CA Foreclosures | The Refinance and Loan Modification Quagmire

In July, President Barack Obama started placing pressure on banks and mortgage companies to put forth a greater effort to revise home loan terms in order to make them more affordable and avoid additional foreclosures. The President’s actions came as a relief to tens of thousands of homeowners who stood worried that their home would soon be added to the swelling pile of CA foreclosures.

Almost immediately after the government’s program went into effect Republican members of congress began to say that the President’s move might be too little too late plug the dam on this escalating problem.

While the administration set a lofty goal of preventing 3 to 4 million homes from going into foreclosure, a recent government oversight report expressed doubt over whether that objective can reasonably be attained.

While Federal officials recently reported that the Making Home Affordable program had reached its initial target of 500,000 trial mortgage modifications. While this milestone was reached more than three weeks ahead of schedule, the ability of large banks who hold large portfolios of loans in states like California, Nevada, Arizona, Florida, and Michigan to be able to effectively meet the needs of the countless applicants who send in their loan modification requests each day is seriously in question.

Ken Stein, associate director of the California Reinvestment Coalition, an advocacy group for homeowners, stated that the report pointed out that the banks involved got off to a slow start in accelerating the number of modifications being processed and failed to pick up the pace once the initial workload proved to be greater than expected. Mr. Stein stated that:

“They’re improving and that’s good, but the numbers are still insufficient.”

Leaders within the mortgage industry quickly responded by saying that banks had been busy modifying loans (nearly 2 million since 2007) when the call by the Obama administration came to increase the number of loan modifications completed. They pointed out that it always takes a period of months, not weeks, for government sponsored initiatives to get off the ground and rolling at full speed and that we should not expect anything different from this government program.

That’s not good news for thousands of California residents who’ve been beat down by job losses and other economic setbacks and who are now living continually in a state of imminent default. Some residents drive home from work every day to see another house in their neighborhood added to the list of CA foreclosures which grows bigger by the day.

“This is a new program that had a lot of kinks,” said Scott Talbott, the top lobbyist for the Financial Services Roundtable, which represents large financial institutions. “And now it is up to speed, and I expect the pace to continue.”

That statement is in stark contrast to the words of Elizabeth Warren, the chairman of the Congressional Oversight Panel monitoring use of government bailout money as she voiced her own concerns about the effectiveness of the $75 billion dollar program. She said that , “It isn’t clear the program in place will do enough to tame the crisis.” The report also questioned whether the modifications were putting homeowners into “long-term stable situations” or if the end result would simply be more foreclosures down the road as those who receive modifications find themselves unable to pay their mortgage even under the revised terms.

Analysts from California and other states echoed those worries, saying that the 500,000 modifications recently completed was just a drop in the bucket compared to the millions of loans that needed to modified in only a few short months. And while it is true that the program is helping to decrease the number of CA foreclosures flooding into the market right now, a lot more has to be done if this effort is going to significantly impact the decline in housing prices which has battered the entire country for more than two years now.

Short Term Struggle or a Pattern of Behavior?

Mark Zandi, chief economist at Moody’s Economy.com has stated that:

“The program is kicking into a higher gear, but not high enough to forestall a continued increase in foreclosures and more house price declines.”

Zandi stated that borrowers whose mortgages are modified tend to default on the new terms at an unusually high rate. He predicted that of the estimated 4.5 million homeowners in foreclosure or headed there with mortgages 90 days or more delinquent, the program ultimately will only be able to save 1 million of them.

When asked, Obama administration officials continue to say that they understand that foreclosures continue to rise and that they fully intended to keep the pressure on mortgage companies until the situation is resolved.

Housing and Urban Development Secretary Shaun Donovan said,

“We believe we are absolutely moving in the right direction and have reached an important turning point in our modification efforts . . . but we are nowhere near the finish line yet.”

Officials from HUD and the Treasury Department have now met with top mortgage servicers in Washington to discuss improving responsiveness to borrowers and the efficiency of the program with the goal of reducing a tsunami of CA foreclosures from arriving in the near future.

