Loan Modification and the Second Lien Program

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The U.S. government yesterday announced details of new plan aimed at helping distressed homeowners modify second mortgages. The Second Lien Program is slated to work in tandem with first lien modifications offered under the government’s Making Home Affordable Program to deliver a “comprehensive affordability solution for struggling borrowers,” says the U.S. Department of the Treasury.

Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when one of the government’s Home Affordable Modification’s is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by the U.S. Dept. of the Treasury.

Yesterday’s announcement may make it easier for borrowers to modify or refinance their loans under FHA’s Hope for Homeowners program. Here are two examples of how the program could work:

Family A: Amortizing Second Mortgage

  • In 2006: Family A took out a 30-year closed-end second mortgage with a balance of $45,000 and an interest rate of 8.6%.
  • Today: Family A has an unpaid balance of almost $44,000 on their second mortgage.
  • Under the Second Lien Program: The interest rate on Family A’s second mortgage will be reduced to 1% for five years. This will reduce their annual payments by over $2,300.
  • After those five years, Family A’s mortgage payment will rise again but to a more moderate level.

Family B: Interest-Only Second Mortgage

  • In 2006: Family B took out an interest-only second mortgage with a balance of $60,000, an interest rate of 4.4%, and a term of 15 years.
  • Today: Family B has $60,000 remaining on their interest-only second mortgage because none of the principal was paid down.
  • Under the Second Lien Program: The interest rate on Family B’s interest-only second mortgage will be reduced to 2% for five years. This will reduce their annual interest payments by $1,440.
  • After those five years, Family B’s mortgage payment will adjust back up and the mortgage will amortize over a term equal to the longer of (i) the remaining term of the family’s modified first mortgage (e.g. 27 years if the first mortgage had a 30 year term at origination and was three years old at the time of modification) or (ii) the originally scheduled amortization term of the second mortgage.

Here’s what U.S. Dept. of Treasury Secretary Tim Geithner has to say about the Second Lien Program:

With these latest program details, we’re offering even more opportunities for borrowers to make their homes more affordable under the Administration’s housing plan. Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind.”

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Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

Bank of America and Countrywide Home Loans Sued by United Law Group

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A law firm engaged in the practice of helping distressed homeowners negotiate loan modifications has filed a lawsuit alleging that Bank of America and its subsidiary Countrywide Home Loans deliberately and maliciously sought to harm its reputation with its clients in order to stall and mislead clients.

According to United Law Group, representatives from Bank of America are telling the law firm’s clients that United has not contacted them and that they have not received any notices and legal demands on their behalf. In response to those claims, United Law Group — a provider of legal foreclosure prevention and foreclosure litigation service — today announced that it filed a complaint in the Superior Court of the State of California County of Orange Central Justice Center against Bank of America and its subsidiary Countrywide Home Loans, Inc. for tortuous interference with contract, defamation (slander) and unfair business practices.

The complaint alleges that as a direct result of the representations, statements and recommendations made by Bank of America and Countrywide Home Loans directly to United Law Group’s clients, United Law Group’s clients became distraught and confused as to the state of their loan modification applications, the services being performed by United for those clients, and whether such loan modifications were even possible in the first place. In short, United is claiming that Bank of America representatives were aware that their direct communications with United Law Group’s clients would cause a significant crisis in confidence, and intended those consequences when the communications were made.

Representatives from Bank of America are telling our clients that we have not contacted them and that they have not received our notices and legal demands,” says Richard Stinstrom, Senior Litigator for United Law Group. “This deliberate attempt to mislead our clients is a calculated move designed to shake consumer confidence so that these consumers cancel with United Law Group.”

United is asking the court to help recover actual damages, general damages and punitive damages. The firm is also seeking a preliminary restraining order and preliminary and permanent injunction against Bank of America and its subsidiary Countrywide Home Loans from engaging in any communications directly with the firm’s clients, other than as may be specifically permitted by United Law Group, following receipt of notice of representation by United Law Group.

