Monthly Archives: July 2009

Loan Modification Should Include a Principal Balance Reduction

principal balance reductionDale 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.

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The Key to Real Estate Recovery: Affordability

key to real estate market recovery is affordabilityI’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. 

Forget about price per square foot.  Forget about tax incentives.  Forget about absorption rates and inventory levels.  Forget about median prices.  And, forget about unemployment rates and consumer confidence.  The key to real estate recovery is affordability.

Maricopa Seeing Signs of New Beginning, an article in last Sunday’s edition of the Arizona Republic, told the story of a community 30 miles south of Phoenix hit hard by the real estate market downturn.  Maricopa is on the road to recovery because homes there are affordable again.

The median price for a home in this community is $100,000.  A first-time homebuyer can get an FHA/VA/USDA home loan at 6.5% and with a monthly payment of $777.  A family with a combined household income of $40,000 can easily afford this payment.  Likewise, an investor looking for cash flow, a tax deduction and hedge against inflation can do well here.  If the investor pays all cash and nets $750 a month in rent their annual cash on cash return is 9%.

The California Association of Realtors publishes a Housing Affordability Index on their website.  According to their site “the C.A.R.’s First-time Buyer Housing Affordability Index (FTB-HAI) measures the percentage of households that can afford to purchase an entry-level home in California.”

In the first quarter of 2008, 46% of Californians could afford to purchase a home…the first quarter of this year, 69%.  There are a number of areas in California that are experiencing the same type of recovery as Maricopa, Arizona. 

While this index, like most indices, don’t explain the whole story it is clear that as homes become more affordable again people will buy.

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Big Bad Banks and the Government that Enabled Them

Big bad banks“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.”

–          Michael S. Barr, the assistant Treasury secretary for financial institutions, as quoted from the New York Times article, ‘Paper Avalanche Buries Plan to Stem Foreclosures’ on 6/28/09, discussing the banks’ loan modification efforts.

Most of us have a family member or friend that has experienced hard times.  You help them find a job, buy them a few meals, let them crash at your place for a while, and may even lend them some money.  But, at some point you realize two things:  (1) Perhaps it was their poor attitude and lack of organization that got them into this situation in the first place; (2) If I keep bailing them out what incentive do they have to clean up their act?  Then it dawns on you…you are an enabler.

That is the situation we find ourselves in today with banks like Wells Fargo, Bank of America (formerly Countrywide), and Citigroup.  By now you’re probably familiar with the bailout figures, published on Pro Publica’s website, ‘Eye on The Bailout’:

  • Bank of America        $52 Billion
  • Citigroup                      $50 Billion
  • Wells Fargo                 $25 Billion

Staggering numbers indeed…but, the enabling began long before the bailout took place.  This is an excerpt from a HUD urban policy brief written in 1995:

“At the request of President Clinton, the U.S. Department of Housing and Urban Development (HUD) is working with dozens of national leaders in government and the housing industry to implement the National Homeownership Strategy, an unprecedented public-private partnership to increase homeownership to a record-high level over the next 6 years.”

This National Homeownership Strategy initiative gave banks their green light to start lending to anyone with a pulse.  And, the incomprehensible part is the amount of greed and corruption that took place in the years that followed.

“Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

–          Beth Jacobson, former loan officer at Wells Fargo Bank discussing marketing practices in ‘Bank Accused of Pushing Mortgage Deals on Blacks’ from the New York Times on 6/6/09

Wells Fargo is now being sued by the city of Baltimore and the N.A.A.C.P.  However, they’re not alone.  Last month, the SEC filed a lawsuit against the former CEO of Countrywide for civil fraud.

sink or swimSo 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.

And come to think of it…it’s time to kick my brother off the couch.

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