President Obama, please, don't let them take Grandma's house!

The Senior Citizen Solution… RMO HAMP

By Rick Rogers, JD/MBA

Too many of those devastated by the foreclosure crisis in this country are older Americans, who are often on a fixed income or are otherwise disadvantaged in the battle against unexpected financial trauma. This proposal seeks to protect mature homeowners and their families by arming them with a powerful new weapon against the on-going foreclosure onslaught.

This article is a plea to President Obama for a supplemental HAMP initiative which would provide superior benefits to as many as a quarter of distressed American households, while generating the enthusiastic lending industry support necessary to make any modification program successful; all at no additional cost to taxpayers.

The foundation of this proposal is a reverse mortgage “RM”, a powerful and underutilized foreclosure defense tool. It is particularly valuable to financially distressed homeowners because bad credit is not a disqualifier, income requirements are minimal, and no principal or interest payments are due for the life of the loan. Although reverse mortgages are not new, a leveraged combination of reverse mortgages, HAMP, and a subordination program will bring amazing benefits to homeowners, the mortgage lending industry, and our real estate market.

Below is a description of the proposed Reverse Mortgage Option HAMP “RMO HAMP”:

I. Homeowners, age 62 and older, if in default or imminent default, shall be allowed to obtain a reverse mortgage for their primary residence. All proceeds of the RM shall be applied to the homeowner’s current mortgage. Unfortunately, that will probably not be enough to completely pay-off the mortgage. Proceeds from a typical RM are usually about 60% of the market value of the home, far less than the amount distressed homeowners usually owe on their mortgage. That problem leads to step II of this proposal.

II. The original first mortgage will be subordinated to the RM (meaning it will become a junior mortgage behind the reverse mortgage) and will be modified as follows:

a. The interest rate on the junior mortgage (which was formerly the first mortgage) shall be fixed at 5% and the term shall be adjusted to 30 years.

b. If necessary, there will be a principal reduction of the junior mortgage so that the combined balances of the junior and reverse mortgages (less the closing costs of the RM) do not exceed the fair market value of the property.

III. In order to provide appropriate incentives and compensation for the additional work required of mortgage servicers (the bank or company to which you make your mortgage payments), the HAMP financial incentives normally directed to borrowers and lenders shall be re-directed to servicers, along with standard HAMP benefits previously payable to servicers. Those benefits shall be calculated and payable on the same schedule as if a standard HAMP modification had been granted. Many, including this author, believe insufficient servicer compensation has resulted in minimal and begrudged HAMP participation. This defect may be the primary reason HAMP has produced such dismal results. The redirection of incentives is intended to eliminate that debilitating flaw for RMO HAMP. Due to the far superior benefits of RMO HAMP to borrowers and lenders, they have no cause to object to the necessary redistribution of HAMP incentives to make this program possible. This redirection also eliminates necessity for additional taxpayer funding.

IV. Junior mortgages that were already in place prior to the RMO HAMP transaction, (initially a HELOC or 2nd mortgage), would be required to modify their terms in a manner consistent with the requirements, if any, under standard HAMP. All junior mortgage holders would necessarily be required to subordinate their position to RMO HAMP mortgages. Although the legal seniority of those junior mortgages would, technically, be reduced, default risk of those mortgages would be significantly improved as a result of the far greater affordability of total mortgage payments, and the principal reduction of superior mortgages when warranted. That provides the financial justification for the mandatory subordination of junior liens.

In order to gain a better sense of the potential benefits of the proposed program, it is helpful to look at the following typical example of a home with an 8% mortgage currently in default, with a principal balance of $220,000, and a market value of $200,000. The retired homeowners have pension income totaling $3,780 per month.

