As of a year ago, only 266 of the FHA Secure program loans were originated for borrowers who were delinquent at the time of the refinance. When it became clear that very few delinquent homeowners would be helped by the program, HUD began counting all FHA refis as FHA Secure, in order to pad the numbers.

It was clear from day one that, based on the criteria, very few homeowners would be able to prevent foreclosure through this program.

Late this summer, while hawking the Emergency Economic Stabilization Act of 2008, members of Congress were exclaiming that 400,000 borrowers would be helped to prevent foreclosure with the “Help for Homeowners” refinance program, which would allow them to refinance into fixed rate loans. Of course, this program is dependent on the cooperation of the current lenders. Apparently, that cooperation has not been forthcoming. Who could have guessed it?

Recently, with the passage of the Emergency Economic Stabilization Act of 2008, the Help for Homeowners program was scheduled to begin on October 1, 2008. Again, a swing and a miss: only 312 applications have been submitted. Obviously, not all of those applications will result in foreclosure prevention.

This is what happens when legislators draft “solutions” to problems. Of course, now Barney Frank blames George Bush for the watering down of the bill. Sure, blame W… everyone else does.

For anyone who wonders how all the government intervention of 2008 will end up, you need look no further than the performance of these plans.

Most recently, we have the Fannie Mae “streamlined loan modification” program. I argued with a former Freddie Mac official over the intelligence (or lack thereof) in thinking that modified loan payments of 38% of gross income. He asked me what type of borrowers I typically deal with [median income]. He clarified that this approach would work with borrowers who have “higher incomes.” How much higher, who knows? No point in trying to convince a man that something is true when his paycheck depends on it not being true.

I’ve said this before: the investors are as deep in denial as most homeowners who are trying to prevent foreclosure. So MANY times I’ve heard lending industry types opine about homeowners who don’t communicate with the servicer. Denial is just one of the top three reasons. Ftom the beginning of this crisis, it’s been clear to me that the investors are just as unwilling to face their inevitable losses as the borrowers. “Streamlined loan modifications” at 38% will fail at an even higher rate than the current recidivism measure, and the losses that could have been avoided with a more intelligent approach will be amplified when they’re finally accounted for, at a later time, with lower asset values.

Regardless of income or station in life, human nature prevails. A real, sensible, sustainable solution to the foreclosure prevention problem will probably not come from those who are currently trying to solve it.

Why is that?

Well, they unveiled this “innovative” program called the Home Saver Advance (HSA). Instead of doing an actual modification (including offering payment relief/rate reduction), they provide an advance to the homeowner, bringing the mortgage current. The homeowner then resumes normal monthly payments.
 
Six months later, the homeowner must begin paying the loan back in monthly installments at 5% on a 15-year term.

So, why is this bad?

First of all, servicers seem to be jamming anyone and everyone into this program, whether it makes sense or not, seemingly without thinking at all.

Second, the old standards regarding acceptable surplus limits have been tossed out the window on this program. I’m seeing new clients who were approved for HSA’s with surpluses as low as $177/month! I’ve never seen this before, so I e-mailed my contact over at Fannie Mae to confirm this madness…. is this really what passses for loss mitigation these days?

Her response:

Yes.  $200 surplus is the magic #.  The formula is net income minus
expenses (including the HSA payment) = residual income.  We want that
residual income to be $200 surplus.

Does it take a brain surgeon to recognize that a $177 monthly surplus is a prescription for disaster? With this kind of thinking, is it any wonder why the recidivism rate for loan modifications is so high?

What’s a family of four going to do when the car needs repairs, the furnace goes out, and the kids need new shoes… all in the same month?

Once again, they’ll be choosing amongst creditors, utility bills, car payments, and… the mortgage payment.

On the other hand, maybe the homeowners could simply ignore the HSA payments. It’s unclear how aggressive the collection activity will be.

Here’s my bold prediction:

the FNMA Homesaver Advance program (HSA) will have a higher failure rate than loan modifications (58% default rate within 8 months).

I’d been trying to figure out where or how they came up with this hare-brained scheme. I had been thinking that maybe there’s some insider knowledge about further federal bailouts- for the investors. So maybe they were just kicking the can down the road until a real solution would arrive.

Here’s the real explanation. According to Housing Wire, this program allows Fannie Mae to avoid having to buy the loan out of the pool in order to modify it, saving them a substantial amount of cash… in the short term, of course.

I believe they have to pay face value for the note, but I had thought that they could eventually place it back into the pool, provided it performed for a period of time. Of course, with the wonderful job they’re doing with their loan modification failure rate, I can see another important reason as to why they’d rather not modify the loans at all.

In case anyone important is listening (I know you’re not), here’s something to consider: you can only “fool with” a homeowner for so long. If you’re going to force them into plans that are not designed with long-term sustainability in mind, they eventually reach the point where they say, “I’ve had it- I’m out of here.”

So, if their intention is to focus on short-term thinking, talking about loan modifications and keeping people in their homes while not delivering, then they’ll have themselves to blame for this problem… because they’re making things worse.

