Loan Modification category archives

For a while now I’ve been ranting and raving to everyone that will listen about the gross failure of the HAMP (Home Affordable Modification Program) program and lenders’ inability and incompetence with regard to actually helping homeowners to stop foreclosure.

Over the duration of the last year and a half The Treasury Department has threatened, begged, cajoled, et. al. major lenders in hopes that they will finally stop using Making Home Affordable Trial Modifications as their own personal forbearance agreements, and actually grant loan modifications.

People are getting peeved, and Congress has now stepped in and found that of the original target of helping 3 – 4 million homeowners through HAMP, lender’s are going to fall very, very short at a measly 700,000 – 800,000 homeowners helped.  So they’ve issued a big report and Treasury especially is in big trouble.

Wait lets back track a minute.  How did we get in this predicament?  And why is The Treasury Department in hot water?  Let’s backtrack to the start of HAMP and take a look at what happened.

Banks are in big trouble and need money bad.  They’ve sold the Country down the river in neat little packages marked “AAA” Rated Mortgage Backed Securities (supposedly as safe as Government Bonds), and now of course don’t trust each other enough to pass these overrated packages to each other so they’re no longer “liquid”.  So Uncle Sam steps in to prevent a depression and cuts Wall Street a nice big check.

Thankfully that big check had a couple of strings attached, one being HAMP.  HAMP = Making Home Affordable, a program designed to help deserving and needy homeowners to modify their loans and save their homes.  The idea was HAMP was going to stop 3-4 million foreclosures and end the crisis, helping things get back to normal, and of course these grateful lender’s were going to participate.

I guess this is as good a place as any to note that HAMP in a nutshell = Submit documents, qualify, 3 month trial modification to make sure you can actually afford the payment, permanent modification.  In that order and pretty straightforward, right?

Well, most major lenders didn’t (and still don’t) want to modify the majority of the loans in their portfolios because financially it didn’t (doesn’t) make sense.  Maybe they purchased the loan from another failing bank at 10 – 20 cents on the dollar, maybe there’s equity in the home.  Maybe they simply don’t trust delinquent borrowers to cough up that mortgage payment each month.  Maybe money’s tight, lender’s aren’t as liquid as they’d like, and they’d rather loan money at prime rates to prime borrowers, rather than lower interest rates to 2-3% (or less) for homeowners that, prior to the mortgage crisis, would have been termed “sub-prime”.  Maybe the lender’s “loss mitigation specialists” are underpaid, undertrained, or just plain lazy.  Maybe your loan modification request was denied because your “negotiator” had a killer headache.  Lot’s of maybes.  Lot’s of reasons why lender’s don’t want to modify.  So hardly anyone is getting into “Trial Modifications”.

So the Treasury Department and the Obama Administration call in these big banks for a meeting.  And another meeting.  And another meeting.  And there’s a lot of talk and finger pointing and finally Treasury says “Ya know what, we’re gonna see more people in Trial Modifications, or else.”

The lenders are a little scared.  What are they going to do?  The investors that hold itty bitty portions of each mortgage backed security don’t want to agree to modify loans in accordance with HAMP guidelines, and the lender’s themselves already have enough “maybes” to not want to modify…

And then one of these itty bitty bankers got a very big idea.  Why not place homeowners into the Trial Portion of the HAMP program, sucker them out of say 3 months, 6 months, heck why not an entire year’s worth of payments and then later cite exactly why they don’t qualify for a permanent modification if it doesn’t make sense for the lender to modify?

It’s funny how when a lender is 100% aware and sure they will lose money on a foreclosure they will bend over backwards to modify the loan, regardless of who the investor is, how much of a headache the negotiator may have (one particularly awful BofA “loss mitigation specialist”), or even whether it fits into HAMP guidelines (I’ve seen modifications of investment properties under HAMP?!).

And here we are almost present day.  Well, Congress is a little peeved because lots of “constituents” – the people that voted for them like you and me are calling, calling, calling and complaining because they’re not getting permanent modifications.  Finally Congress decides to do a little investigating.

