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09/19/2014 : michaelgaddis : 4:08 pm : California Loan Modification Attorney
While many economist and housing analysts believe that the housing crisis is now behind us, I am not so sure that this is the case. I would agree that the majority of first-time defaults have already occurred, however, I fear that the methodology utilized by lenders in the restructuring of defaulted loans, the increase in property tax and the maturity of junior liens could cause a second housing crisis. I have already started to see it happen. As I see it, this “Second Housing Crisis” might be stimulated by anyone or combination of the following factors:
Interest-Only to Fully Amortized Loans
In the early days of loan modifications lenders thought that the best way to deal with delinquent borrowers was to capitalize past due payments and then modify borrowers into low interest-only loans for a fixed period of time that would convert into a fixed rate principal and interest payment. I call this the “Band-Aide” solution. While these types of loan modifications provided temporary relief to homeowners, they did not fix the long term problem. For example, a homeowner had a new principal balance (after capitalizing past due amounts) of $500,000 and a remaining term of 23 years. If the borrower’s lender offered him a loan modification with 5 year interest-only that converted into a 5% fixed upon the expiration of the interest-only period the borrowers initial new interest-only payment would be $1,458 per month. The $1,458 payment is super low and most borrowers would be more than happy to make that payment. However, at the end of the 5 year period, the payment would convert into an 18 year principal and interest payment with a new payment of $3,515.17 per month. In other words, the borrowers payment would increase by over $2,000.00 per month! So as more and more of these Band-Aide loan modifications convert into principal and interest loans the re-default rate will increase substantially.
Junior Liens & HELOCs
Since the beginning of the housing crisis most homeowners just stopped paying on their junior liens and HELOCS. The theory was that since the value of their home decreased to the point that the junior liens and HELOCS were complete out of position there was no need to pay on them or deal with them because if push came to shove, these junior liens and HELOCs would not foreclose. For the most part, these borrowers were correct. Although junior liens and HELOCS could, in theory, foreclose, it did not make good business sense. In California, a lien holder can foreclose or pursue a deficiency judgment, but not both. So if the junior lien foreclosed they lost the right to pursue a deficiency judgment AND, the they were out of position, they were at the mercy of the 1st lien holder as to whether they would be able to recover anything at all. In most cases the junior liens and HELOCs decided to sit back and wait it out hoping for 1) property values to increase to put them into a better position; or 2) the borrower to initiate either a settlement request or short sale; or 3) an investor to come along that was willing to pay them a reasonable amount for the note. As property values rise the position of these junior lien holders and HELOCs strengthens. With a strengthened position these same junior liens and HELOCs have begun pushing back and now the threat of foreclosure is real is to homeowners. In some cases, homeowners who have modified their first loan and are delinquent on their seconds have been foreclosed on even though they are current with their first lien holder. Many of these homeowners disregarded the warnings and did not believe the threats regarding foreclosure from the junior lien holders were real. They were real and, as a result, they lost their house. Sooner or later these “forgotten” junior liens and HELOCs need to be dealt with or more and more homeowners will be pushed into foreclosure.
Ballooning & Converting HELOCs
Junior liens and HELOCs present a potential problem even for homeowners that remained current during the housing crisis. First, many junior liens and HELOCs were interest-only for a period of time, usually 10 years, that convert to principal and interest. So, like the Band Aide loan modifications above, they represent a potential drastic increase in housing expense to homeowners. Homeowners that are living on a fixed income might not be able to absorb the increase from these converting junior liens and HELOCs which will be converting, like the Band Aide loan modifications mentioned above, into a principal and interest loans on short amortization periods. Another huge problem is that some of these junior liens are ballooning. A balloon is when the repayment term expires without the principal balance being paid off in its entirety leaving a very large balance that needs to be paid. These balloons are causing many homeowners headaches that could eventually force them into foreclosure.