The actions don’t match the rhetoric.

So, this is what we’re calling success? 1 out of 4 homeowners who gets a loan modification misses TWO of the first six payments afterwards, and they’re patting themselves on the back?

I’ve written a number of times on why lenders don’t want to modify your mortgage. Meanwhile, Ocwen has been touting its loan modification efforts for quite some time. Robert Dubitsky, a Credit Suisse analyst, has suggested that their real motivation may be self interest. They prefer to offer a loan modification, because it allows them to stop paying out advances on the delinquent loans. This preserves capital for them, along with getting files off the loss mitigation department desks.

Another reason, perhaps more important, is that there is a lot more flexibility in the portfolios that they service. A healthy chunk of Ocwen’s loans would be called “predatory” by the mainstream media, although it’s unclear if they meet the technical definition of the term. When you have a borrower paying credit card-like interest rates, well into the double digits, it doesn’t take a genius to figure out that lowering the interest rate will make a difference.

Also, in a lot of cases, the underlying property was over-appraised, so reducing principal makes sense as well, because the fact is, the debt is worth much less than face value. Even a conventional sale at full market value is not going to net enough to pay off the debt, so we may as well get real and write these down.

It’s pretty easy to look like a hero when you’ve modified a loan for a borrower who was probably getting screwed from day one. So while it is laudable that Ocwen is aggressively offering loan modifications to homeowners, I don’t think they should be nominated for the Nobel Peace Prize. They’re not any more socially conscious than other loan servicers, or “better” at loss mitigation. The only reason they’re having any loan modification “success” is because the skanky, toxic loans that they service are still profitable (for the senior bondholders, at least) after a significant haircut (for the junior bondholders). This is not so much a “win-win” solution so much as a “win-win-lose.”

Rather than spending a lot of time on a flowery narrative, here are the highlights of his loan modification report:

After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due.

After six months, the rate was nearly 53 percent, and after eight months, 58 percent.

The key questions he raised afterwards revolved around “Why is the re-default rate so high?” and he said that they have “begun asking our servicers in detail.”

I’ll give you the quick answer why re-default rates are so high:

because re-default rates on loan modifications have always been high.

I’ll offer a second hint to Mr. Dugan: the servicers are not going to be able to answer his questions about “Why?”

Why is that?

Because it’s not the business of servicers to track borrowers after their loan modification. The job of the servicer is to collect a debt, and to collect and produce data related to that collection activity. They’re not in the business of conducting long-term, longitudinal studies. As if they don’t have enough capacity problems as it is… sure, let’s have the servicers conduct additional studies now, and we’ll have them do it on their dime.

Dugan found the results”surprising, and not in a good way.” I’m ceaselessly amazed at how out of touch our regulators are with the industries they supposedly oversee. Not long ago, Maxine Waters was publicly admitting her lack of fundamental knowledge. Then, Sheila Bair came out with her “innovative”  loan modification approach: Do step 2, THEN step 1. Apparently, those results have been lackluster.

Next, they’re planning “streamline loan modifications.” This constant striving for “economies of scale” has them pointed 180 degrees in the wrong direction.

Did you ever wonder to yourself, “Is anybody paying attention… ANYONE?!?!” A person that I have a lot of respect for recently said, “90% of the people in any given field are mediocre, 5% are truly dangerous, and only 5% are truly masterful.” We have a tendency to think that this rule doesn’t apply to our leaders, highly paid executives, and regulators.

This “news” isn’t news at all. It’s been mentioned most recently by Credit Suisse in their loan modification report, and earlier in the Boston Federal Reserve paper on loan modifications.

I take a lot of pride in the fact that I spend a LOT of time figuring out how to solve problems for my clients. The people who are supposedly in charge of “solving” the foreclosure crisis clearly don’t have the same values.

For God’s sake, if you don’t know how to do your homework, then pay someone to do it for you!

There are SEVERAL key reasons why the recidivism rate on loan modifications is so high. One of the reasons that over 94% of my clients are still in their homes 12 months later is because I started investigating these issues a long time ago.

If you want to roll the dice, or play the equivalent of “Foreclosure Roulette,” then go ahead and call your lender, or Hope Now, and see how it goes. Heads, you lose the home in 12 months. Tails, you get to keep it. Or, you could call my office and follow a proven path to long-term loan modification success.

The same could be said about the mortgage industry. The article included mention of an Illinois woman who borrowed $10,000 from her 401(k) to try to prevent foreclosure, only to end up losing it. She said, “I’m still paying for that [401(k) loan] and don’t even have the house to show for it.”

Many homeowners who are trying to prevent foreclosure who have access to funds (like an IRA or 401(k)), often end up breaking the piggy bank to get their heads back above water.

The problem is, this is usually just a short-term fix, doing nothing to address underlying weakness in their financials. Moves like this have a tendency to kick the can down the road a little while, only forestalling the inevitable loss of the home. I strongly advise most clients to look at retirement funds, “loans” from relatives or any large cash infusion as absolutely LAST resorts for this reason, among others.

