California Loan Modification Attorney Blog
01/05/2016 : michaelgaddis : 2:54 pm : California Loan Modification Attorney
Loan Modifications in 2016
I wanted to start out 2016 by sharing my recent experiences with assisting homeowners in their efforts in obtaining a loan modification and/or preventing a foreclosure. There is no doubt about it, loan modifications are becoming more and more difficult to obtain. Ever increasing property values and appreciation factors in lenders’ Net Present Value (“NPV“) calculations are causing more and more homeowners to be denied loan modifications. Every day I receive three to five calls (or emails) from homeowners desperately looking for clarity on their “REAL” options. Most of these homeowners are at the end of their emotional “rope.” The stress and uncertainty of dealing with their housing situation has affected them emotionally, physically, in their relationships, in their workplace, etc. Most of the homeowners that contact me have already tried to modify directly with their lender, or with the help of a nonprofit, or with the help of litigation, or with the assistance of a “Loan Modification Assistance” company or with the assistance of another attorney. I am usually a homeowner’s last hope. Homeowners typically find me after hours and hours of Internet research. These homeowners find my blogs, copies of the mods that I have obtained for my clients that I post on my website, YouTube videos, etc. One of the first questions that I ask homeowners that call me is whether they want me to tell them the truth or a lie. Homeowners are usually surprised by this question. The reason I ask this question is because I am not going to tell them about leprechauns and unicorns. I am going to tell them the truth. Loan modifications are very difficult, even for me, so I do not want to provide someone with false hope, especially when I know that the probability of success is very low. With that being said, loan modifications are still attainable, but the probability of success can only be determined after a thorough review of each individual situation. In other words, I need to review them case by case.
I understand the enormous amount of stress and pressure that homeowners are under when dealing with the imminent threat of losing their home. I would make the following suggestions to homeowners facing foreclosure in 2016:
- Do not wait until the last minute! For whatever reason some homeowners wait until the LAST possible minute before seeking assistance. Stopping Trustee Sales is becoming more and more difficult. I have literally had homeowners call me to tell me that they have sales at 9AM the next day. If you are a homeowner do yourself a favor and do not wait until the last second. I promise you it will not end well.
- Take detailed notes when communicating with your lender! At a minimum write down the date, time and name of the person from the lender you are speaking to. Ask questions like “Is my loan modification application with an underwriter?” “Are you missing any documents?” “Is there a scheduled sale on my property?” Make sure that you take detailed notes and write down everything that you are told. Do not assume anything!
- Follow up at least 3x per week! I do not care what the lender tells you, you need to call, at a minimum, Monday-Wednesday-Friday. You need to ask the same questions every call. Do not assume that you have already been told the information and do not need to ask again.
- Do not become overly friendly with your dedicated point of contact! Your dedicated point of contact is not your friend. No matter how nice or friendly they may seem, they are not your friend. Do not assume that they have your best interest at heart.
- Do not trust what your dedicated point of contact is telling you! If your dedicated point of contact attempts to tell you how to structure your income or your package BE CAREFUL!!! Dedicated points of contact do not have any specific information related to how to achieve a loan modification. It is amazing how many people call me and tell me “I don’t understand why I failed, my dedicated point of contact told me exactly what to do!”
- If you are using a 3rd party to assist you, keep updated on what is going on! If you have a 3rd party working on your loan modification file make sure that you are receiving AT LEAST weekly updates. Do not just pass your file to them and forget about it.
- Pay attention to your mail! Make sure that you are reading all of the mail that you receive from your lender. Some homeowners do not want to read it. Do not ignore your mail!
I could go on and on giving suggestions but I think you get the point. You need to be vigilant and prudent when seeking a loan modification.
Loan modifications are not the only loss mitigation tactic that you could utilize to resolve your housing situation. You could file a Chapter 13, seek a repayment plan, obtain assistance from Keep Your Home California, seek a deed in lieu, pursue a short sale, etc. The most important thing is to weigh the pros and cons of each and determine the best and MOST REALISTIC option. I know that emotions can sometimes cloud reality so you should really do your best to look at your situation objectively.
