Dale Carnegie once said that “the only way to get the best of an argument is to avoid it.” This is easier said than done if you’re currently attempting to get a loan modification from your bank. Whether you are going it alone or paying for a loan modification no doubt you will experience some frustration.
This may be because lenders don’t really want to modify your loan. In an article from the Boston Globe yesterday titled ‘Lenders avoid redoing loans, Fed concludes’ economist Paul S. Willen said “loan modification is not profitable for lenders, if it were profitable they would go out and hire staff.”
Now this isn’t entirely accurate. The lenders are hiring staff and they are modifying loans. How do I know this? I recently interviewed for a position in the loan workout department of a very large lender that accepted billions in TARP money. During my interview I was told that they are reducing interest rates AND principal balances.
My theory is that the banks are slowly starting to recognize that a loan modification should include a principal balance reduction. Without one the borrower will inevitably fail. A few weeks ago I was asked to speak at my church about loan modification. I met a woman there who was able to successfully negotiate a loan modification on her own with Wachovia Bank. This loan modification included a change in interest rate from 6.6% to 5.87%. That’s obviously not enough to make her payment significantly more affordable. The real help came with the $60,818 principal balance reduction she received.
The reason the statistics on modified loan failures are high is because they don’t include a principal balance reduction. Borrowers eventually realize that while their payment is more affordable the mortgage they have could take a decade or more to pay off. Once this reality sets in they just walk away. For example, it would take 8 years for a homeowner with a mortgage of $150,000 and a home value of $100,000 to be at break even. And that’s at a 6% annual appreciation rate.
My advice to colleagues, clients, friends and you is to fight hard for a loan modification which includes a principal balance reduction that is more in line with the market value of your home. Without one you are likely to become another statistic.
I’m no economist, although as a real estate investor and loan modification consultant I do study trends like unemployment and consumer confidence. These trends have less to do with what is actually going on in the real estate market and more to do with public perception. After all, unemployment may be up and consumer confidence down but people still need a place to live.
“They need to do a much better job on the basic management and operational side of their firms,” Mr. Barr said. “What we’ve been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet.”
So the notion that the banks and government working together, or against each other, will save us is seriously flawed. They should both be held equally accountable for creating this mess, for sure. But, it’s time to cut ties. Let the banks sink or swim. No more free rides. It’s time to stop the enabling.
Warren Buffett wrote last year in a New York Times op-ed piece called
Don’t get me wrong. I believe there are many quality real estate education programs out there that will help you reach your goals. Next month I’m enrolling in several, including a class on using self-directed IRAs for real estate investing and a business financial management class. My point is that much of what you need to know in real estate isn’t taught in the classroom.
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In the 1960’s, the Fair Isaac Corporation started working on a system designed to help lenders analyze the probability that they would be repaid on a loan. Fair Isaac sought to develop a system that could dependably predict one’s statistical likelihood of creditworthiness, thus the FICO score was born. The evolution of Fair Isaac’s research became the standard of credit scoring by the 1980’s.
There’s a disturbing trend developing in the real estate market today. I have no scientific data to support this trend. I didn’t hire a consulting firm to do market analysis for me to come to this conclusion. It’s more than just a hunch. I sense an avalanche, or perhaps a tsunami coming. All types of people I meet in the online and offline world are grumbling about it. Here it is:
As a result, property values have continued to spiral downward and even the most responsible homeowners find themselves stuck in homes worth half of what they paid for them. Among these homeowners, what is most stunning is the emotional transition that has taken place over the past six months. They no longer have any attachment to the home. Therefore, the decision to run, not walk away from the home is business, not personal. Forget about the fact that they signed a promise to repay the lender. Forget about the fact that their credit will be negatively affected and forget about the fact that everyone they know will find out that they lost their home in foreclosure. All of this pales in comparison to losing hundreds of thousands of dollars on a place to live.
I read a story in the Arizona Republic last week with a headline that read,
The experts say you shouldn’t pay for a loan modification because you can do it yourself. That got me thinking about all of the things that I can do myself. I can change the oil in my car, do my own taxes and buy or sell my own house. But, I chose not to because I would rather have a professional mechanic, CPA or real estate agent handle the job for me.
Keep in mind that it can take up to 100 hours to complete a loan modification yourself. If you have 2-3 hours per day for the next 3-4 months then the odds are in your favor. If you don’t believe that this is true then check out this story from ABC News, called