                                               No Modification     Standard HAMP     RMO HAMP

Home Market Value – $200,000

Current Mortgage Balance           $220,000                  $220,000                   $ 80,000

Reverse Mortgage Balance                                                                         $130,000

Monthly P&I Payments                $1,468                      $950 (for 5 yrs)        $429 (fixed)

Principal Reduction                      $ 0                          $0                           $10,000

Approximate NPV to Lender        $ 73,787                   $162,207                 $200,000
                                               (assumes foreclosure)

HAMP Fees to Servicer               $ 0                           $1,500                   $19,553

Results of the above RMO HAMP example:

1. From the borrower perspective: RMO HAMP modification would be a bit like winning the lottery. The foreclosure threat would be permanently ended with the easily sustainable modification. The principal and interest payments under RMO HAMP, only $429 per month, would be less than 1/3 of the current payments, and less than 1/2 of standard HAMP payments. RMO HAMP payments, unlike standard HAMP, would remain fixed, an important feature for those on a fixed income and not intending to die within the next 5 years. A principal reduction of $10,000 would top off the RMO HAMP benefits in this example.

2. From the lender perspective: The lender would immediately receive more cash, 60% of market value, than it ever expected to receive from foreclosure. It would also have a much better chance of receiving another 40% of market value through its new, more affordable junior mortgage, because no payments would ever be due on the first mortgage. Lender NPV would be almost triple that of foreclosure, and 23% more than from standard HAMP. On a national basis, the program would create new lender demand for hundreds of thousands, if not millions, of Reverse Mortgages. These are exceptional results for lenders.

3. From the servicer perspective: Fees payable to the servicer, almost $20,000 in this case, would be about 13 times higher than under standard HAMP. The servicer may be able to further increase fees by seeking servicing rights on the reverse mortgage. These fees should be sufficient to award, rather than punish, the servicer for doing the right thing… modification. When compared to the paltry incentives typically available, this is a superlative result for servicers.

4. From the taxpayer perspective: Same cost per modification as standard HAMP. Many more modifications completed, as originally projected. Faster recovery of the real estate market and economy. It doesn’t get much better than that.

All parties under RMO HAMP would benefit far more than from standard HAMP or current proprietary modification programs.

Note it may be necessary to amend or waive HUD regulations governing subordinate liens for RMO HAMP. Those regulations were designed during better times to protect senior homeowners, but are now rendering many of them defenseless against foreclosure. Certainly, there is ample justification to change those restrictions for purposes of avoiding foreclosure.

RMO HAMP could be utilized immediately by a sizable portion of American households. By providing the necessary incentives to all parties of interest, it might put HAMP back on track to avoid foreclosure for the originally intended four million homeowners. Imagine how many people affected by the housing crisis would be back to work if 3 – 4 million homeowners were able to keep their homes and were suddenly motivated to maintain and improve them, and could afford to do so. With the snowball effect, many of those re-employed people would be enabled to modify or otherwise keep their homes.

