Loan Modification or Glorified Workout?

Real estate sales are down. Loan originations are down.  Thousands of Brokers and Realtors are out of work. Whats left?  A new breed of realty work is emerging, and many brokers and realtors are jumping on this train.  Just try googling “loan modification” and you will see of all the opportunities to make “thousands of dollars” in this new line of work.  Loan Modification seems to be the latest trend in the real estate industry.  Unfortunately, many of these modifications offered outside of law firms are not the solution to the problem.

To start, the recent housing market has seen astronomical deterioration.  As I drive through affluent neighborhoods of San Diego, I am not immune anymore to seeing chain link fences around housing projects gone bust.  Lots are 1/2 graded, model homes 1/2 complete, weeds everywhere.

Long over are the days where one’s home in San Diego County used to generate more than one’s yearly income.  These infamous “house ATM machines” have gone bust like the likes of Lehman Brothers and the rest of the financial institutions, and now home values have dwindled to 2003/2004 levels and still declining.

It used to be that 1 out of 10 clients coming into my office for bankruptcy relief had real estate. I would send these people away since they had too much equity and would lose their home in bankruptcy.  So they would refinance, tapping that housing ATM machine, and all was well in the appreciating market.

Today, 9 out of 10 clients coming into my office have real estate, and virtually none of them have any equity.  Instead, they are typically anywhere from $100,000 to $500,000 upside down on their home. I tell them to let it go in the bankruptcy, and most do.

However, there are a few that refuse.  They are “married” to their homes.  They tell me they put $100,000 in renovations in their home over the last year.  I try to explain the math that the $100,000 does nothing to the negative $300,000 equity, but it simply does not register. Eventually, most come back months later after the math turns to reality.  We file their bankruptcy, and the reality of letting go of the home is accepted.  But for some the acceptance of losing their homes comes much harder, and they will try anything to stay there.

Unfortunately, many of the new loan modification entities are making false promises.  While they offer to modify the loan, the modifications are minimal.  Typically, the loan balance remains the same, and the past due payments are merely put at the end of the mortgage.  Sometimes, interest rates and payments are reduced, but only temporarily.  The loan might also be extended from 30 to 40 years.  Indeed, less than 5% of these modifications actually involve the reduction of principal balances.

But is the homeowner really that better off?  I suppose that all depends on how long the market will continue to decline.  If we see appreciation next year, then maybe these workouts lacking principal reductions will be a success. But how many people actually think housing will start to appreciate next year?

Until principal balances are reduced in loan modification agreements, anything else is just a “glorified workout,” and probably no better off than Uncle Sam’s bailouts.  Unfortunately, these bandaids are no different than Uncle Sam’s and will only go so far.  You simply can not stop the bleading of a femoral artery permanently with band aids.  The only true solution is by principal balance modification.  Only by reducing the principal balance to fair market value will everyone truly be better off, and possibly the economy might change course too.

A reduction to the principal balance will keep the homeowner in the home.  It will result in a higher receivable to the lender/trust pool than foreclosure.  Elimination of foreclosures will stabilize housing prices, clean up neighborhoods, and eliminate the drain off government resources.

Ironically, Bankruptcy already allows this for certain people.  If you have $30,000 to $50,000, you can file for Chapter 11 relief to modify your mortgage and reduce it to the fair market value.  If you do not live in your home, you can file for Chapter 13 relief and modify your mortgage.  But watch out!  If you live in your home, Bankruptcy forbids you to save it by modifying the loan.  Investors take priority over individual homeowners.  This is what Congress wanted.  Why?  Beats me!

While there is talk on Capitol Hill to reform the bankruptcy laws because of the irony between homeowners and investors, that remains to be seen in the future. But there is help.  Some people are fighting for the individual homeowners and reducing principal balances.  People like Eric Fagan in San Diego, April Charney in Florida, and others, are all sticking up for the homeowners.  They are beginning to achieve results with principal reductions.  And they are doing so by suing the lenders for all the origination fraud that has taken place over the recent years.  My firm has recently started as well, provided you meet a five part test.

So if you feel you are a victim of origination fraud and refuse to let your home go, get in touch with a reputable firm to save your home.  Through state, federal, and bankruptcy laws, there just might be an avenue to save that precious home by modifying the loan with a principal balance reduction.

Related posts:

1. Mortgage Modification Failure Inevitable
2. Can Obama’s Mortgage Modification Program Save Your Home?
3. Mortgage Loan Modifications