In its conception, the Obama program was designed to help ease foreclosures by aiding struggling homeowners modify the terms of their mortgages by cutting interest rates and extending the length of the loans. Unfortunately, government guidelines and other rules weren’t released right away, and banks shied away from the program even after it was refined.

This is not unusual as the mortgage industry tends to make excuses for itself when it chooses not to aggressively pursue the path outlined by the current administration…whichever that administration may be.

George Bush, seeing in advance how truly devastating the mortgage meltdown could become pressured banks to aggressively address the issue before it spiraled out of control.

His administration told banks to not only begin the process of modifying loans but to start actual principal reduction measures, now known as a short refinance, in order to make payments affordable for troubled homeowners in the long run. He even signed into law the Homeowner Indebtedness Relief Act of 2007 which would remove any harmful tax implications to the homeowners who received such assistance so that they wouldn’t have to be afraid to take advantage of principle reduction once their bank chose to extended a helping hand.

That hand never arrived however. Banks, who are consumed with the pursuit of profit, could not bring themselves to begin writing down losses without any resulting penalty to the homeowner. They simply did not want to reduce the average $150,000 loan to $110,000, recast it as a fixed rate mortgage, and write off the difference while the borrower stayed in the home. Instead, their idea of help was reducing payments for a few months or adding missed payments on to the end of the loan. Of couse no significant improvement resulted from such non-actions and the number of CA foreclosures exploded into a mushroom cloud of loss in 2007 with the rest of the nation soon to follow within a matter of months. It would appear that this is one time that a lack of compassion backfired on an entire industry in a big way.

Fast forward a few years and it looked as if Obama’s attempt to wrench order from the current chaos the foreclosure problem had developed into would meet the same ignominious fate as the previous effort by Bush.

Then, this spring, the government added cash incentives for borrowers and lenders to participate.

Both Donovan and Treasury Secretary Timothy F. Geithner pushed the chief executives of mortgage servicers to increase staffing, streamline application procedures and improve their customer response time. In return, the banks, credit unions, and other mortgage would receive funds for helping to stop additional CA foreclosures from continuing to flood the market.

Geithner said the three-month trial modifications are being added at a faster rate than homeowners are becoming eligible for the program. Administration officials said that about 40% of the nation’s estimated 1.2 million eligible homeowners were trying to take part.

The pace of loan modifications has nearly doubled since the end of July. But the 487,081 trial modifications as of the end of September amount to just 16% of the eligible delinquent mortgages. The latest comprehensive data, as of Sept. 30, showed that JPMorgan Chase & Co. had modified the most mortgages followed by Bank of America Corp. and Citigroup Inc.

What Happens When Banks Refuse to Help?

The major reason that we find ourselves in the state of economic woe is because lenders continued to loosen lending standards in an effort to push more loans and earn bigger profits. Just a few years ago when the idea of millions of CA foreclosures seemed laughable, the joke around many real estate offices was that “If you could fog a mirror with your breath, you could get a stated income mortgage.”

It seemed that everyone forgot that the borrowers had to actually be able to make the house payments each month. Not just for the first two or three years, but until the loan was paid back in full. The leaders of the lending institutions should have known better. The traditional lending practices were in place for a reason, what did they think would happen if they disregarded them?

After the mortgage meltdown, banks have subsequently tightened their lending practices, which is a good thing in a way. But have they gone too far? The cat is already out of the bag, so are the ridiculously exclusive lending guidelines helping to stem the tide of CA foreclosures or are they doing just the opposite? It’s not just loan modifications that are running into unexplainable roadblocks. Let’s take a look at how regular refinances are being torpedoed by the very banks that desperately need every good customer it can find in order to boost profits enough to account for the losses incurred when liquidating the repossessed homes.

The story recently came out about how Angie Trujillo and Carl Heinzen were denied a mortgage by Bank of America.