10/22/2015 : michaelgaddis : 3:29 pm : California Loan Modification Attorney
Studies have show you can be happier when you practice thankfulness exercises.
Please take a moment to share what you are thankful for today.
10/15/2015 : michaelgaddis : 11:23 am : California Loan Modification Attorney
The Law Offices of Michael Gaddis, APC recently obtained a loan modification from SunTrust for homeowners located in Oxnard, CA. This loan modification was EXTREMELY difficult due to the fact that the loan was in a Mortgage Backed Securities (“MBS”) pool. The problem was not SunTrust, in fact, SunTrust worked diligently with Michael Gaddis to find a proposed solution. MBS loans are one of the most difficult types of loans to modify. The underwriting guidelines that provide the rules for how the loan servicer can modify a loan in the pool are very limited. MBS loan pools do not typically participate in HAMP/MHA so borrowers attempting to obtain MBS loans are limited to the investor based underwriting guidelines. Sometimes borrowers like to blame the servicers for the issues that they incur during the loan modification process, and although the servicers do deserve much of the blame heaped upon them, sometimes they are not responsible for the issues that are preventing a loan modification approval. In this case, the underwriting guidelines would not allow a decrease in interest rate or an amortization extension. The guidelines were very restrictive and SunTrust was just as frustrated as Michael Gaddis. However, SunTrust told Michael Gaddis that they were going to have a new Net Present Value (“NPV“) tool and that, although the investor had not approved use of the tool yet, that they would run this borrower’s financials through the new NPV and then, if it passes, try to get the investor to approve the results. When SunTrust ran the borrower’s financials through the new NPV it passed and created a step-rate modification with an initial interest rate of 2.65%, well below the 6.75% note rate. SunTrust then attempted to get approval from the “investor” who they claimed was Wells Fargo. After weeks and weeks of trying SunTrust notified Michael Gaddis that the proposal from the new NPV had been denied because it did not comply with the underwriting guidelines. Meanwhile the borrower received a notice from SunTrust identifying not Wells Fargo, but US BANK as the investor. Michael Gaddis found this odd so he approached US BANK about the potential of making an exception for this borrower and allowing it to be modified or Michael Gaddis requested that US BANK move this particular loan out of this MBS pool into a different pool that would allow for the SunTrust NPV tool results. US BANK responded that they were not the investor on the loan, that SunTrust’s paperwork was incorrect. Michael Gaddis then advised SunTrust of the issue and, at the same time, approached Wells Fargo about the issue. Subsequently, US BANK followed up with Michael Gaddis and explained that they had been incorrect, that they were the Trustee of the MBS pool and that Wells Fargo was the Master Servicer. US Bank said that ultimately it was Wells Fargo that made the call regarding the MBS pool. Michael Gaddis then approached Wells Fargo AGAIN and explained what had happened and appealed to them to allow the loan modification pursuant to the terms of the SunTrust NPV. Believe it or not, they did!
So this was a case where everyone involved worked together to get the right result. SunTrust, Wells Fargo and US BANK all deserve credit for thinking outside the box and doing the right thing. This loan modification was not easy but the result was the correct result.
The clients are ecstatic to say the least. They were able to save their home. Michael Gaddis takes a lot of pride in helping homeoweners save their homes and he is very proud of this case.
Michael Gaddis is a licensed California attorney based in Carlsbad, CA. His practice is limited to assisting distressed homeowners resolve their home loan situations with their lenders. Since 2008 Michael Gaddis has helped nearly 2,000 people modify their home loans.
To view a copy of the SunTrust Loan Modification please click the following: Suntrust Loan Modification
10/09/2015 : michaelgaddis : 2:58 pm : California Loan Modification Attorney
Loan Modification Expert and Attorney, Michael Gaddis, J.D. provides tips to those attempting to obtain loan modifications on the October 7, 2015 episode of “The Michael Gaddis Show” on San Diego’s KCBQ AM1170 The Answer. During the segment Michael Gaddis, J.D. urges borrowers to stop believing misleading advertisements as well as to face the realities of their situation. Michael Gaddis also tells homeowners to not give upfront money to ANYONE for loan modification services. Michael Gaddis, J.D. then provides tips such as 1) Beware of lenders because they are not your friends! 2)Make sure that the loan modification file is complete 3) Do not waste time 4) Follow up with the lender at least 3x per week and 4) Keep detailed notes of who you talk to as well as the date and time of the call. Michael Gaddis, J.D. also discussed things that might make a loan modification more difficult such as: Equity, owning multiple homes, being self-employed, previous loan modifications, difficult servicers and low currently scheduled payments due to adjustable interest rates or previous loan modifications.