Well, the sleuths over at Congress discover that neither Treasury or the Lenders have been doing their job (really mostly the lenders) but in order to avoid bad public opinion this Oversight Committee decides to particularly blast The Treasury Department:

While HAMP’s most dramatic shortcoming has been its poor results in preventing foreclosures, the program has other significant flaws.  For example, despite repeated urgings from the Panel, Treasury has failed to collect and analyze data that would explain HAMP’s shortcomings, and it does not even have a way to collect data for many of HAMP’s add-on programs.  Further, Treasury has refused to specify meaningful goals by which to measure HAMP’s progress, while the program’s sole initial goal – to prevent 3 to 4 million foreclosures – has been repeatedly redefined and watered down.  Treasury has also failed to hold loan servicers accountable when they have repeatedly lost borrower paperwork or refused to perform loan modifications.  Treasury has essentially outsourced the responsibility for overseeing servicers to Fannie Mae and Freddie Mac, but both companies have critical business relationships with the very same servicers, calling into question their willingness to conduct stringent oversight.  Freddie Mac in particular has hesitated to enforce some of its contractual rights related to the foreclosure process, arguing that doing so “may negatively impact our relationships with these seller/servicers, some of which are among our largest sources of mortgage loans.” Treasury bears the ultimate responsibility for preventing such conflicts of interest, and it should ensure that loan servicers are penalized when they fail to complete loan modifications appropriately. (View the full report here: http://cop.senate.gov/documents/cop-121410-report.pdf)

Ok, so Congress has effectively placed the burden on Treasury.  Reading through the Report they’ve also done their homework, hitting everything from the importance of free counseling for homeowners to targeting re-default rate so lender’s cant use it as much as a factor in denying modifications, and even looking more closely at what Treasury can and should be doing regarding holding Lenders as well as Fannie Mae and Freddie Mac accountable for botched modification requests.

For the first time in a long time I’m beginning to think that maybe the Foreclosure Crisis is finally coming closer to an end.  Call me cautiously optimistic.

I’m interested to hear your thoughts — Do you feel Treasury has dropped the ball?  Should Congress have been taking a more proactive effort and if so at what time should they have targeted the HAMP program?  Since inception?  Have you been placed in a Trial Loan Modification only to be later rejected from getting a permanent modification (and did your loss mitigation specialist have a headache that day…)?  I’d like to hear your story — so comment freely below!

Home Mortgage Interest Deduction -

Wikipedia defines it this way – A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the interest paid on the loan which is secured by their principal residence.

Eliminating MORTGAGE INTEREST DEDUCTION which has been around since 1894 could be a fatal blow to the fragile Housing market

Let me ask you a question and please answer as honestly as you can.

Would you swim in a pool of hungry sharks? Would you stand in front of a charging bull? Would you jump from a bridge into shallow water? Would you play chicken with a freight train headed directly at you? You must be thinking these are trick questions huh? Follow along please….

Hypothetical here –> Let’s say the President put you in charge of ending the housing crisis. Would you eliminate the mortgage interest deduction allowed by the IRS since 1894?

Now that is a crazy thought isn’t it? Who in their right mind would want to eliminate the biggest deduction come tax time for millions of American Homeowners. Not to mention the effect it would have on a fragile housing sector where many experts predict foreclosures to rise, where property values continue to decline and strategic defaulters are no longer stereotyped. Come now,  who in the world would consider eliminating the mortgage interest deduction?

Why Would Home Prices Keep Declining?

Proposals from a White House commission to dramatically slash the federal budget deficit include ELIMINATING MORTGAGE INTEREST DEDUCTION. And to make matters worse, other cost cutting recommendations include Cuts in Social Security Benefits and Defense Spending.

The mortgage interest deduction is the largest tax break for millions of American Homeowners, reducing their tax bill by hundred or even thousands of dollars. And how do you think the housing market is taking this? The National Association of Realtors claims “the Mortgage Interest Deduction (MID)  is vital to the stability of the American housing market and economy”. To read the full press release from the NAR – click here. Bob Toll, Chairman of the National Association of Home Builders, calls the proposal “selfish“. Toll also thinks the odds of the proposal getting passed are “zero to negative five”. NAHB has launched a website which they say separates the myths about the MID from reality.