Someone being denied for a home loan is not unusual, but the story borders on bizarre when you consider the fact that Mrs. Trujillo worked for Bank of America for 40 years, that she was laid off after attaining the rank of assistant vice president when the bank gave pink slips to over 30,000 employees in an effort to cut costs, and that the married couple applied for the loan a number of weeks before she was told that she was going to be laid off.

When you consider the fact that she worked for the bank for such a long time, that she received a severance package just under $60,000 when she was let go, that she had a pension valued at just under $375,000, and that she had more than $150,000 in cash stored in savings accounts at Bank of Amercia it quickly becomes clear that whoever is responsible for making the decisions on who was and was not an acceptable risk was out of touch with reality. Either that or someone somewhere had made a conscious decision to find any number of excuses which they could use to justify not lending money to anyone that did not fit into the most traditionally conservative borrower mold.

This line of thinking becomes more apparent when you add in the facts that Mrs. Trujillo and her husband have bought more than a few CA Foreclosures which they had rented out. These rental properties sit nicely on a balance sheet as income-producing assets. In fact, up until recently they had been depositing $10,000 at Bank of America every month for rental properties they own and manage themselves.

We won’t even go into the fact that both Heinzen and Trujillo had credit scores which placed them squarely in the top 5% of all borrowers nationwide for creditworthiness.

Kind of makes you wonder: If people like Heinzen and Trujillo can’t get a home loan, even for just a refi, who can?

When questioned about cases such as these, Rick Simon, a spokesman for Bank of America, said that outstanding credit scores are just one factor in determining who gets a loan (or refinance) and who doesn’t. Another significant factor is showing you’ll be able to make regular payments.

“Verifiable, sustainable and qualifying income is a critical component,” Simon said and went on to state that severance pay and rental income don’t count as income for loan purposes, even though they’re both income. In regards to the pension, that does count — but only if you’re already receiving those pension payments.

So while Trujillo had already qualified for her pension the bank won’t factor it in until she actually retires and starts receiving the checks.

Simon said these aren’t just Bank of America’s rules. He said the rules are pretty much dictated by the secondary market, where banks sell off many mortgages after writing them.

The leading players in the secondary market, Fannie Mae and Freddie Mac, have tightened their rules since the mortgage market went haywire and Uncle Sam had to step in to bail out both firms. These mortgage giants felt that the best thing to do was take on zero additional risk that CA foreclosures as well as defaults in other states might continue to be an issue which could put the now government-owed institutions into an increasingly risky financial position. The only way to do that is to hunker down and not lend out any money. “Don’t make the loan and the borrower can’t fail to pay it” is the type of loopy logic behind such policies.

So Simon conveniently passed the responsibility on to the government as he said:

“We write loans to the guidelines of the secondary market. And those guidelines are now very conservative.”

So Bank of America is choosing to allow Fannie and Freddie to call the shots. And if that means slamming the door on some of their best customers, then I guess that’s just the price we have to pay if we want to see a decrease in the number of CA foreclosures and jump start some type of recovery in the housing sector, right?

This type of scenario makes the entire situation seem like it’s stuck in a sort of vicious circle. If the housing industry is dependent on the mortgage industry, and the mortgage industry spends millions of dollars advertising to the public it wants to loan money to good customers but then finds any and every reason to deny them when they actually apply, what type of recovery can we really expect to see…and when?

It’s clear as day now that this simple refinance transaction fell victim to the fact that the lending rules, which once were irresponsibly lenient, are now overly strict. And if that is the case for a simple refinance, how many more loans were denied without a good reason that would have been purchase money mortgages? You know, the kind of transaction that would have resulted in fewer CA foreclosures sitting on the market and more stability to home values as a whole?

It seems that we are left to hope that the Obama plan does indeed begin to build up steam. We certainly can’t put any faith in the banks when stories like this abound. Unfortunately, it might be time to mentally prepare ourselves to see a lot more CA foreclosures on the market over the next few years as there’s nothing to indicate that the banks will be willing and able to handle a mountain of loan modifications any better than they process their own in-house refinance applications.