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Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

California Loan Modification Companies May Soon Become a Thing of the Past

If a group of consumer-minded California State Senators get their way, loan modification companies may soon find themselves out of business or scratching their heads as they consider how to successfully adjust their revenue model.

California Senate Bill 94 (SB 94), which looks like it might be days away from being passed by the full California State Senate, would prohibit the charging of advance fees to homeowners in connection with a loan modification, and require anyone who wishes to charge a fee for loan modification services (after performing them) to provide a state mandated notice beforehand regarding the availability of non-fee options for the borrower.

Here’s California State Sen. Ron Calderon (D-Montebello), discussing the measure:

More on yesterday’s development from the California Political Desk at the California Chronicle:

The Senate Judiciary Committee today passed a measure by Sen. Ron Calderon (D-Montebello) that will protect California borrowers who are struggling in today´s troubled housing market.

The bill, SB 94, authored by Sen. Calderon, will prevent a person or a business from charging an upfront fee to a borrower for helping negotiate a loan modification on that borrower´s behalf. Such services are free of charge from non-profit housing counselors.

“Economic times are difficult enough without homeowners having to worry whether they are being scammed when they want to modify their mortgage loans,” said Senate President pro Tem Darrell Steinberg (D-Sacramento). “The bill is a common sense, consumer measure that will make it clear to struggling homeowners that they can get help with their loan modification needs free-of-charge. I commend Senator Calderon for introducing SB 94.”

Tens of thousands of Californians face default and possible foreclosure if they are unable to negotiate a loan modification with their lender. A cottage industry has sprung up to exploit these borrowers, prey on their fears of foreclosure and their ignorance of the complicated foreclosure process. Loan modification “consultants” charge borrowers fees - often up-front and nonrefundable - for services available elsewhere free-of-charge.

“Fear and desperation create a fertile climate for exploitation,” said Senator Calderon, chairman of the Senate Banking, Finance and Insurance Committee. “Borrowers facing financial ruin are misplacing their trust in these so-called consultants who charge fees for limited services that often leave the borrower worse off than before.”

“The Senate Judiciary Committee heard testimony last month about the increasing number of consumer scams targeting people facing foreclosure,” said Senator Ellen Corbett (D-San Leandro), chair of the Senate Judiciary Committee. “I strongly support these important protections that will help to put an end to unscrupulous scammers who take advantage of trusting homeowners desperately looking for help.”

Unscrupulous loan-modification consultants can be found lurking outside every mortgage fair, trolling for troubled borrowers. Their advertisements flood neighborhoods that have been hardest hit by foreclosure.

Senator Lou Correa (D-Santa Ana), in support of the measure added, “I´ve heard horror stories from my constituents who were facing foreclosure and paid thousands of dollars to heartless individuals offering false hope and unmet promises. This has to be made a crime.”

Sen. Calderon´s measure, SB 94, cracks down on these loan-modification con artists by prohibiting lenders from charging borrowers for loan modification services. Non-lenders can charge a fee for helping arrange a loan modification only after providing promised services and informing customers that similar services are available for free from non-profit housing counselors.

The bill´s next stop is the Senate Appropriations Committee.

Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

Private Mortgage Insurance and Foreclosure

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In several blog entries here on, I point out that loan modification is a no-brainer for lenders. In short, when dealing with distressed homeowners, lenders essentially have the following choices:

  • Loan modification
  • Foreclosure
  • Forbearance
  • Deed in lieu
  • Short sale

All things being equal, offering a loan modification to borrowers is usually the best option for lenders, because they avoid the high cost of foreclosure (by some estimates $50,000 to $100,000 per foreclosure) and they continue to collect interest on the loan – at a lower rate of return, but still more than enough to earn a profit.