Increasing Property Taxes
As values rise so do property taxes. Many homeowners that have received loan modifications were forced to “escrow” their taxes and insurances into their payments. Rising property taxes will force lenders to increase their escrow payments resulting in higher payments to homeowners. These escalations are causing problems for homeowners, especially homeowners in higher value properties where the value swing has been substantial resulting in large increases to property taxes. Homeowners unprepared for the increased monthly obligation could be in trouble.
Beginning at the end of 2009 many homeowners received step-rate loan modifications. Step-rate loan modifications are fixed loan modifications that have an initial interest rate below the permanent fixed rate. For example, a loan modification might have an initial interest rate of 2% set for 5 years followed by 3% in year 6, 4% in year 7 and fixing permanently at 4.75% in year 8. This means that starting in year 6 the principal and interest payment will start increasing every year until the maximum interest rate is reached. Many homeowners really liked the initial 2% interest rate but felt that the increased payments might be too much for them to handle. As these step-rate modifications increase homeowners, especially those that are still severely under water, will begin to redefault. The problem for these homeowners is that obtaining a new loan modification, although not impossible, will be extremely difficult.
All of these factors could lead to another wave of massive defaults. Many homeowners are still living on a very slim budget and increases to their housing expenses, even ever so slight ones, could be catastrophic for them.
06/17/2014 : michaelgaddis : 6:14 pm : California Loan Modification Attorney, Nationstar
Nationstar Loan Modification Success!
Miracles never cease to happen, at least at The Law Offices of Michael Gaddis. Over two-and-a-half years ago a homeowner made an appointment with Michael Gaddis for a consultation regarding his chances at obtaining a loan modification at Bank of America. At the time, Michael Gaddis was very skeptical because 1) the homeowner’s income appeared to be too high and 2) the homeowner’s loan-to-value (“LTV”) appeared to be around 100% or lower. In other words, the homeowner did not have a “cookie-cutter” scenario. Based on a thorough review of the situation Michael Gaddis agreed to take the homeowner’s case but told him that it would not be easy and that his chances of success were, at best, 60%. As the homeowner had already tried to modify his loan numerous times prior to consulting with Michael Gaddis, the homeowner was convinced that using Michael Gaddis was his best chance at obtaining a loan modification. Michael Gaddis took the homeowner’s case thus starting a very lengthy roller coaster ride. During the two-and-a-half years that Michael Gaddis worked on the homeowner’s loan modification the homeowner lost his job, then got a new job, then lost that job and then got a new job. This constant change in income was an underwriting nightmare that gave Bank of America, and Michael Gaddis for that matter, fits. Just when the homeowner’s financial situation stabilized the servicing of the loan was transferred from Bank of America to Nationstar. Meanwhile, the San Diego real estate market began to rebound resulting in an increase to the homeowner’s property value. As you are probably aware increases in property value mean less risk of loss to the investor which means less incentive for the investor to approve loan modifications. Everything seemed to be working against the homeowner and Michael Gaddis. However, Michael Gaddis continued fighting for the loan modification.
Finally, two-and-a-half years after the homeowner first consulted with Michael Gaddis Nationstar issued a Home Affordable Modification Program (“HAMP”) trial loan modification. The trial amount of $2,627 per month reflected a potential payment savings of over $1,300 per month PITI. Incredible to say the least. Michael Gaddis literally willed this loan modification into existence through his zealous persistence and tenacity.
Michael Gaddis is very proud of every one of the modifications that he obtains for homeowners. However, loan modifications like this one hold a special place in his heart. This loan modification means that yet another family will be able to keep their home. Michael Gaddis especially appreciates his Nationstar loan modification success stories because Nationstar can be a difficult lender to deal with. As always Michael Gaddis and his staff will continue to monitor the homeowner’s file during the trial period in order to ensure that a final Nationstar loan modification is obtained. To view a copy of this trial Nationstar Loan Modification as well as other successful loan modifications procured by Michael Gaddis please click the following links: http://californialoanmodificationattorney.com/trials-modifications/ and http://californialoanmodificationattorney.com/trials-modifications/approved-trials-modifications-pg-2/