As a Mortgage Banker in Maryland, a State where property values in many parts of the state have taken a big hit, I believe eliminating this tax deduction to be similar as standing in front of a charging freight train. I realize recent statistics point to upward ticks in the economy but let me tell you something. Take it from someone who pulls credit, looks at income and has their finger on the pulse of home values every single day. If the housing market is getting any better, (I don’t really see it nor believe it), the overall health of housing values could be categorized as “fragile” at best.

The engine that drove home sales not too long ago, the housing Tax Credit for New Homebuyers, seems to be a complete 180 degree turn around from the proposed MID. I can understand why NAR and NAHB are up in arms regarding eliminating the Mortgage Interest Deduction.

Share your thoughts about the proposal and let us know how a change would effect you.

In the mortgage industry as in many industry there are words tossed around like school house chatter which have a clarity of meaning to insiders yet are somewhat foreign to the clients being served. Most home buyers and owners who are refinancing assume if they are getting a loan from LMNOP Mortgage that is their mortgage company for the entire time they have that loan.

Not so fast.

During the application period you will be asked to sign the “Servicing Disclosure Statement” which in essence is telling you whether or not your loan will be serviced by the lender or broker originating your loan. (Image)

What is “servicing”?

The lender who originates your loan may or may not accept and manage your payments.  Smaller lenders may not have the staffing power to do so and larger lenders may like the reduced risk of having a third party company handle mortgage payments, collections and even foreclosure proceedings as required.

The servicer and the lender will enter an agreement about the payments. Generally the servicer will pay your mortgage payment on the 1st of the month to the lender. They actually will pay multiple mortgage payments at once using electronic transfer of funds.  The servicer makes a small gamble that you will either pay early or pay late enough that the servicer’s late fee comes into play. The servicer will pay the lender a reduced cost for the mortgage payment and keep all of the late fee.

When the mortgage and real estate industry began to collapse the servicers were not ready to handle the huge volume of foreclosures, short sales and inexperienced negotiators which cause a huge backlog and resulted in several short sale opportunities being lost, homes being foreclosed on much later than they normally would have and loan modifications being delayed by weeks or months.

The originating lender is not required to tell you to whom they will be selling/transferring the servicing of your loan. They are required only to indicate the likelihood of your loan and/or servicing being transferred or retained.

Loan modifications have been fading in and out of favor since the idea was floated that the federal government could pick up a portion of the tab for lenders being willing to grant them. modification is a change to the terms of the mortgage to reduce the principal, forgive some interest, or drop the interest rate. Basically, anything that changes the terms of the original note. Banks have been slow to grant them, for reasons that have been detailed here and here on this blog (there are some really good posts on this topic). Now there’s more bad news. For those attempting to get a modification, and even for those lucky few that have been successful.

First, the majority of those attempting to get a modification are seeing related negative items appear on their credit. Our office has an endless parade of people that have been making exactly the payment dictated by the lender in the trial period, complete with back-up documentation for multiple months. They have never missed a payment or been even 10 days late. And yet, their credit shows a long string of 30-, 60-, and 90- day late payments on their mortgage. In other words, the lender negotiated a trial payment, then began marking the borrower late when those payments were made. Can this be sorted out? Probably. Is it a massive headache, and a potential catastrophe? You bet it is. The borrower is often legally in foreclosure. At the point where the lender believes that foreclosing will be financially beneficial they can do so that very weekend.

Now the lender actually has an additional incentive to drag its collective feet in taking care of the modification. Now 23 states have a de facto foreclosure moratorium, lenders may start taking even longer to grant the official contractual modification, because they will now need a large increase in staff in the foreclosure and loss-mitigation departments to meet the increased burden of proof in handling judicial foreclosures. That staff is going to come from the modification department, not the underwriting department or the unemployment line. Reduced staffing = more delays. Get used to it.

But if you get through the process and actually get the modification, you’re out of the woods, right? Wrong.