All would agree, foreclosing and throwing a family out of their home is a horrific action. Can we stop doing this to Grandma and Grandpa, and then see if we can progress from there?

~~~

About the Author: Rick Rogers, JD/MBA is Executive Director of the Rogers Law Group, a Chicago area Law Firm dedicated exclusively to Home Preservation. For over 20 years, he has composed and utilized NPV Tests for the purpose of comparing real estate alternatives nationally and internationally. For the last 10 years, his practice has been devoted to foreclosure, mortgage default, and related matters.

Contact him at rrogers@therogerslawgroup.com or at http://www.therogerslawgroup.com

BANKING WHERE YOU PAY YOUR MORTGAGE MAY BE BAD FOR YOUR FINANCIAL HEALTH

If you have a checking, savings, or other account at the bank to which you make your mortgage payments, you should be aware of the risk.

Consider the following… A man had experienced financial difficulty, and so applied to both his first mortgage company and second mortgage company for loan modifications.

The first mortgage company approved his application and started him on a Making Home Affordable, aka HAMP, trial modification.

The second mortgage company, we’ll call it the Bank of H, would not approve a modification for the second mortgage. Instead, a representative called the borrower and wanted to know when the bank would receive the overdue payments. The borrower explained again he was having financial difficulties, but said things were looking up, as his first mortgage lender had just approved his loan modification request. He said he couldn’t pay the Bank of H right now, but he hoped to get caught up soon and come current with all of his bills.

The next day, the borrower learned that his Bank of H checking account had been emptied. The Bank of H had emptied his checking account and applied all of his funds to amounts due on his second mortgage. This caused many of the borrower’s checks to be dishonored, including his first Trial Period Loan Modification check to his first mortgage lender. That bad check and his inability to replace it on a timely basis caused him to fail the Trial Modification, and therefore become permanently ineligible for a HAMP modification.

If you are behind on your mortgage, the bank may take any money you have on deposit with that bank and apply those funds to the amounts due for your mortgage. This may result in checks you’ve already written being returned for non-sufficient funds in your account. That would likely result in penalties and fees, in addition to the personal embarrassment and the difficulty of trying to come up with the unexpected shortage of funds at a time when you’re already embroiled in severe financial problems.
Is it legal for banks to do this? That is debatable. However, it is important for you to recognize that it is not uncommon for a bank to do this. This is not the only time we’ve seen this happen to someone who is late with mortgage payments.

Be warned, and act accordingly, before your bank acts for you.

ARE YOUR PROBLEMS TEMPORARY OR PERMANENT?

If you’re thinking about applying for a loan modification, without professional help, you should answer the following questions first:

1. Are your financial troubles temporary or permanent?

If you answer “temporary”, as almost everyone believes or wants to believe their financial problems are, you may have just lost your Making Home Affordable loan modification. 

If you answer “permanent”, you may have just lost any other type of loan modification for which you would otherwise have qualified. 

The correct answer is anybody’s guess, but your “guess” may well disqualify you, as it did for one poor guy appearing on the 10 O’clock news a week or so ago. He said “temporary” , and months later he got a rejection letter from his bank. The reason given for the loan modification rejection? ‘Your financial problems are only temporary.’ Permanent or temporary, his problems were sufficient for him to lose his home to foreclosure.

2. Do you receive any child support or alimony/maintenance?

Answering yes to this question can qualify you or disqualify you for a loan modification. Only the review of your financial situation can determine how best to answer this question. Note that you have the option of providing this information for consideration, or not providing it.

3. If you have others living in your home, are you receiving income from them, or are they helping with household expenses?

Again, your financial situation will dictate how best to answer these questions. We never advocate lying or misleading a lender. However, there is some information which you must disclose, and some information which need not be disclosed. There are also different options on how to include this information. You can report reduced household expenses based on the contribution of your boarder toward those expenses, or you can prepare a formal lease even if the boarder is a relative like your son, or you can sometimes include your boarder’s gross monthly income. Only a financial analysis will disclose how best to report or present this information to your lender. The way you present this information to the bank, even though the net financial result to you for having a boarder is the same, could easily determine whether you get your loan modification.

