Call the Lender You may need to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department, you want the supervisor's name, the name of the individual capable of making a decision.

Loan Modifications

According to the FDIC chairman,Sheila C. Bair, looking back as far as the 1980s, "the FDIC applied workout procedures for troubled loans out of bank failures, modifying loans to make them affordable and to turn nonperforming into performing loans.The U.S. housing boom of the first half of this decade ended abruptly in 2006. Housing starts, which peaked at more than 2 million units in 2005, have plummeted to just over half that level. Home prices, which were increasing at double-digit rates nationally in 2004 and 2005, are now (in 2006) falling in many areas across the country. As home prices decline, the number of problem mortgages, particularly in sub-primeand Alt-A portfolios, is rising. As of third quarter 2007, the percentage of sub-prime adjustable-rate mortgages (ARMs) that were seriously delinquent or in foreclosure reached 15.6 percent, more than double the level of a year ago.The deterioration in credit performance began in the industrial Midwest, where economic conditions have been the weakest, but has now (2006-2007) spread to the former boom markets of Florida California, and other coastal states.

 

During 2007, investors and ratings agencies have repeatedly downgraded assumptions about sub-prime credit performance. A Merrill Lynch study published in July estimated that if U.S. home prices fell only 5 percent, subprime credit losses to investors would total just under $150 billion, and Alt-A credit losses would total $25 billion. On the heels of this report came news that the Case-Shiller Composite Home Price Index for 10 large U.S. cities had fallen in August to a level that was already 5 percent lower than a year ago, with the likelihood of a similar decline over the coming year.

The complexity of many mortgage-backed securitization structures has heightened the overall risk aversion of investors, resulting in what has become a broader illiquidity in global credit markets. These disruptions have led to a precipitous decline in sub-prime lending, a significant reduction in the availability of Alt-A loans, and higher interest rates on jumbo loans. The tightening in mortgage credit has placed further downward pressure on home sales and home prices, a situation that now could derail the U.S. economic expansion.Residential mortgage credit quality continues to weaken, with both delinquencies and charge-offs on the rise at FDIC-insured institutions.

This trend, in tandem with upward pricing of hybrid adjustable-rate mortgage (ARM) loans, falling home prices, and fewer refinancing options, underscores the urgency of finding a workable solution to current problems in the sub-prime mortgage market. legislators regulators, bankers, mortgage servicers, and consumer groups have been debating the merits of strategies that may help preserve home ownership, minimize foreclosures, and restore some stability to local housing markets.

On December 6, 2007, an industry-led plan was announced to help avert foreclosure for certain sub-prime homeowners who face unaffordable payments when their interest rates reset. This plan provides for a streamlined process to extend the starter rates on sub-prime ARMs for at least five years in cases where borrowers remain current on their loans but cannot refinance or afford the higher payments after reset. An important component of the industry-led plan is detailed reporting of loan modification activity. Working with the Treasury Department and other bank regulators, the FDIC will monitor loan modification levels and seek adjustments to the protocols if warranted.

 
 

    Purpose

    Sheila Bair has “long advocated a systematic and streamlined approach to loan modification that puts borrowers into long-term, sustainable mortgages. I support the industry plan as a means to allow borrowers to remain in their homes, provide investors with higher returns than can be obtained under foreclosure, and strengthen local neighborhoods where foreclosures are already driving down property values. It is my hope that this plan will be implemented in a way that delivers real progress on these important policy goals.

    Under the financial rescue package, the Treasury plans to directly inject $250 billion of capital into U.S. banks in exchange for preferred shares. Nine of the largest U.S. banks were essentially arm-twisted into signing on for the first $125 billion in capital infusions. "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity ... are in a state of shocked disbelief," said the former Fed chief. "Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."Bair made clear that she considers existing voluntary loan modification programs inadequate. "We are falling badly behind and more needs to be done," she said on a day when RealtyTrac announced U.S. home foreclosure filings in the third quarter 2008 were 71% above the comparable period a year earlier.

Streamlined modification process

The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable foreclosures. This framework will not only help homeowners who receive a streamlined modification, but will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren't able to get to them.

This is the first time the industry has agreed on an industry standard. The benchmark ratio for calculating the affordable payment is 38 percent of monthly gross household income. Once the affordable payment is determined, there are several steps the servicer can take to create that payment – extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower’s means, the borrower’s situation will be reviewed on a case-by-case basis using a cash flow budget. This program resulted from a unified effort among the Enterprises, Hope Now and its 27 servicer partners, Treasury, the Federal Housing Administration (FHA) and FHFA. In addition, we’ve drawn on the FDIC’s experience and assistance from developing the IndyMac streamlined approach and have greatly benefited from the FDIC’s input and example. To accommodate the need for more flexibility among a larger number of servicers, the Streamlined Modification Program does differ from the IndyMac model in a few areas. However, it uses the same fundamental tools to achieve the same affordability target.

The Streamlined Modification Program (SMP) was developed in collaboration with the Federal Housing Finance Agency (FHFA), the Department of Treasury, Freddie Mac, and members of the HOPE NOW Alliance.
 
 

SMP Eligibility Criteria Include

  1. Conforming conventional or jumbo conforming mortgage loans originated on or before January 1, 2008;
  2. At least three payments past due;
  3. The loan is secured by a one-unit property that is the borrower's primary residence;
  4. Current mark-to-market LTV of 90 percent or more; and
  5. Property is not abandoned, vacant, condemned, or in a serious state of disrepair.
  6. SMP is designed to reduce distressed borrowers' monthly mortgage payments to an amount equal to 38 percent of their monthly gross income. To do so, servicers may, in the following order:
  7. Capitalize accrued interest, escrow advances and costs,if allowed by state law;
  8. Extend the term of the mortgage loan by up to 480 months;
  9. Reduce the mortgage loan interest rate in increments of .125% to a fixed rate that is not less than 3% (if this exercise results in a below market rate, it will, after 5 years, step up in annual increments to a market rate);
  10. As a last resort, provide for principal forbearance, which will result in a balloon payment fully due and payable upon borrower's sale of the property or payoff or maturity of the loan.

 

Borrowers meeting the SMP eligibility requirements enter into a trial period in which they must make monthly loan payments equal to the proposed modified payment. Timely payments must be made for three consecutive months before a borrower's loan can be modified under the SMP. The "Streamlined Modification Plan," or SMP, which is an expansion of what many lenders are already doing, will be implemented by December 15, 2008. Warnings to people looking to apply for loan modification programs Foreclosure rescue and mortgage modification scams are a growing problem. Homeowners must protect themselves so they do not lose money or their home. Scammers make promises that they cannot keep, such as guarantees to “save” your home or lower your mortgage, oftentimes for a fee. Scammers may pretend that they have direct contact with your mortgage servicer when they do not.