The same could also be said of many loan modifications. Homeowners- and legislators- seem to think that all you have to do is perform streamlined loan modifications to a host of borrowers and everything will work out fine.

The fact they seem to forget, or conveniently sweep under the rug, is that half of all loan modifications become delinquent again in 24 months or less. Furthermore, that timeline distribution seems to be shifting to the short end of the scale. Today, more homeowners are becoming delinquent even faster than before, even though it’s easier now to get a loan modification than any other time in our history.

The missing link to a sustainable foreclosure is the in-depth, line by line analysis of a homeowner’s financials. You have to unearth every possible advantage in order to prevent foreclosure long-term. You also have to identify as many behavior changes as possible, looking for those that will yield the greatest changes in monthly cash flow.

As I’ve said before, it ain’t about the cable. Cutting cable and similar changes don’t yield a high enough benefit-to-cost ratio, and they’re usually unsustainable.

Not only is the mortgage industry ill-equipped and too short-staffed to adequately prevent foreclosure, it’s really not their responsibility. And their real job is to collect a debt, which is why any discoveries of assets or possible changes would likely be soaked up by the debt collector, leaving the borrower just as weak as they were before they spoke to the “housing counselor.”

And this is not the kind of analysis that’s best performed by the homeowners, on their own. If they knew how to do it, they’d have already done so, and likely wouldn’t be looking to prevent foreclosure. And, it’s difficult to see the forest OR the trees when you’re under fire like most delinquent borrowers.

But it’s work like this that needs to be done, and it needs to be done by professionals, preferably who have done it numerous times, maybe even faced a financial crisis of their own- and managed to come back from it. If we’re going to continue to our quest for “economies of scale” in addressing the mortgage problem, we’ll continue to prevent foreclosure on just a temporary basis.

Yesterday offerred a perfect example. I’m working with a couple on the west side of my state. She had surgery to remove a tumor, and while the tumor was being removed from her body, it fell apart and some of it fell back into her abdomen. As a result, the surgery was not as successful as it might have been, and the cancer has spread even further.

She’s on a heavy rotation of chemotherapy, spending 8 hours at a time hooked up to an IV for her treatments. Naturally, she’s unable to work, and has a mountain of medical debts despite the fact that she has health coverage through her husband’s job. As she’s been fighting cancer for the last two years, a medical provider had garnished her husband’s wages. They tapped out their 401(k) to keep things going and help to pay the mortgage and other bills.

She had called 4 bankruptcy attorneys to assist her in filing Chapter 7, as it’s clear that she will never have the money to pay the overwhelming amount of medical debts that she has. All 4- ALL OF THEM- told her that she had to be current on her house payments before she could file a Chapter 7.  

In addition, the mortgage company was a little less than cooperative in helping her to prevent foreclosure on their home. They denied her modification on a technical matter, which was heartless and hopelessly incompetent. The matter can be resolved, if someone would be willing to lift a finger.

She contacted me and after reviewing her financials, it was obvious that she’s not quite ready to resume monthly mortgage payments in the next few weeks, which she was on track to do. After having a conference call with her attorney’s office and re-directing their efforts, it appeared that we would be able to work in concert with them to obtain a good result.

The very next day, she left a message, in a panic, saying that her attorney had called and that she would not be able to do what we had planned the day before. In addition, she’d called 4 MORE attorneys, and they had all confirmed what he had said.

Disgusted with the legal profession as whole, I put her in touch with an attorney who tells his clients the TRUTH about the bankruptcy process, and now she’s finally on track to get the results she needs. It seems that honesty is a little scarce in many bankruptcy attorneys’ offices these days.

She now is finally on track to not only help clean up her debts, but once she does resume her mortgage payments, she will be in much better financial shape. She will not be a statistic- there is no reason for her to end up being one of the 50% of homeowners who obtain a loan modification and then find themselves back in foreclosure within 12 months.

Obviously, the last few weeks have been extremely stressful for her- not exactly conducive to fighting cancer. She was effusive in her gratefulness to me- so glad to have found someone who would help her get the results she knew she needed in order to survive financially.

Her stress levels should plummet, her blood pressure will fall 40-60 points, and she should be able to now focus on sleeping through the night and getting well.

While there is so much that I complain about the loan modification business, nothing I’ve ever done can match the feeling I get when I work with a client like Mrs. I. To know that I’ve helped where others refused, that I found a solution where there wasn’t one, that I was able to take a complex set of circumstances and fashion a solution where both the borrower and the investor will come out ahead, that I was able to take a file that was destined to be marked “foreclosure” and breathe life into it… that’s gratifying.

While I know there will come a day when I won’t be doing this anymore, it’s definitely the days like yesterday that I’ll remember fondly. Getting a loan modification and helping to prevent foreclosure for a homeowner in a way that’s sustainable for the long term… for me, there’s nothing like it in the whole world. And I am extremely grateful for the opportunity to do it for a living.