Conclusion: If you don’t know who really owns your loan, if you’re not adept at the necessary financial analysis for a loan modification, if you don’t know the difference between net and gross income, or if you don’t know whether one or the other needs to be higher or lower to qualify for a loan modification, then you shouldn’t be playing this game. It would be a bit like playing poker when you don’t know if a flush beats a straight. Yes, you might get lucky, but there’s a lot at stake in this game.

If you don’t know the answers to the above questions, please make sure and learn them before you call your bank for a loan modification. Also, fair warning… these are not the only tricky questions your banker may ask.

SHOULD I CALL MY BANK FOR A LOAN MODIFICATION?

The more I talk to banks and new clients that have already talked to their bank, the more concerned I become. Here’s one true story that shocked me:

A client came to my office after trying unsuccessfully for four months to get a loan modification from her bank. During that time, she fell further behind on her mortgage. I determined quickly that her loan was owned by Freddie Mac. Her bank never told her that. I did the financial analysis, and found she qualified in all respects for the government Making Home Affordable, MHA, loan modification. The bank would have to approve her. She was happy.

When reviewing the information my client had previously given the bank, I noticed an entry of $500 per month for child support. She hadn’t mentioned that income to me. She told me she didn’t receive child support, but the guy at the bank told her she needed about $500 more income to qualify for a modification. So, she told him that her daughter’s father sometimes gives cash to help out with expenses. In reality, there was no court-ordered child support, she rarely saw her daughter’s father, and she never received money from him. He never had much to give. Her daughter may have occasionally received a few dollars or a Happy Meal, but my client never received anything.

After further analysis, I found that including that extra $500 of monthly income, which she never received, was just enough to disqualify my client for a loan modification. It put her just under the 31% DTI ratio needed to qualify. My client thought the guy from the bank was doing her a favor by telling her what she needed to qualify. In fact, he told her just what she needed to be disqualified.

The happy ending to this story is that my client was approved for a Making Home Affordable loan modification.

The lesson is that you better know the rules before you play this game. Had my client not sought professional help, she would not have been approved for the modification, and might have lost her home in foreclosure by now. I don’t know if the “supposed help” from the guy at the bank was an intentional attempt to derail her application, or if it was simply advice from an unknowledgeable bank employee. Either way, the result was the same; the borrower would not have received a loan modification because she acted inappropriately on the advice of the bank.

You could take a stern view and say it isn’t a bank’s fault if a borrower doesn’t qualify because of “lies” on a loan modification application. I would agree with you if the bank doesn’t describe, quantify, and encourage a dishonest act by indicating it may be the only way for a borrower to prevent foreclosure.  That’s especially true when a bank should have initially approved an applicant based on the information provided prior to any bank manipulation or coaxing. 

Be careful out there. It’s tough to figure out who you can trust.  There are certainly some loan modfication firms you can’t trust (law firm based or not), and now you have to add banks to your list.

Finally, a quick tip… Please, please don’t use an out-of-state company to apply for your loan modification; particularly if the company is from California or Florida. The company would likely be in violation of Illinois law, whether a law firm or not.  Also, what will you do when the company doesn’t get a modification and doesn’t refund your money? Find an Illinois attorney with an office within driving distance from your home.Then visit the office to get an idea of the quality of the people and operation.

Good Luck.

WHO SHOULD NOT DO THEIR OWN LOAN MODIFICATION?

There are some situations in which I recommend you seek legal assistance. The first such situation is if you are more than 2 months late on your mortgage and have not already applied for a modification. Consider the following:

Could my home be sold at a foreclosure auction while the bank is reviewing my Loan Modification request? YES!

I’m not trying to sensationalize this issue. It is a serious risk, and you must be aware of it in order to prevent it! Below are two important examples, and they are not hypothetical. They are real examples of Chicago area homeowners who came to me this year, and they are not rare occurrences.
Today, most lenders and servicers continue foreclosure proceedings while they are evaluating a request for a loan modification. The reason being if the loan modification is not approved, foreclosure can follow quickly. Lenders tell borrowers that although foreclosure proceedings will continue, any foreclosure sale will be postponed until the loan modification decision has been made. However, I’ve not seen any lender put that in writing.