Suppose you get the modification taken care of. Your job changes and you get a better offer somewhere else. You’re next step is to get pre-approved for a new loan for a home at your new location. You’re denied. Why? Because your current lender has reported on your credit that you have obtained a modification. Once a new lender sees it, your loan is dead. Most lenders have issued credit overlays for mortgage modifications that treat them as pre-foreclosures, and require 48 months from the date of the modification before a new loan is eligible.

Right. A notice of default and a modification have the same credit impact from a refinance or a purchase standpoint. Should you get a modification, you better stay in that house, with that loan, for four years. (Or have a wheelbarrowful of cash).

Personally, I think contractual modifications are a great idea. Commercial loans have been almost infinitely modifiable for centuries. Circumstances change, and if the parties to the contract want to alter the original terms of the agreement, why shouldn’t they be able to? But the way things have turned out with the wave of modification attempts in the residential markets, it might have been better for everyone if the concept never existed at all.

It must have seemed like a great plan to the president. Mortgage modifications certainly seem like the best choice to avert more foreclosures. At least to anyone who doesn’t understand or appreciate free market capitalism. Then again we’ve never actually had any of that.

First the feds would pour billions of taxpayer dollars into a “toxic asset” recovery plan which would be distributed to the biggest banks. Only those banks who are most friendly with the ruling party, though. Then when that didn’t do the trick the feds, having now nationalized these big banks, would “suggest” they modify the home mortgages on a few million homes. After all when you have the president (Obama), Nancy Pelosi, Harry Reid, Barney Frank and Chris Dodd all on a rocket tour through the destruction of the American economy who could say no?

The banks did not. At least the ones who were walking around with their lips around the teat of the mother of all bailouts. It appears Robin Hood was, after all, a modern American socialist. Only he stole from the rich and gave to the poor people. This version is different wherein the Robin hoodlums steal from the commoner and their children and give to the rich … or at least the mega rich. In fact evidence shows if you are not large enough to affect an entire national election you aren’t due for any of the people’s gold.

In the end nearly one-half of the home owners who applied and who were/are underwater in their homes, not able to keep up with their “toxic mortgage” payments for any number of reasons or simply looking for some of that very personalized socialism have fallen out of the all but forced Home Affordable Modification Program (HAMP). All but forced upon the banks that is. After all, the banks owe the president and the four horsemen of the recession their sworn allegiance. Instead of letting the banks fail, as open market capitalism requires, the executives of the behemoths still have their positions and have pockets lined with tax payer sacrifice ripped from the altar of belief in an increasingly communistic way of life.

More a sign of the times than actual necessity for the preservation of America we now are burdened with poorly written regulation mixed with a recipe of lack of foresight, failed introspect, atrocious levels of community involvement (nil), and “how can we make this work for re-election” publicity. The Summer of Recovery hasn’t even so much as sparked before it fizzled. It’s a dud bomb that only poisoned the waters of the free market with yet another failure in the HAMP program. I can’t wait to see how they spend our children’s money next. Surely there must be yet more ways to fail the American people.

Who’s fault is it? Why Chris Dodd and Barney Frank of course. The same people entrusted to make America safe from the horrible bankers for years and years. The same horrible bankers who followed their regulatory changes to open the mortgage market to the “underserved” citizens of America under the Clinton administration. These are the same underserved people who continually get the very short end of the stick and still find themselves uninformed enough to vote for the same kings and queens election after election. I suppose the sheep doesn’t really know he’s a sheep. He just wonders why every time the lord of the barn invites him in he leaves cold and naked having his shearing blamed on the shearer, not the lord of the barn. But there’s plenty of grass to eat and it’s so green …

Agree? Disagree? Got an opinion? Share it!

Some of the most lively comments I have seen are on posts about loan modifications and people are frustrated by the entire loan modification process.

It wasn’t like people in the industry needed a “Housing Scorecard” to tell us what was happening on the ground – just ask anyone who has tried to get a loan modification how their experience was.

But just in case further validation was needed that loan modifications aren’t working, the Obama Administration released their monthly housing scorecard which pointed out that the number of borrowers in the Home Affordable Modification Program (HAMP) program who get trial and permanent loan modifications is dropping off a cliff as more and more people are dropping out of the program.

