There are quite a few people who have tried to work with their lender to modify their mortgage who have ended up in foreclosure for one reason or another.

It has even gotten to the point where the Obama Administration has enacted a plan to start fining lenders who can’t find a way to modify more loans.

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said Friday. “Some of the firms ought to be embarrassed, and they will be.”

“We’re seeing a failure by some of the bigger banks on execution,” Mr. Barr said. “We’re going to be quite focused and direct on particular institutions that are not doing a good job.”

If the issue has gotten to this point - where fines are going to be handed out and the NYTimes is writing about it - it is clear that there are many people who are frustrated and wondering why it is so difficult to get a loan modification done.

Here is one possible answer as to why it is so difficult to get a loan modification done:

The FDIC has set up sweetheart deals with lenders called “loss sharing agreements” that financially encourage lenders to foreclose rather than modify a loan.

An excerpt from the most well-articulated thoughts on the subject that I have seen: (be prepared to be floored when you read the entire post)

When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to  simplify the terms. Some of the major details are:

• OneWest would purchase all first mortgages at 70% of the current balance
• OneWest would purchase Line of Equity Loans at 58% of the current balance.
• In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.

How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:

• The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
• The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
• ‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
• Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.

At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.

Although I don’t pretend to know everything - it has generally been my experience that in America, banks are organizations that are designed to follow economic laws (translation: their sole intent is to make a profit).

So when wondering why your lender won’t modify your loan, you may be well advised to follow the trail of money - as in what is going to make your lender more money.

And if the FDIC is literally agreeing to pay hard dollars to the lender to foreclose rather than modify?

It seems to me that someone might want to investigate this issue further and then start talking about possible ways that it could be fixed.

Related Information:

Making Home Affordable Performance (see page 3 for individual lender performance)

Anatomy of a Government-Abetted Fraud: Why IndyMac Always Forecloses

NYTimes: Treasury Pushes Firms For Loan Relief

It is entirely possible that proposed Legislation aimed at protecting consumers from “too big to fail” lenders could actually shutter community banks nationwide, putting thousands of out of work and making it even more difficult for prospective home buyers to find affordable mortgages.

A draft of the Financial Stability Improvement Act is currently making its way through the U.S. House. There’s a similar piece of legislation being considered in the Senate. The overarching goal of these measures is to curb the risks associated with lending behemoths like Bank of America and Wells Fargo.

But broad risk-retention provisions in the drafts would effectively kill community lenders, who account for about 40 percent of all home mortgage originations nationwide. Instead of minimizing risk, this new legislation would simply pave the path to home mortgage monopoly for the same “too big to fail” lenders who helped trigger the current financial crisis, according to a joint statement recently issued by the Community Mortgage Banking Project and the Community Mortgage Lenders of America.

“The result would be reduced competition and choice for consumers — an ironic and counterproductive result for a bill intended to mitigate ‘too-big-to-fail’ concerns,” the statement read in part.

The problem is rooted in risk retention. Legislators want to emphasize risk management for lenders and ensure a disaster like the subprime mortgage collapse will never be repeated.

But the House bill requires lenders to retain up to 10 percent of the credit risk on any loan sold into the secondary market. Hundreds of community-based mortgage bankers would likely go out of business overnight if they were required to retain just 5 percent. A company that originates $100 million each year — a normal figure for a small to mid-size firm — would have to have an astounding $5 million in cash reserves.

In contrast, Wells Fargo originated about $230 billion in residential mortgages in 2008. But those cash reserves are easier to maintain for lenders that also serve as depository institutions.

Community-based lenders are the lifeblood of the U.S. housing market. These smaller lenders provide secure, affordable mortgage products to buyers in search of personal service and local expertise.

These crippling risk-retention requirements could put thousands of Americans out of work. Home buyers would likely see a spike in rates and fees, part of a wave of increased cost created by the new requirements and the elimination of competitive pricing.