Example 1 - In December, 2008, a young man was trying to help his mother get a loan modification. As a former loan officer, he had considerable experience with mortgages and banks. The bank had already filed a foreclosure lawsuit, but repeatedly assured the young man that the December foreclosure auction would be postponed until after a decision was made on the loan modification, which looked promising. In January, the man and his mother learned the foreclosure auction had not been postponed, and his mother’s home had been sold on December 23, two days before Christmas.

Example 2 - A man qualified for a loan modification under the new Home Affordable Modification Program, HAMP. The lender had filed a foreclosure lawsuit before HAMP was announced, but stated repeatedly it would not allow the home to be sold at a foreclosure auction before a decision had been made on the loan modification. Days before the auction, the lender had not yet approved the modification and had not yet postponed the foreclosure sale. Two business days before the auction, I learned after a multitude of calls, that the bank had intended to go forward with the foreclosure auction with no advance notice to the borrower. One of the bank’s inspectors said a neighbor said that nobody lived at the property. The property appeared to be abandoned, and along with the neighbor’s comment, the bank felt it had sufficient evidence to determine the property was ABANDONED. Since the property was vacant, the owner no longer qualified for the HAMP loan modification. Therefore, the foreclosure sale was on. One business day before the foreclosure auction, I was able to prove to the bank’s satisfaction, with emailed pictures from a cell phone, and faxed copies of utility bills, that the owner still lived in the home. The bank cancelled the foreclosure auction and the borrower got his loan modification. The result might have been much different. Even with a lawyer representing you, your home can be sold out from under you through foreclosure.

A few words about abandonment… If you abandon your home, you will not qualify for a HAMP loan modification; and why would a lender give you a modification anyway? It wouldn’t. Unfortunately, for various reasons, homes in foreclosure often appear abandoned when they are not.
Following are characteristics of a typical home in foreclosure, but not yet sold at auction:
- All the drapes, upstairs and down, are tightly closed
- The lawn and bushes are overgrown and neglected
- There are numerous old newspapers on the front door step
- No lights are on inside the home at night
- Nobody answers the front or back door when you knock
- The paint is peeling, some windows are broken, and the home is the eyesore of the neighborhood
If you knew nothing about homes in foreclosure, and visited a typical one, you would think it was abandoned. That’s what the occupants want you and bill collectors and neighbors and the rest of the world to think. However, most likely, it’s not abandoned, even if the neighbors think it is. If you spent just one day with an investor looking at foreclosure properties, you would know this well. People with financial problems don’t leave “free accommodations” to go and pay rent elsewhere. Also, they’re often too embarrassed and/or depressed to face the outside world. The very last thing these people want to do is mow their lawn or paint the trim, so they don’t.

The point of this discussion is that if your home resembles the typical foreclosure home, you should find a way to let the lender know you still occupy the property, and you want to keep your home. Send the lender letters with your return address. Send utility bills showing you’re still using gas or water at the home. Don’t allow the lender to label your home as abandoned, if it is not.

How often does this happen? The above examples relate to 2 of my first 8 clients this year. Another of those first 8 clients was locked out of a home by the bank for months because a neighbor told a bank inspector that nobody lived there. The bank quickly boarded up the windows, changed the locks, and proceeded with foreclosure on the basis that the home had been abandoned. We later regained occupancy of the home, and proceeded with the loan modification. It is not a rare occurrence for a bank to proceed with a foreclosure sale when it should not, or when it is mandated to provide a loan modification under HAMP. For about half of my clients, I must keep a close eye on the lender’s foreclosure activities because I know what might happen if I don’t.

I doubt that inappropriate foreclosure sales are due to intentional misdeeds of the lender, but that makes little difference to the homeowners. However, as a homeowner, you must be aware that these incidents do occur, and that your options will be limited after a foreclosure sale.

DECIDING IF YOU NEED HELP TO GET A LOAN MODIFICATION

May 1st, 2009

These days, it seems there are companies everywhere advertising their expertise in loan modifications. At the same time, the federal government and banks are telling you to do your loan modification yourself, and not to pay a fee for someone to do it for you.  Should you do it yourself? Yes, sometimes.
In the next couple of posts, I’ll talk about who should do it themselves and who should seek professional assistance.

Who should do a loan modification themselves?
If you can answer YES to all of the following questions, you can probably do a successful loan modification without assistance:

