Law” created during the 2008 Washington State Legislative Session and signed into law by Governor Christine Gregoire on March 30, 2008.

The purpose of the law was to protect vulnerable homeowners from being targeted by ‘equity-skimmers’ and ‘lease-option’ investors. For example, a homeowner with a substantial amount of equity, who faced difficulties in making their mortgage payments would be approached by an investor who would offer to make their mortgage payments in exchange for the deed to their house.

After a period of time, say 12 to 24 months, the homeowner would have the option of buying back their house. In reality, the homeowner would have little chance at either staying current on the rent, and face eviction or come to the end of the rental period and be in no situation to qualify for a loan and buy the house back. Either way, the investor ends up with the house and a lot of equity.

If the law focused narrowly on that issue, it would have been helpful. Unfortunately, the way it was drafted makes it even harder now for homeowners in distress to find help. Clearly a case of overreach by lawmakers who don’t fully understand the situation.

At the heart of the law is the idea of all parties to a transaction with a distressed homeowner needing to exercise ‘fiduciary responsibility’ towards the homeowner. Imagine a homeowner who has decided to sell their home. The buyer, and the buyer’s agent, under the provisions of this law, are now classified as Distressed Home Consultants. Buyer’s do not typically have to take into consideration the financial situation of the seller. They are simply making a purchase decision for their own account. This law may have the effect of scaring away buyers, when a buyer is exactly what the homeowner needs at that moment.

In addition, any real estate agent who engages with a homeowner who is in financial distress will automatically be labeled a Distressed Home Consultant.  Many agents will not want to expose themselves to the  liability  and choose to not represent these homeowners in need. Again, this law, while having good intentions, suffers from overreach, and serves to reduce the amount of qualified help for homeowners.

“A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery,” FHA commissioner Brian Montgomery said in a prepared statement.

The new policy “will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes,” Montgomery said.

This will allow investors to move in quickly to purchase foreclosed homes, clean them up, and quickly resell them to retail buyers.

http://www.hud.gov/news/release.cfm?content=pr08-082.cfm

Unfortunately, the pain and suffering is only getting worse. The Mortgage Bankers Association numbers for the first quarter of 2008 show that mortgage delinquencies and foreclosures continue to surpass records. The number of new prime ARM foreclosures increased by 20,000 to 117,000 in the first quarter, while the number of new subprime ARM foreclosures increased by 20,000 to 195,000. At this point, prime ARM defaults are growing faster than subprime ARM defaults, demonstrating that credit-worthy homeowners are not immune to the crisis.

The rise in past-due loans is widespread. Delinquencies are up year over year in every state except Louisiana. 39% of subprime ARMs and more than 10% of prime ARMs are now at least one payment behind. It is clear that the Option ARMs, featuring low introductory rates have been devastating to consumers.

The following article is from the May 30, 2008 Wall Street Journal article by James R. Hagerty:

The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders.

The report, released Thursday, is based on an analysis of 7,560 fixed-rate home-purchase loans completed in May and June 2001 and insured by the Federal Housing Administration, an arm of HUD.

The study says lenders typically make better offers to borrowers in neighborhoods with higher general levels of education.

Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates.

For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.

Borrowers who paid “discount points” to lower their interest rates typically didn’t benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose “no-cost” loans — in which all fees are built into the interest rate — typically paid the lowest effective fees.

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on “stale” seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.