Why aren’t loan modifications working?

In the report, two reasons are given: first that many borrowers prefer a private modification to a government modification program and second that many people are hesitant to modify a mortgage for an underwater mortgage without a principal reduction.

My personal opinion is that the second of those two reasons is the real reason that loan modifications are not working – people who find they are in a situation where they owe more than their home is worth and can no longer afford their mortgage payment are not going to stay in the HAMP program — short sale or foreclosure is a much better solution for people in this scenario.

And for those people who are under water but can afford their home? As long as they have a Conventional or FHA/VA loan, and don’t owe more than 125% of what the home is worth, the Home Affordable Refinance Program is a better solution than the Home Affordable Modification Program.  If you have good credit, can afford your home and are looking to reduce your payment – getting a refinance done under the HARP program is going to be much easier than going through a loan modification under the HAMP program.

And if you have a jumbo loan and can no longer afford your monthly payment on a house that is worth less than you owe on your mortgage?

Short sale is most likely going to be your best option (in my opinion)… no matter what anyone from a loan modification company says here in the comments.

Complete housing scorecard available on HUD.gov

Today I heard a couple of frank words from a “negotiator” at a major lender that made gave me chills.  I’ll get to them in a moment, but it’s definitely got me thinking and worried about the future for homeowners that are facing foreclosure.

A little back-story: I help homeowners for free, the ones diligent enough to pick up the phone and call me, usually devoting 2-3 hours of my day to answer questions, and walk homeowners through what can be the tough, arduous process of saving a home.  Every conversation typically begins with the same series of questions; and following the same algorithm I’ve been able to help hundreds of homeowners modify for free.

The same question keeps coming up though; loan modifications that fit inside of the HAMP box, approved for a “trial modification” and then kicked out after three months payments, the homeowners with no money to move into a new place, and no permanent solution.

The bottom line is lenders simply will not modify if financially, they believe they can make more money selling the home as a foreclosure; guidelines and government incentives, Christian charity and homeowner plight are absolutely meaningless when stacked up against a big red bottom line.

(I’ll get to the really scary part in a second)

I’ve helped a good deal of homeowners modify that were kicked out of Making Home Affordable (HAMP, or “The Obama Loan Modification” as some like to call it) by putting together NPV (Net Positive Value Tests) to better understand the lender’s position.  In truth, I use the “Net Present Value Worksheet” here: http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html, using the “Test Scenario” tab, accounting for re-default rate with an educated guess, the Freddie weekly indexed rate (located at freddiemac.com and under “Primary Mortgage Market Survey”), and the homeowner’s information.

This test paints a clear picture of what the bank would lose or gain by modifying vs. foreclosing.

So I’m on the phone with a positively delightful retiree and I’ve “threeway’ed” in her lender, and we start doing the whole song and dance:

Me – “Mrs. _____ is facing foreclosure, she was approved for a loan modification under HAMP that she does in fact qualify for, I’m curious why she was not approved for a permanent modification?”

Negotiator – “Well, at this time she simply doesn’t qualify.”

Me – “Really, according to whose guidelines?  Is there an investor holding the loan that does not participate in HAMP?  Please help me to understand!”

Negotiator – “Well, I really can’t say at this point in time; as far as I can tell she just doesn’t qualify…”

Me – “Alrighty, well I’m sure you won’t mind if we just run through all of her financials, hardship; I’m happy to illustrate that she qualifies at 4.875% on a 30 year fixed term through HAMP, actually above Freddie’s Surveyed rate for this week, she’s net cashflowing approximately $-300 prior to modification, $250 positive after modification…”  I continue, explaining in detail, covering every base, HAMP, net cashflow, even the silly hamp questionaire in conjunction with her hardship letter..  And the “negotiator” has no response, still isn’t budging.

Here’s what she said two hours later:

“Sir, I understand ya’lls predicament.  I’m going to be honest with you.  We purchased the loan at less than 30 cents on the dollar.  So while from your point of view it seems like, well, she owes about $500,000, the homes worth $250,000 give or take, so we’d lose $250k and we want to modify.  We can’t.  I’m sorry.”