Unfortunately, in many cases, another factor comes into play – mortgage insurance. If a loan is FHA- or VA-secured or the owners are paying PMI (private mortgage insurance), the lender stands to lose much less from foreclosure, because insurance will make up a portion of the difference. In other words, the lender’s motivation to work out a reasonable deal with the homeowner/borrower is undermined by mortgage insurance – often mortgage insurance that the homeowner is paying for!

When foreclosure numbers spiked, so did mortgage insurance claims. This is what contributed to the need for insurance giant AIG to receive bailout money from the government. Without it they could not have paid all the claims being made and still remain in business. AIG going out of business would have jeopardized the stability of millions of loans and caused even greater market insecurity.

If you are wondering why the federal government is willing to subsidize lenders for modifying mortgages and subsidize homeowners for making their monthly mortgage payments, wonder no more. One reason the government wants to bail out homeowners is because it has to. The government stands to lose more if homeowners with government-secured mortgages default on their loans than by paying ten thousand dollars or so to subsidize loan modifications for at-risk loans.

You can also stop wondering why mortgage lenders approved all of those risky mortgage loans in the first place. Risks to the lenders were often reduced by the fact that the loans were insured. They could afford to gamble, because after all, someone else would be there to pick up the tab on any losses.

Having insurance when disaster strikes is usually a good thing, but in the case of the foreclosure crisis, having mortgage insurance can work against you. It’s not like homeowner’s insurance that protects your investment in the case of a natural disaster. It only protects the lender’s investment – leaving you and your family without a roof over your heads. In addition, as a recent visitor here on pointed out, eliminating PMI for loans that require it could make house payments more affordable, put more money in people’s pockets, and help stimulate the economy.

I am not entirely against having the government secure loans or requiring homeowners to pay PMI on certain mortgage loans. Up to this point, these programs have helped more people achieve the American Dream of Homeownership. However, when these same programs are working against homeowners during an unprecedented economic crisis, I think it’s time to review the real purpose of these programs. Lenders need to start relying less on mortgage insurance and more on loan modification to mitigate their losses and help more Americans keep their homes.

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Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

FICO’s Web Initiative May Help Those Seeking Loan Modification

FICO/Fair Isaac, the company that manages the all-important credit-scoring formula used by lenders when making mortgages, today unveiled Mortgage Relief Online, a new website that supposedly lets you know within seconds whether you qualify for a loan modification or refinancing under the Making Home Affordable Program.

Here’s Wall Street Journal blogger Mary Pilon’s take on the site/service:

If a borrower fills out the form and qualifies for free mortgage counseling, Fair Isaac will give applicants a free credit score and credit report. (You’re entitled to your free credit report once a year from each of the three credit reporting agencies at But you don’t get a free credit score for just filling out the online form. (Applicants must complete a mortgage counseling session first.)

A handy flowchart explains how the mortgage-assistance process on the site works. However, Shon Dellinger, vice president for Fair Isaac’s consumer division, says “we don’t want to turn this into a site that people game for fixing their score. We want them to fix their mortgages.”

The Mortgage Risk Analyzer tool aims to identify mortgage holders who may be likely to default. The hope is that consumers can reconfigure mortgages before they become delinquent.

Considering that Fair Isaac also helps financial institutions manage the risk in their mortgage portfolios, it makes sense that they want to identify trouble before foreclosure proceedings begin. There’s also concern about more adjustable-rate mortgages resetting and the questionable effectiveness of mortgage modifications.

The information submitted by consumers is confidential. After borrowers complete the online form and find out what they’re eligible for, then the borrowers decide whether or not to send information on to a mortgage counselor. The mortgage counselor only passes on consumer information to lenders with the borrower’s permission. In other words, your lender won’t know that you used the site unless you let them know.

Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

Latest Foreclosure Statistics: U.S. Foreclosures Increase by 9%

RealtyTrac’s latest foreclosure statistics are now available, and once again the news isn’t very good. According to the U.S. Foreclosure Market Report for the first quarter of 2009, foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 803,489 properties, which sadly translates into a 9 percent increase from the previous quarter and an increase of nearly 24 percent from the same period in 2008. The bottom line: One in every 159 U.S. homes received a foreclosure filing during the months of January, February, and March.

