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?

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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

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.