For more information on Michael Gaddis, J.D. you can visit www.californialoanmodificationattorney.com.
09/25/2015 : michaelgaddis : 3:46 pm : California Loan Modification Attorney
Michael Gaddis, J.D., the host of “The Michael Gaddis Show” on KCBQ AM1170 The Answer, dedicated a segment to discuss foreclosure alternatives for people facing issues with their home loans. Michael Gaddis, J.D. has extensive experience helping distressed homeowners through his legal practice and wanted to share some tips for his listeners. Michael Gaddis, J.D.’s first piece of advice was for homeowners to exhaust all efforts to refinance to solve their problem prior to becoming delinquent. Loan modifications have become more and more difficult to obtain in recent years due to several reasons. First, as home values increase the incentive for investors to approve loan modification solutions decreases. Loan modifications are a loss mitigation tactic for investors and are primarily agreed to if the resulting loan modifcation is in the financial best interest of the investor. During the housing crisis most homeowners that were requesting loan modications were “Under Water” meaning that they owed more on their loan than the house was worth. As home values rebound and continue to increase resulting in fewer homeowners that are underwater, the risk to the investor is lessened. Second, equity is the enemy of loan modifications. All loan modifications have to go through some sort of Net Present Value (“NPV”) test. NPV is a computer program that takes into consideration every variable related to a particular loan modification application. If NPV issues a PASS then the loan modification is deemed to be in the best interest of the investor and a loan modification is granted. If NPV issues a Fail then the loan modification will be deemed to NOT be in the best interest of the investor. Third, many homeowners have already received a loan modification and the terms of those loan modifications are very aggressive making it extremely difficult for the lender to find a solution that is beneficial to the borrower. Fourth, many homeowners have already received 3 loan modifications. Normal investor guidelines allow for up to 3 loan modifications during the life of the loan.
The purpose of this segment was not to discourage homeowners from seeking loan modifications. The purpose was to provide homeowners with some realistic issues that might make seeking a loan modification problematic. Too many homeowners are chasing hope which, for many, is tantamount to pushing a very large boulder up a steep hill.
“The Michael Gaddis Show” airs on Wednesdays at 8PM on San Diego’s KCBQ AM 1170. To listen to podcasts of “The Michael Gaddis Show” you may either visit the KCBQ webpage or click the following link: http://am1170theanswer.com/pages/the-michael-gaddis-show.
12/10/2014 : michaelgaddis : 2:44 pm : Bank of America DOJ, California Loan Modification Attorney
The Law Offices of Michael Gaddis recently negotiated the forgiveness of a charged off 2nd lien held by Bank of America. The homeowner, a resident of Valley, Center, CA, retained Michael Gaddis to negotiate a settlement and release of lien with Bank of America. The 2nd lien had an outstanding principal balance of $56,277.03 and had only recently been charged off. Bank of America is a VERY difficult servicer and negotiating settlements on 2nd liens can be nearly impossible at times. However, Michael Gaddis knew that once the underlying debt had been charged off that that a window of opportunity had been opened. Utilizing his close relationship with Bank of America Michael Gaddis approached the bank with a settlement offer. The bank reviewed the offer and after a couple of weeks Michael Gaddis was notified that there might be a possibility of getting the entire lien extinguished via the Department of Justice (“DOJ”)settlement provisions pertaining to 2nd liens. Although optimistic, Michael Gaddis continued to push the settlement while continuing to encourage his contacts to get the loan extinguished via the DOJ program. Finally, on December 3, 2014 the borrower received a notice from Bank of America stating that they had received full forgiveness of the 2nd lien. The borrowers were stunned to say the least.