Foreclosure filings were reported on 341,180 properties in March, a 17 percent increase from the previous month and a 46 percent increase from March 2008. The March and Q1 2009 totals were the highest monthly and quarterly totals since RealtyTrac began issuing its report in January 2005 despite a decrease in bank repossessions (REOs), which were down 13 percent from the fourth quarter of 2008 and 3 percent from February totals.

In the month of March we saw a record level of foreclosure activity — the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record. Since much of this activity was in new foreclosure actions, it suggests that many lenders and servicers were holding off on executing foreclosures due to industry moratoria and legislative delays,” said James Saccacio, chief executive officer of RealtyTrac, in a prepared statement. “It’s also likely that the drop in REO activity can be attributed to these processing delays, rather than to any of the foreclosure prevention programs currently in place. It’s very likely that we’ll see the number of REOs increase again now that most of the moratoria have been lifted.

On a positive note, it appears that demand is up in some of the harder-hit areas, particularly on bank-owned REO properties that first time homebuyers and investors see as bargains. But it’s unlikely that this increased demand will be enough to offset the growing number of foreclosures in the pipeline, accelerated by rising unemployment rates.”

Nevada, Arizona, California post top state foreclosure rates in first quarter

Nevada continued to document the nation’s highest state foreclosure rate in the first quarter, with one in every 27 housing units receiving a foreclosure filing — more than five times the national average. Foreclosure filings were reported on 41,296 Nevada properties during the quarter, an increase of 19 percent from the previous quarter and an increase of nearly 111 percent from Q1 2008. Bank repossessions in Nevada were down 3 percent from the previous quarter, but defaults increased 27 percent and auction sale notices increased 35 percent.

Arizona posted the nation’s second highest state foreclosure rate for the first quarter, with one in every 54 housing units receiving a foreclosure filing, and California posted the nation’s third highest state foreclosure rate, with one in every 58 housing units receiving a foreclosure filing.

Other states with foreclosure rates ranking among the top 10 in the first quarter were Florida, Illinois, Michigan, Georgia, Idaho, Utah and Oregon.

Five states account for nearly 60 percent of nation’s first quarter total

California, Florida, Arizona, Nevada and Illinois accounted for nearly 60 percent of the nation’s foreclosure activity in the first quarter, with 479,516 properties receiving foreclosure filings in the five states combined.

With 230,915 properties receiving foreclosure filings during the quarter, California accounted for nearly 29 percent of the nation’s total. The state’s foreclosure activity increased 35 percent from the previous quarter and 36 percent from Q1 2008, and the first-quarter total was state’s highest quarterly total since RealtyTrac began issuing its report in the first quarter of 2005.

Despite a 12 percent decrease from the previous quarter, Florida’s first quarter total was still second highest in the nation. Foreclosure filings were reported on 119,220 Florida properties, a 36 percent increase from the first quarter of 2008. The state posted the nation’s fourth highest state foreclosure rate during the quarter, with one in every 73 housing units receiving a foreclosure filing.

Foreclosure filings were reported on 49,119 Arizona properties in the first quarter of 2009, the third highest total among the states, and 41,296 Nevada properties received a foreclosure filing in the first quarter of 2009, the fourth highest total among the states.

Illinois posted the nation’s fifth highest total, with 38,966 properties receiving a foreclosure filing during the first quarter — a 32 percent increase from the previous quarter and a 68 percent increase from the first quarter of 2008. With one in every 135 housing units receiving a foreclosure filing, the state’s foreclosure rate also ranked fifth highest among the states.

Rounding out the states with the 10 highest foreclosure activity totals in Q1 2009 were Michigan, Ohio, Georgia, Texas and Virginia.

Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)

Understanding How Long it Takes to get a Loan Modification

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Understandably, if you applied for a loan modification and failed to hear from your lender after two to three weeks, you’d tend to get a little antsy and perhaps even annoyed (especially if you continue to receive late payment notices and nasty phone calls from collection agencies). With this in mind, many homeowners ask me, “How long will it be before I hear anything?” and “What should I do while I’m waiting?.” This blog post should help answer those very pressing questions.

How long does a loan modification take?

The loan modification process typically takes 30 to 90 days, depending mostly on your lender and your ability to efficiently work through the process with your attorney or other loan modification representative.

Note: The loan modification timeline is not set in stone. The more complex your situation or the greater the degree of concessions needed from the investor, the longer the process takes. Borrowers with a lot of collateral issues can see their loans take longer than what has become the typical 30- to 90-day timeframe.

A professional can often reduce the amount of time required by processing your paperwork efficiently, presenting your application exactly the way the lender wants it, and knowing from past experience what the lender is able and typically willing to agree to. Although each borrower’s situation is unique, knowing the measures the lender is willing to take for similarly situated borrowers can be a real time saver.

Whether you are dealing directly with your lender or through a loan modification specialist, ask several questions up front:

  • How long is the process likely to take? Find out the best- and worst-case scenarios and then count out the days and mark them on your calendar.
  • When can I expect to hear something about my case? Mark this date on your calendar.
  • If I don’t hear anything by the specified date, whom should I contact? Get the person’s name, employee identification number (if available), phone number, and any extension you need to dial to reach the person directly.

What should I do while I’m waiting?

Playing the waiting game can be agonizing, particularly when you have no idea of whether your application will be accepted or rejected or what the lender will offer in terms of a workout. It feels like your future hangs in the balance, and you remain in the dark. Knowing the standard timeline for processing a loan modification can certainly help relieve some anxiety.

In addition, you can continue to make progress on your own by doing the following:

  • If you hired a loan modification specialist to represent you, do not speak with your lender or lender’s representative. Refer all matters to the professional who is representing you. Anything you say to the lender could confuse things or compromise your representative’s ability to negotiate the best deal on your behalf.
  • Log all phone calls and correspondence between you and your lender or representative. Write down the number you called, the person you talked with, what the person said, and what you said – not word for word, just jot down the key points.
  • Keep track of important dates. If you do not hear something back on the date promised, call the next day to find out what’s going on. Lenders almost never call you back with updates. If you hired a third party representative, they will (or should) keep you posted, but the lender simply doesn’t have the time to make follow up phone calls. If you’re dealing with your lender directly, you’ll have to be the one making the calls. Mark your calendar and schedule periodic update phone calls. Consistent follow up is paramount to a successful modification.
  • Explore other options. If the lender denies your request for a loan modification or presents an offer that you cannot accept, you will need a plan B (and maybe a plan C and a plan D). In addition, other options may be better for you than a loan modification. Consult a real estate agent about listing your home for sale. Talk to a mortgage broker or loan officer about refinancing. Speak with a bankruptcy attorney to find out whether filing bankruptcy would be a better choice.
  • Don’t be surprised if you continue to receive delinquency notices or late payment phone calls. Lenders rarely put a stop on the foreclosure process until a workout solution is fully in place. You should ask your lender if your attempts to negotiate a solution will stop or at least postpone other collection actions. If they do not, you should find out what that means for you. If the lender is able to foreclose in 30 days and a workout takes 60 days, there’s a slight timeline problem. Push to have all default and foreclosure actions put on hold while your workout attempts are underway.

When your fate is in someone else’s hands, 30 to 90 days can seem like an eternity. By doing your part to keep the process on track, remain informed, and explore other options, you not only improve your chances of achieving a positive outcome, but you can also reduce the stress that commonly accompanies the waiting process.

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Ralph R. Roberts, GRI, CRS
Award-Winning REALTOR® and Author
Loan Modification For Dummies (avail. Summer 2009)