The country’s three largest mortgage lenders — Wells Fargo, Bank of America and J.P. Morgan Chase — accounted for 52 percent of all new home mortgages in the first half of 2009, according to Inside Mortgage Finance.

In 2007, the trio had a market share of 37 percent. In 1990, no company had more than 5 percent of the market.

Legislation without exclusions and exemptions for qualified lenders would put almost all of the nation’s home mortgages in the hands of the “too-big-to-fail” firms.

“These regulations would thus unnecessarily deprive consumers and businesses of competition for safe and sustainable mortgage options and reduce the available funds for home financing by billions of dollars,” John A. Courson, president and CEO of the Mortgage Bankers Association (MBA), recently said in a news release.

The House Financial Services Committee recently agreed to exempt government loans (VA, FHA, USDA, SBA) from the risk-retention requirement. The Senate Banking Committee draft has similar exemptions for government-backed loans.

But there’s no guarantee that these exemptions — or any future exclusions — will make the final piece of legislation brought to President Obama.

The committee is expected to begin marking up the bill in the next few weeks. Now is the time to make your voice heard if you are so inclined - you can stand up and blog, tweet, make phone calls, or anything else and hopefully someone will hear. Also, if you’re alarmed and inclined to join the organization who is trying to make their voice heard in this matter you can also join CML America, an organization whose mission is protecting small mortgage bankers.

It’s a great time to be a homebuyer. Interest rates are historically low, the tax credit for buyers has been extended into next year, and now Fannie Mae is making it easier to find and buy an affordable home with their First Look program. The affordable homes involved are the foreclosed properties Fannie Mae is selling. In buying these, individuals have been at a disadvantage competing with investors who can pay cash and don’t have to wait to qualify for a loan and get an appraisal.

To help this situation, Fannie Mae’s First Look program will consider offers only from potential owner-occupants (and certain public-housing entities) for the first 15 days one of their foreclosed homes is on the market. First Look can also reduce deposits required to as little as $500 and lets buyers renegotiate their offers after the appraisal. Finally, buyers who will occupy their homes will be allowed up to 45 days to complete their transaction, up from the 30 days formerly required.

Freddie Mac said it has similar programs now in the pilot phase. Both Fannie Mae and Freddie Mac are government-controlled companies that buy and guarantee mortgages and now own many foreclosed homes.

To learn more, free educational information is available about the home buying and prequalification processes.

As we approach Thanksgiving weekend - and families gather to talk about football, movies and mortgage backed securities (well, two out of those three) - I thought it’d be helpful to provide you with some definitions behind the jargon.

The Dow
The Dow (or The Dow Jones Industrial Average) was created in 1896 by Wall Street Journal editor and Dow Jones Company co-founder Charles Dow and his associate Edward Jones. It’s simply an average of the stock market indices of 30 large companies (such as Exxon, Cisco, Microsoft, McDonald’s and Disney). It offers a broad measure of the American stock market and a thumbnail of our country’s financial health.

Charles Dow compiled the index to show how large publicly traded companies behave on an average day, and its performance has become a major indicator of the American economy. The Dow is influenced by domestic corporate and economic reports, and domestic and foreign political events. When it was first published, the index stood at 40.94. The Dow reached its record on October 9, 2007 at 14,164.53 - and hovers around 10,400. The word “Industrial” is now just a historical reference, as most large companies in the past century dealt in heavy industry.

The Fed
The Fed is shorthand for the Federal Reserve, America’s central banking system. The Fed was created in 1913 as part of the Federal Reserve Act to overhaul the national banking system, reform currency, and create monetary policy. The Fed is charged with conducting this policy, ensuring the safety of our banking and financial systems, and providing financial services to depository institutions. The Federal Open Market Committee (FOMC) is the policy making branch of the Fed, and their decisions are widely covered by the media.

In order to “be local” and monitor the regional aspects of our economy, 12 Federal Reserve Banks exist throughout 12 national Federal Reserve Districts to monitor the economy and financial institutions within their sphere.

