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

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.