As my brain automatically did the math, my jaw hit the ground.  — They bought the loan for something in the neighborhood of $150,000; they unload the property at $200,000 in a week, $50k undermarket, they still make $50k.

Thinking quickly, I countered as best as a could, but I knew at that moment I had lost –

“Umm.. What about time on market, maintenance fees for six months at least getting it to sell, REALTOR’s fees, attorneys fees..”  I know this is bad tact but I can’t think of anything.  Out of desperation I say, “C’mon, she’s retired, she can afford this and she won’t be late.  Please just do it.”

“The truth is, we don’t know that.  We’d rather lend the money to a prime borrower at 6% interest”.

And then I got scared.

*** Afterthoughts ***

I connected the lady with (what I hope) is a good REALTOR® in her area to help her with a short-sale (I really gotta connect with more real estate professionals).  I could tell she was devastated, but probably other than the last few sentences didn’t really comprehend what I or the “negotiator” were saying for most of the conversation.

I’d like to think I’m damn good at loss mitigation; I’ve helped a lot of people, but this shook me to the core.  It’s tantamount to a lender not modifying simply because they don’t want to.. And apparently they get away with it, day, after day, after day.
Just before I say goodbye, I remember thinking, man that negotiator should lose her job.  Mulling it over I’ve kind of changed my mind; the poor woman is probably underpaid, had to listen to me yell at her for 3 hours, and through it all had the integrity to actually be honest, even though it could possibly cost her her job.

I’m still not sure what to think.  I hope this helps anyone out there looking at modifying their loan on their own, and doesn’t discourage.  Things have to change eventually; there’s only so long that Americans will stand for being kicked around by the banks.

HAFA comes into play on the 5th of next month, and, to tell you the truth I haven’t finished getting up to snuff on it; guidelines are here: https://www.hmpadmin.com/portal/programs/foreclosure_alternatives.html, and I’ll try to break it down next week for homeowners as best as I can.

Photo Credit: brianlewandowski

If you haven’t already applied for a loan modification via the federal government’s Home Affordable Modification Program (HAMP), but plan on doing so, look out for the following changes announced today.

For all HAMP trial period plans with effective dates on or after June 1, loan servicers will only be able to evaluate borrowers for eligibility if they submit evidence of income beforehand.

In the past, borrowers were able to verbally state income to get the ball rolling with a trial loan modification, and later verify income in writing to obtain a permanent loan modification.

But of the more than 900,000 trial loan modifications initiated, only 100,000 have been moved to permanent status, partially because borrowers didn’t provide the necessary paperwork to verify the stated income figures.

Once these changes are implemented (potentially immediately at the discretion of individual loan servicers), borrowers will need to provide the following upfront “Initial Package” to qualify:

- Request for Modification and Affidavit (RMA) form
- IRS Form 4506-T or 4506-EZ and
- Evidence of Income

The RMA form provides the servicer with borrower/co-borrower financial information and cause of hardship.

The IRS 4506-T/4506T-EZ forms are requests for transcripts of tax returns in case borrowers decide to fudge the numbers.

Evidence of income documentation will vary based upon employment type.

Within 10 business days of receiving the initial package, the servicer must acknowledge in writing the borrower’s request for HAMP participation by sending confirmation it was received.

Within 30 calendar days, the servicer must review the documentation and determine if the package is either incomplete, eligible for a HAMP trial mod, or ineligible, whereby the borrower must be considered for alternative loss mitigation options.

*The changes outlined above apply to loans not owned or guaranteed by Fannie Mae or Freddie Mac.

The aim is to streamline the process and ensure more borrowers are eligible (and eventually granted permanent loan mods) before going through all the legwork only to find that borrowers misrepresented themselves.

If you’re having trouble making monthly mortgage payments, you may be eligible for a permanent loan modification under the federal Making Home Affordable Modification Program (HAMP). Rates are expected to rise, making loan modifications more difficult for lenders to do.