As mentioned in previous posts, borrowers that have outstanding liens on their property need to try and negotiate a settlement on these liens as soon as possible. Many borrowers think that if the loan has been charged off or if they have not heard from their lender in a while that the loan has been forgiven and they are off the hook. The problem is that the lender retains a security interest in the property and most definitely will create problems for the homeowner in the future. Now is the perfect time to negotiate settlements on 2nd liens such as a home equity line of credit (“HELOC”). As the housing market recovers and the value of homes continue to rise the leverage that borrowers have against the lenders will decrease.
If you or someone you know has a lingering junior lien such as a HELOC and you are wondering what your options are please contact Michael Gaddis, Esq. at 760-692-5950 or by email at Michael@LawOfficesofMG.com.
12/03/2014 : michaelgaddis : 2:05 pm : California Loan Modification Attorney
WARNING: Attempt To Settle Unpaid Second Liens Before It Is Too Late! When the housing crisis began in 2008 and house prices began to drop homeowners desperately began trying save their homes by renegotiating the terms of their loans. Homeowners with more than one loan securing their property concentrated their efforts on modifying their 1st loans putting any junior liens on the back burner. Homeowners felt safe neglecting the junior liens because the drastic fall in home values effectively negated the ability of the junior liens from foreclosing on their property. The junior liens still had the power to foreclose, however, due to the foreclosure laws in California foreclosing on the property was not in the best interest of these junior lien holders. Many homeowners modified their first liens and then “forgot” about the junior lien. Over the years these homeowners might have received a threatening letter or two from the junior lien holders but whatever threats were contained in these letters were negated by the reality that their was not a financial gain for these junior lien holders to foreclose. Likewise, homeowners that file Chapter 7 Bankruptcy dismissed the potential threat of junior liens due to the misguided belief that a Chapter 7 discharge released the junior lien holders’ right to foreclose on the property. These homeowners failed to realize that although their personal liability to pay the debt to the junior lien holder was extinguished, the security interest on the property remained.
Now, over 6 years later, homeowners are beginning to realize that their “safety net” is disappearing. The “safety net” was the negative equity position that was preventing the junior lien holders from exercising their rights to foreclose on the property. As values increase the “safety net” shrinks. As these junior lien holders begin to reevaluate their position, the risk to homeowners that have outstanding liens on their property increases.
The best advice is for homeowners to be proactive and try and negotiate a settlement to release these liens before the increasing home values reduce their leverage position. The first problem is figuring out who is servicing the 2nd lien. Sometimes, for numerous reasons, the 2nd lien stops sending paperwork to the homeowner. Homeowners typically feel that if the junior lien holder is no longer contacting them that they have “gone away”. Rest assured that junior lien holders do not “go away”. Many times they investors on these loans will sell off the lien rights to these liens to companies that specialize in enforcing lien holder rights. These companies are able to purchase these rights at substantial discounts. They will patiently wait until: 1) the equity in the home rises enough to press the foreclosure process; 2) they are contacted for release of the lien through a short sale; or 3) they are approached for a settlement offer.
Attempting to negotiate a settlement to release the lien while leverage still exists is the most advisable course of action. As the junior lien holders position increases and the settlement amount will likely follow suit. Some loan servicers are easier to work with than others. Greentree, Real Time Resolutions and Chase will typically entertain settlement offers while Bank of America and Wells Fargo can be more challenging.
The trick is to settle the lien for as little as possible.
If you have an outstanding junior lien and would like to consult with Michael Gaddis about negotiating a settlement to release the lien please contact Michael at 760-692-5950 or by email at Michael@MichaelGaddis.com.