The Fed acts within the government, is not owned by anyone, and is “not a private, profit-making institution.” The President appoints a 7-member Board of Governors to oversee the Fed’s operations. The Board is currently chaired by Ben Bernanke, and the Board’s decisions can directly manipulate the nation’s money supply and short-term interest rates.

Fannie Mae and Freddie Mac
By now, you probably know that I’m not talking about your long-lost cousins.

Fannie Mae, or the Federal National Mortgage Association (FNMA), was created in 1938 to make more mortgages available to buyers throughout the country - and was chartered by Congress in 1968 as a stockholder-owned corporation. It’s tasked with buying and securitizing mortgages to ensure that funds are readily available to mortgage lending institutions.

Freddie Mac is shorthand for the Federal Home Loan Mortgage Corporation (FHLMC), which was created in 1970 to expand the secondary mortgage market by buying mortgages, bundling them into pools, and selling them on the secondary market in order to garner more funds to finance more mortgages throughout America. The moniker was the longtime shorthand for the FHLMC, but has since become the company’s official name.

Both Fannie Mae and Freddie Mac are government sponsored enterprises (GSE’s) and guarantee about $6 trillion in the nation’s mortgage market. In 2008, both were taken into conservatorship by the Federal Housing Finance Agency (FHFA) during the subprime mortgage crisis.

Happy Thanksgiving!

When shopping for a mortgage, it’s important to take note of your LTV, or loan-to-value.

If you haven’t heard this term before, it simply refers to your loan amount as a percentage of the property value.

So if you buy a home appraised at $100,000 and put down 20% ($20,000), the LTV would be 80% ($80,000 loan amount).

Loan amount / property value = Loan to Value (LTV)

If you only come in with a five percent down payment, the LTV would be 95% (zero down would be 100% LTV).

The latter example poses more risk to the bank or lender, as the homeowner is borrowing more while holding less equity (ownership) in the property.

For that reason, the LTV affects pricing and also program eligibility.

Typically, banks and lenders offer different pricing for certain loan-to-value ratios, such as 65-70%, 70-75%, 75-80%, and so forth.

The higher the LTV, the higher the risk, associated pricing adjustments, and mortgage rate you will ultimately receive.

So if you’re on the cusp of a certain LTV threshold (say 71%), it may make sense to bring a little more money to the table to qualify for the lower pricing tier between 65-70%.

That move alone could lower your interest rate significantly and save you hundreds each month.

Keep in mind that you may also be required to bring in more money to qualify for a specific loan program that caps the LTV at a certain percentage.

Most lenders also require that you pay for private mortgage insurance if the LTV exceeds 80%, so that’s another issue to consider when determining your desired down payment/loan amount.

Of course, your loan officer or mortgage broker should be able to help you decide what makes the most sense in terms of LTV and pricing/eligibility, so don’t fret.

(photo: thetruthabout)

Homeowners facing foreclosure now have a new option–federal housing agency Fannie Mae is offering a Deed for Lease™ Program. It lets homeowners stay in their homes by signing a lease after transferring the property deed back to the lender. They rent the house at a market rate, which should be more affordable than their mortgage payment. In fact, the market rental rate can be no more than 31% of gross income.

Leases under the program can be up to 12 months, with renewals extended for a period of time or simply month-to-month. If the lender sells the property, the lease is assigned to the buyer.

Deed for Lease™ is for homeowners who can’t qualify for or maintain other loan workouts like a loan modification. They will no longer own their homes. But the good news is, they get to stay in them…and for a cost they can afford. This keeps families in their homes during a time of transition and helps stabilize neighborhoods and home values.

Freddie Mac, another federal housing agency, has been offering former homeowners month-to-month leases since March. For either program, your mortgage must be held by Fannie Mae or Freddie Mac. You can find out if it is by visiting our site: https://www.mortgagereliefonline.com

An interesting thread is happening on Zillow Advice as a result of a question posed by Peter888:

Am I entitled the learn the reasons why my mortgage application was turned down?