Here’s why economists anticipate a hike in mortgage rates. The Federal Reserve, our country’s central bank, has been buying $1.25 trillion worth of mortgage bonds. This raises bond prices and brings mortgage rates down. But the Fed has announced they’ll end this purchase program on March 31, 2010. Unless another big buyer comes along, mortgage bond prices could go down, sending mortgage rates back up.

By the way, the latest federal report on the HAMP program is encouraging. The number of people with trial and permanent loan modifications went up over 75% for October, November and December 2009, compared to the three prior months.

And if you’re wondering if it’s worth it, get this. The median monthly payment among borrowers with permanent loan modifications dropped from $1,419 to $830 a month! This reduced the median debt-to-income ratio from 45% to 31%.

Having a staffer on the House Committee on Financial Services for a best friend and growing up here in our nation’s capital it’s almost impossible for us to avoid long conversations about financial recovery, the foreclosure crisis, and the steps that various legislators and government organizations are or should be taking to help homeowners. I enjoy our conversations and it’s always great to get the inside scoop on what’s happening in Washington from a good friend.

The work day’s ended, and we’re sitting down for a Guinness at 18th St. Lounge talking shop; new appraisal guidelines, the pros and cons of the Nationwide Mortgage Licensing System (NLMS), the movie The Hangover (I loved it he hated it), and of course, HAMP – the loan modification side of Obama’s Making Home Affordable Program – and the disturbing number of homeowners that have been placed in Trial Modifications only to never receive a Permanent Loan Modification.

From an outsider’s perspective it’s very difficult to grasp exactly what is going on at the major servicers, and why the majority of homeowners aren’t being placed in permanent modifications. Let’s take Bank of America for example; as far as I recall last month, B of A had 43,000 homeowners in Trial Loan Modifications, yet has only approved 98 for Permanent Modifications?

Are Bank of America and the other major servicers not committed to helping homeowners? Are their loss mitigation departments simply too swamped? Are banks truly just putting homeowners into Trial Modifications to get a couple of payments from them prior to foreclosure? Here’s where talking with my buddy helps to understand what exactly is going on:

There has been a gargantuan amount of pressure on lenders to put more homeowners into Trial Loan Modifications coming from pretty much all sides; in addition to pressure from HUD and the Treasury Department on lenders to modify more mortgages, recently, President Obama called the CEO’s of most of the major lenders to the White House to explain why more hasn’t been done to help struggling homeowners. I can’t even begin to imagine how stressful that was for Ken Lewis.

As such, lenders are placing homeowners into Trial Loan Modifications just as quickly as they can to appease Washington. Here’s the problem – rolling over from a Trial Modification to a Permanent Modification is not just contingent on the homeowner making three consecutive affordable payments on time. The big hold up is the fact that lenders have the option to perform a NPV (Net-Present-Value) test to determine whether it is fiscally in their best interest to modify the loan, weighing the cost of foreclosure versus the cost of modifying the mortgage, factoring in the likelihood the homeowner will re-default.

Here’s the insider information you’ve been looking for: the exact process your lender is using when performing the NPV test can be found here. Additionally, a NPV Worksheet was created for FDIC’s Mod-in-a-Box Program, which can be found here: http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html. Merely enter the pertinent information and viola you’ve performed an NPV test!

If financially it doesn’t make sense for the lenders to modify the mortgages in question, no amount of hemming and hawing in Washington will force them to set themselves up for a larger loss than merely foreclosing. So for right now the only sure-fire way for a homeowner to know that they will get a permanent loan modification under HAMP is for the homeowner to perform a NPV test on their own? When lenders are unwilling to disclose crucial factors for the test, such as what percentage the lender is using to account for re-default rate?

Rather than blathering on about how I think lenders or Washington can solve the problem of getting more homeowners into Permanent Mods, I’d rather hear your opinions! Comment freely and let’s get some plausible solutions together that we can suggest a solution (no, not in a crazy NACA way but through proper channels). Maybe it’s time to put together a lobbyist group; as I understand Washington is getting a lot of calls from irritated homeowners.

Photo Credit: Pete Souza – Whitehouse