81 Months Past DUE !!! Select Portfolio Servicing (“SPS”) Loan Modification Obtained For Homeowner in Valley Springs, CAÂ
11/20/2014 : michaelgaddis : 10:19 am : California Loan Modification Attorney, SPS Loan Modification
SPS Loan Modification Success Story
Recently I helped a homeowner living in Valley Springs, CA obtain a HAMP trial loan modification from Select Portfolio Servicing (“SPS”). This file was one of the most difficult and frustrating cases that I have ever had. I have been assisting homeowners obtain loan modification since the inception of the housing crisis. I only mention this because I want you to understand that I am extremely familiar with not only loan modifications but also the evolution of loan modifications. When this homeowner contacted me she had been attempting to modify her loan for over 6 years and was coming off of a fresh denial from SPS. The homeowner also had a Trustee Sale scheduled to occur in 20 days. I asked the homeowner to send all of her paperwork to me and then, as I always do, thoroughly reviewed her situation to determine whether or not I thought she should be able to qualify. My first impression was that she should not be having problems. Her case appeared to be a text book example for HAMP Tier 1 approval. Yet, when I looked at the SPS denial it appeared that SPS was not even reviewing the homeowner for HAMP Tier 1. I reanalyzed the Homeowners income documentation, verified the value of the home and ran my calculations. I did this 3 times. Each time I ran my calculations I became more convinced that SPS was in error. I agreed to take the homeowners case and, although I could not guarantee a result, I told the homeowner if there was ever a case I thought should pass a HAMP Tier 1 review it was this one. The homeowner agreed to retain me and I prepared and submitted a new loan modification application to SPS for review. My first obstacle was that we the loan modification submission was too close to the sale date. I had to appeal to upper management in order to get the trustee sale postponed and the homeowner’s loan modification package into review. Once in review my work began. Sure enough the first loan modification application I submitted was denied for similar reasons to that which the homeowner received. I appealed and challenged SPS on why the homeowner’s file was not being reviewed for HAMP Tier 1. I might heavy resistance so I appealed the matter up the management chain. Months past as did the constant threat of foreclosure. Finally, I was told by SPS that the reason that the homeowner was not being reviewed for HAMP Tier 1 was because the homeowner had a received a previous Trial Payment Plan (“TPP”) and that the homeowner had defaulted after making one payment. I asked the homeowner if this was true and the homeowner told me that while she had received a TPP, she never made a payment because the approved TPP payment was too high. Hearing this I went back to SPS and told them this information. Again I met resistance. I demanded to see an accounting of her payment history so that I could see where she made a trial payment and then defaulted. Of course they could not show me where the homeowner had defaulted on a TPP. Finally, they agreed that the homeowner had not missed a TPP payment, but argued that she was still not eligible for a new HAMP Tier 1 review because the HAMP Guidelines stated that if the homeowner received a previous TPP offer and did not take it the homeowner was still not eligible for a new HAMP Tier 1 review. I could not believe what I was hearing. I told them that I was familiar with the HAMP Tier 1 Guidelines and that was not what it said. I told them that the HAMP Guidelines stated that a homeowner loses eligibility when a homeowner receives a TPP and then defaults after making the first payment. Since the homeowner did not default after making the first payment the homeowner was still eligible to be reviewed for HAMP Tier 1. The response I received from SPS made me laugh out loud. SPS responded by telling me that the while what I was saying was true for the current HAMP Guidelines, the HAMP Guidelines in effect at the time were consistent with their position and the homeowner was still not eligible because she had received a TPP but never made a payment. I laughed because the newest HAMP Guidelines Handbook clearly states that each new version of the HAMP Guidelines supersedes the previous version. In this case, the new HAMP Guidelines trumped the old HAMP Guidelines thus allowing the homeowner to be reviewed for HAMP Tier 1 again. I actually cut and pasted excerpts from the Treasury Guidelines to support my position. SPS clearly was wrong for not reviewing the homeowner again for HAMP Tier 1 and finally, they reluctantly agreed to rerun her for HAMP Tier 1. Subsequent to their agreeing to rerun the homeowner for HAMP Tier 1 I received another denial from SPS. When I reviewed the denial I noticed that SPS was still not reviewing the homeowner for HAMP Tier 1. I challenged SPS again. SPS told me that they were having trouble removing a block in their computer and that they would need to figure out how to lift the block in order to rerun the homeowner’s file for HAMP Tier 1. About a month later, I was finally informed that SPS was able to properly run a HAMP Tier 1 review and that the homeowner had passed and been issued a TPP.
