Voluntary or “strategic” mortgage defaults are challenging governmental efforts to resolve the real estate crisis.  But what are strategic defaults?

“Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they’ve fallen behind on other accounts.”

In other words, one out of every five homeowners who defaults today is voluntarily walking away from their mortgage, even though they can afford to make the payments.  That’s almost 300,000 people in 2007, and twice that number in 2008. Strategic defaults are higher in markets where home values have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005.

What are the consequences?  Well, the penalties can be stiff.  A consumer with a mortgage default on their credit history will  a) pay higher rates on all loans and credit cards,  b) be unable get a mortgage for at least two years, and  c) have  employment challenges with employers who demand clean credit. Yet 18% of those in default are willing to pay this price…

“Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: “Well, I’m $200,000 in the hole on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.”

Who does this?  You might be surprised at the answer.  Statistically, people with higher credit scores, larger mortgages and/or multiple properties are more likely to walk away.  They seem to have adopted the attitude that ” it’s just business.”

For homeowners waiting to find out if they qualify for a mortgage refinance or modification under the Obama plan announced last week, here is the first place to look.  Click the “self assessment” tools to guide you through the options and see if you might qualify either to refinance or to secure a loan modification.  There are then instructions for gathering up the required documentation and contacting the appropriate people.

Jim Wasserman of the Sacramento Bee had an article in the Sacramento Bee this morning that provides some excellent resources, including phone numbers to lenders other than Fannie & Freddie.  I can’t seem to link to the article anymore, so I’ve pasted it in for reference below.

Surviving Recession: Mortgage relief program has homeowners hopeful

By Jim Wasserman
Published Friday, March 6, 2009

Mortgage lending institutions reported high call volumes Thursday and thousands of Internet inquiries from struggling borrowers eager to find relief in President Obama’s $275 billion housing rescue plan.

“Within minutes of the plan being announced, there were 3,000 hits on our Web site,” said Eileen Fitzpatrick, a spokeswoman for federal mortgage giant Freddie Mac.

“As I understand it, the phones are ringing this morning,” Jay Brinkmann, chief economist of the Mortgage Bankers Association, told reporters during a conference call early Thursday.

Read the rest of this entry »

The second part of the plan announced last week to help troubled homeowners gets at the core of the problem:  how to help “at risk” homeowners who are struggling to keep their homes.  The key objective of the “Stability” piece of the plan is to reduce monthly mortgage payments to sustainable levels for those committed to keeping the homes in which they live.  If you’re a flipper, an investor, or worried about your vacation home, you can stop reading here.

We’re still waiting for March 4th and more detail, but here’s what we know so far:

• Do I have to be behind on my payments?  No, this is a big improvement over previous efforts.  You qualify without falling behind on payments if you can show that you are “at risk of imminent default” due to loss of income or employment, a big increase in your expenses, or a bad loan that is resetting to an unaffordable level.  Following the FDIC’s model of their IndyMac bank takeover, the government wants lenders to pro-actively send letters to those who appear to meet the eligibility requirements.  That will take a few weeks after the March 4th announcement, and the phones lines will be busy, so patience may be needed.
• Will this reduce my principal balance?  It could.  Unlike Part I, this part of the plan offers incentives to lenders to reduce principal balances if other measures fail to bring payments down to 31% of your monthly income. Principal reduction is  still voluntary and will be the last resort for lenders, but at least there are now financial incentives in place to encourage lenders and servicers to consider this.   Furthermore, if you exhaust all other options and are forced to seek protection under the bankrupcty laws, it looks like the courts will have the ability to  “cram down” the principal balance, allowing you to keep the home with a lower payment.
• Will all lenders be doing this?  No–and this is sort of a weak spot–it remains a voluntary program, but the government has placed substantial incentives on the table and expects most major lenders to participate.
• What incentives will lenders have to participate?  The government is going to pay loan servicers (the bank who sends your monthly statement but may not actually own the loan) $1,000 upfront for each loan they successfully modify plus an additional $1,000 per year for three years if the borrower stays current on the loan.  To encourage lenders to work with borrowers who are not yet in default, additional incentives are paid to banks and servicers who modify loans before the borrower falls behind.  Finally, a $1,000 per year (up to five years) is actually offered to the borrower who stays current on the modified loan for the ensuing five years.  This goes toward reducing principal even further.  Pretty good stuff.
• How do I qualify?  The home must be your primary residence, the payments must exceed 31% of your current income, and your loan must not exceed the current Fannie Mae/Freddie Mac loan limits for your area.  The standard national limit has been $417,000, however there were higher limits imposed in some areas for 2008, and the Plan reestablishes those for the rest of 2009.
• What do I do between now and March 4th?  If you think you may qualify, then get ready by organizing your current income: pay stubs, tax returns, and anything else; your expenses for your mortgage, property taxes, car payments, student loans, credit cards; and documenting and explaining any hardships that have contributed to your current inability to make your mortgage payments.

So, we wait for March 4th to know the rest of the story, but to summarize, Part I offers a little bit of help to “responsible” homeowners who can currently afford their payments.  Part II creates incentives that encourage banks and servicers to work with “at risk” homeowners before they get behind and damage their credit; offers the possibility of principal reduction to create a livable payment;  and will pro-actively contact homeowners who may be eligible.