1. Will your mortgage holder do a loan modification for your loan in compliance with the published Home Affordable Modification Program, hereinafter referred to as “HAMP”. You must contact your lender to get the answer to this threshold question. Also, you should ask it many times throughout the process, because the answer sometimes changes. If the answer is ever NO, the loan modification terms may be a product of negotiation, not government guidelines, and you should consider getting professional help.

2. Do you have precise, steady monthly income, such as a weekly salary or pension? Gross monthly income is a key component in the loan modification process, and the calculation is often subject to interpretation and manipulation. Should you use your last month or your last 3 months or your last tax year to establish your average monthly income? If you’re on a regular salary, that’s probably not an issue. If you’re self employed, or have changed jobs, or were unemployed for a while, or are in sales and had record sales last month, then average monthly income is subject to debate. If your income is overstated or exaggerated for the last month, your monthly house payment may be larger than it should be.

3. Are you unconcerned about how long it will take to get a loan modification? Note that lenders will start or continue foreclosure proceedings while considering your loan modification request. It often takes longer than 90 days to get a decision from the lender, and your home may be sold at a foreclosure auction while you are waiting. Most often a lender will state that your home will not be sold at a foreclosure auction before a loan modification decision is made, but I’ve never seen a lender put that in writing. I’m aware of at least one occasion where a property was sold at a foreclosure auction in spite of the lender’s verbal commitment to the borrower not to do so while considering their request for a loan modification. The home was sold at a foreclosure auction two days before Christmas, 2008.

4. Do you have the availability and patience to apply for your own loan modification? Note that it is not unusual to be left on hold for more than an hour each time you call, or to be transferred and then disconnected numerous times when trying to make contact with your lender’s appropriate department; and you will have to call several, if not many, times. The simple act of faxing documents can take hours or even days to complete because some lenders claim there is only one fax number to that department, and you must keep trying until that telephone line is no longer busy.

5. Are you sufficiently knowledgeable with the terms of HAMP to be able to determine if the loan modification offer from your lender complies? You shouldn’t rely on the goodwill and competence of your lender to give you all of the benefits for which you qualify under HAMP. Every penny you get is a penny your lender doesn’t get. You should know the terms for which you qualify, or learn what they are before you apply.

Here is an example of a person who might save some cash by doing her own loan modification request:
- A salaried employee
- A hardship created by her adjustable rate mortgage increasing to an unaffordable 10%, while the value of her home has decreased by 20%, preventing a refinance
- The borrower has drawn from her quickly dwindling savings account, and soon will not be able to make the full mortgage payments
- The borrower’s loan is owned by Fannie Mae, and her servicer agreed to comply with HAMP
- The borrower has read and understands the terms of HAMP and monitors the internet for updates
- The borrower is intent on saving money by doing her own loan modification, has sufficient schedule flexibility at work, and will not be discouraged by the aggravation and time required to make repeated calls to her lender and handle the job herself.

Note that another free avenue may be to contact a HUD Borrower Counseling Service. As you might expect, they are very busy right now. I recently contacted a HUD Counseling Service for a borrower, and was offered an appointment to speak to the first available Counselor at the earliest available time, which would be 18 days later. If you have the time, you may want to consider this option. I suspect the level of competence of these government workers varies widely, but one thing is certain… they are busy.

A final thought about doing your own loan modification… This involves what seems to be a very simple modification under HAMP:
A man calls his bank because his mortgage rate increased and his house payment went up to $1,500 per month, which he can’t afford on his $4,000 a month teacher salary. His bank asks for documents which he provides. His bank gives him a loan modification with payments starting out at $1,240 per month for the first 5 years, and goes up only slightly after that. He is elated. His payments went down by $260 per month, a savings of over $3,000 per year. Why shouldn’t he be happy?

He shouldn’t be happy because as a teacher he makes $4,000 per month for only 9 months of the year. His annual income is $36,000, for an average monthly income of only $3,000. His new house payment could have been reduced to $930 per month, for a savings of $6,840 per year. Nothing in this case was done inappropriately, illegally, or contrary to guidelines. However, it could have been done much better for the homeowner. Unfortunately, under HAMP only one modification for the life of a mortgage is allowed.

Here’s that final thought… You only get one shot at a HAMP loan modification. Get it right the first time, because you’ll have to live with it. There are no “do overs” allowed.