Loan Modifications, Workouts and Write-Downs

A loan modification is basically changing the terms of the loan. It’s a major change, such as changing the interest rate or the number of payments on the loan. For example, if the lender allows the borrower to go from a 30-year loan to a 40-year loan, this could reduce the monthly payment amount and extend the life of the loan.

In the past, rising prices of properties provided borrowers with significant increases in home equity. Typically, borrowers would refinance their homes before the loans reset. However, refinancing is almost impossible in a down market because of continuing falling prices, no equity or negative equity, and tight underwriting from most lenders.

In 2008, we had 3,157,806 foreclosure filings, up 81% from 2007. The loan modification programs we have seen so far are not working. The Federal Housing Administration’s (FHA) Hope for Homeowners Program thought they would be able to help about 400,000; they actually had 451 applicants and modified 25 loans. The Federal Housing Finance Agency (FHFA) loan modification program has done better, completing 5,600 for this past October and 8,291 for November. In the first nine months of 2008, an average of 4,948 modifications was completed through FHFA. FHFA is also working with borrowers who are eligible for the Streamlined Modification Program (SMP), implemented December 15, 2008.

Lenders and the government need to implement a loan modification program that will deal with principal reductions. In other words, a write-down of principal, along with an interest rate reduction, is needed. The Federal Deposit Insurance Corporation’s (FDIC) “Mod In A Box” loan modification is getting closer to what is needed, but a permanent write-down of principal will be required for many borrowers to be able to consider it. Lenders would need to determine the amount they will lose in the foreclosure process and work with the borrower to write-down the principal to an amount less that what they would lose through foreclosure, but what will still be affordable to the borrower, AND acceptable to both.
http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html

Loan workouts and modifications have a slim chance of working to truly stem the massive number of foreclosures without a reduction in principal closer to the amount of equity loss.

Renter’s Rights When Landlord Is Foreclosed

Renters should receive a notice when their landlord’s mortgage is being foreclosed. It will list the date of the Sheriff’s sale or auction. In states with a statutory redemption period, the existing renters may continue to pay rent to the landlord and live in the home until the statutory redemption period ends.

With so many renters being displaced due to foreclosures, many states have extended the length of time the renter has to move after they receive an eviction notice. You may want to contact local agencies to determine the applicable time frame in your state. Typically, the eviction notice goes into effect on, or before the last day of the redemption period.

In Minnesota, once the foreclosed property is owned by the REO lender, a two-month written eviction notice must be given to the renter. During this time, the REO lender may offer to lease the property to the current renter on a month to month basis. Rent is charged at the current market rate. If the renter does not want to continue to rent, a cash incentive to vacate is commonly offered, known as “cash for keys.”

This week, Fannie Mae announced a new policy that applies to renter occupants of foreclosed properties when Fannie Mae acquires the property. Renters of any type of single-family property (including two to four unit properties, condos, co-ops, single-family detached homes, and manufactured homes) are eligible. They may lease the foreclosed property on a month to month basis, or receive a financial “transitional” incentive if they choose to relocate.  http://tinyurl.com/Rental-Policy

What happens if the landlord purchased the property on a contract for deed? Once default occurs, if the landlord doesn’t pay the amount due in 60 days, the contract is cancelled. Unlike a mortgage foreclosure, there is no statutory redemption time period in a contract for deed. We are starting to see more states intervene and extend eviction notices from a couple of days, to two months. Make sure to check your local/state rules.

Short Sales–Good For Sellers, Buyers and Lenders

Yes, short sales can benefit sellers, buyers and lenders. However the length of time that they have been taking makes agents, sellers and buyers conclude that they just aren’t worth it. Plus, there are no guarantees. It’s not uncommon to work on a short sale for three or more months and have it fall apart at the last minute. Nobody seems to want to buy short sales these days; real estate agents don’t even what to show those properties. Many people have decided to wait until the property is owed by the bank (REO) instead.

So lenders are having to step up to the plate, reduce time frames and make faster decisions up front. According to a recent survey, lenders lose approximately 19% on short sales and 40% on foreclosures.

Fannie Mae is pilot testing a new program in Phoenix, Arizona and Orlando, Florida that may help. It is for mortgages serviced by Bank of America ’s Countrywide Financial Corp. Within two weeks of receiving the information from the listing agent, they will agree on the price they are willing to accept from the buyer for the property. Hopefully this approach will prove successful and be replicated to other markets and lenders.

JoNell Reed–Foreclosures Blog

Foreclosures Expert & Real Estate Broker

Welcome to my blog dedicated to communicating information about buying and selling foreclosures in today’s challenging market.

The foreclosure process and statutes vary from state to state. Strategies that work today may need to be revised tomorrow, as our national economy struggles to rebound.

I invite your comments and non-personal questions that may be of assistance to other individuals.