All in all, this is an improvement over the litany of half-hearted, watered-down efforts previously made.  Let’s hope it has the desired effect.

There are two parts to the plan announced last week to help troubled homeowners. To clarify what we know so far, I’m going to focus on Part I:  the “Affordability” part of the plan.  This section addresses homeowners who can still afford their mortgages but who have been unable to refinance to lower rates because of falling home values.

Full eligibility details will be announced by the Obama administration on March 4, but we do know a few things now:

• Does this apply to all loans?   No, only to loans owned or securitized by Fannie Mae or Freddie Mac (after March 4, you can call your lender and ask if this is true in your case)
•  Does this apply to rental property loans and 2nd homes?  No, it only applies to primary residences
• What if I owe more than my home is worth?   This is one of the plan limitations for Californians.  Under the plan, you will still be allowed to refinance, but only if you owe a little more than the home is worth.  Specificially, your loan cannot exceed 105% of the home’s current value
• Will my payments go down? Not necessarily.  You’ll merely have access to current market rates without any special pricing or government subsidy.  Furthermore, if you have an interest-only loan now, your payment could actually increase if you refinance into a normally amortizing 30 yr fixed rate loan
• Will mortgage insurance be required?   We’ll have to wait until March 4th to find out.  Since first mortgages that exceed 80% of a home’s values are typically required to have mortgage insurance, this would be a reasonable assumption.  However, since it offsets the benefit of lower rates for those who previously did not have to have it, maybe the plan will address this another way
• Will my principal balance be reduced?   No, the primary benefit to homeowners is to provide access to today’s lower rates for those whose declining home values might prevent refinancing.  It is not the intent of this section of the plan to reduce the amount owed.

That’s my summary of Part I.  Stay tuned for an analysis of Part II:  the “Stability” piece…

Not that it ever proved itself viable to begin with, requiring as it did the voluntary participation of the troubled homeowner’s current lender, but HUD just announced that FHASecure is finished as of December 31st.  Kaput.

FHA stills does (and did long before FHASecure was announced in Sept of ‘07) 100%+ combined loan to value (CLTV) refinances, assuming of course that you can convince your current lender to assume that 100%+ risk by subordinating the balance of any current financing to the new FHA 1st loan.   That’s proven to be a grandiose assumption.

The main difference between the two programs is that while FHASecure required that you be in default, regular 100%+ FHA refinances require that you not be in default.   Go figure.  If that all sounds really stupid, like maybe the right hand didn’t know that the left hand had already spilled the beer, then I’m not alone.  To make FHASecure an even bigger joke, banks now imposed minimum Fico scores of 580 to 620 for all FHA loans, something impossible to maintain when you have defaulted on your mortgage.

Anyway, we can at least strike FHASecure from the list of pseudo solutions to the foreclosure mess.  The sooner we blow out all the legislative smoke, the sooner we can find and try to rekindle the spark of stability in housing.

I know I sound grumpy , but Merry Christmas anyway!

While Wall Street banks and Detroit auto makers fight over trillions of dollars of taxpayer bailout funds, the largely ignored homeowner tightens her belt and trudges on as a new flock of vultures circles overhead.  Yep, the next “big boom” for underemployed mortgage industry professionals is Loan Modification.

Watch out.  So far, loan modification is a sham, a cruel joke, a mirage.  Talked up by politicians desperate to look good, lenders so far have not been required to participate.  Modifying loans is a good idea, but it isn’t working yet.  And until it does, don’t shell out money for something you can do yourself.

For now, just recognize that it’s being promoted as the next big industry opportunity, and you’re the target market.  The last wave was credit repair, which at its nadir was network-marketed like Amway.  This time it’s loan modification, a moral cousin of ambulance chasing.  And, as the Sacramento Bee’s Jim Wasserman reported, the scam artists are out in force.

“Home Front has heard countless stories from struggling borrowers of phone calls offering to mediate with banks for $2,000 to $4,000 or more. Many are so desperate and confused they pay for what they can do themselves or get for free from nonprofit loan-counseling firms. Some say they have paid their advance fees, then can’t reach the firm.

The California Department of Real Estate cites an “explosion” of for-profit loan-modification firms as the foreclosure crisis deepens. Former lenders and real estate agents have retooled, and jumped to the newest way to generate income.

“In some instances the licensees entered the business not appreciating or understanding what the rules were,” said department spokesman Tom Pool. “You have another group that’s just not licensed and looking to make a buck.”

There are no experts.  This is a brand new problem.

Besides, Modifications May Not Help

In addition to being elusive, loan modifications have so far been ineffective.  Evidence from the modifications done this year suggests that whatever lenders are doing isn’t enough.  The OCC reports reports this:

Comptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months.

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today.

This chart shows the effective 2008 Q1 & Q2 “redefault” rates.  The result are shocking.  While only more time and analysis will reveal the cause of the failure, the suspects are  a) loans too badly underwritten to be modifiable,  b) modifications that didn’t go far enough, and  c) consumers who replaced the attenuated mortgage payments with other debt.

Anyway, my point is this: don’t shell out a chunk of money to an expert who promises to fix everything.  Call or email me.  I’d be happy to share their “secrets” with you along with alternatives to consider when the lender won’t modify your loan.