This file was definitely one of the more challenging files because lenders always believe that they are right and that homeowners are wrong. SPS believed that they had properly followed HAMP Guidelines and that they were 100% correct in their review of the homeowner’s file. As you can see, they were wrong. The TPP plan calls for a payment of $2,218.75 which represents a potential savings of nearly $700 a month from the homeowner’s currently scheduled payment. The trial payment begins December 1, 2014.
Michael Gaddis is very proud of every one of the modifications that he obtains for homeowners. This loan modification means that yet another family will be able to keep their home. 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 SPS loan modification is obtained. To view a copy of this trial SPS 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/
11/19/2014 : michaelgaddis : 10:42 am : California Loan Modification Attorney
I have been assisting distressed homeowners either 1) modify their loans; 2) short sell their home; 3) obtain short refinances; or 4) obtain deed-in-lieu since 2008. One would think that by now, most of the companies preying on desperate homeowners would have either disappeared by now or would have been shut down via the legal process. Yet, every single day I receive a phone call from someone telling me that this company or that company took their money or promised them pie in the sky. While I appreciate the fact that homeowners are desperate to keep their homes, I also feel that these same homeowners should not allow themselves to be victimized or lured into an uncomfortable situation by promises of leprechauns and unicorns. I think over the past 6+ years I have heard stories about every scam or false inducement scheme out there. I really feel sorry for homeowners who are not only losing their home but also spending their life savings trying to save it.
If you have friends, family, coworkers or acquaintances that are losing their home and want to give them some advice, I would suggest telling them the following:
1. The bank is not there to “help” them. Banks represent investors. Investors desire to make money. The only reason that investors consider loss mitigation tactics such as loan modifications, short sales, deed-in-lieus, etc. is because the investor is in danger of losing money. Banks do not give loan modifications because they feel sorry for home owners, they give loan modifications because giving loan modifications is in the best financial interests of their investors. The term “Loss Mitigation” by definition means making the best of a bad situation. Banks “evaluate” homeowners to see if they can offer changes to the existing terms of the note that are favorable to, who else, the investor.
2. If you or a homeowner want solid advice on how to resolve a delinquent loan situation, seek out an attorney that has experience in dealing with the banks. Preferably, find an attorney that is also a mortgage broker and real estate broker. The 3 skill sets of an attorney, mortgage broker and real estate broker are perfect for helping distressed homeowners. If you contact an attorneys office or a “legal center” insist on talking to an attorney. Do not be sold until you have the opportunity to speak to the attorney. You have no idea how many times I have been told that a homeowner thinks they were working with a law office but were never allowed to speak or see an attorney. This should send up giant red flags.
3. Watch out for investors. Investor will frequently approach homeowners in sheep’s clothing promising to help save homeowners. However, typically the real motivation is to try and find a way to get you to work with them so that they can acquire your property below market value. These investors will frequently tell you that they will try and help you obtain a loan modification, for free! They know that you do not have a chance but they feel if they earn your trust they will be able to turn you to do what they want you to do once your loan modification application is denied. Or that they will buy the house and let you stay there and eventually buy it back. Their real motivation is their own pecuniary gain.
4. Do not pay up front for loan modification services. Never pay a dime for loan modification services, no matter what they call it, until they have achieved their goal. In California, SB-94 prohibits the taking of up front fees for loan modification services. If someone tries to charge you up front run away, fast. Not even attorneys can take up front fees.
5. Be Realistic. Many homeowners have unrealistic expectations about what can be done to resolve their delinquent loan situation. These homeowners here “stories” about what other homeowners are receiving and want to obtain the same thing for themselves. Homeowners need to keep 2 things in mind: 1) Not all of these “stories” are true; and 2) Every homeowners situation is completely different. The second point is probably the most important to keep in mind. Every single situation is unique. Each homeowner may have: 1) a different loan servicer; 2) a different investor (while the loan servicer might be the same, the investor who owns the underlying note may be different; 3) different income and income sources; 3) different loan-to-value (“LTV”); 4) different amounts of delinquency; 5) different loan terms (interest-only, principal and interest, negative amortization, etc.); and 6) and so and so on…
The point I am trying to make is that modifying a loan is difficult. Homeowners are fighting investors’ financial incentives of granting loan modifications. I strongly suggest obtaining competent professional assistance. As real estate prices continue to rise and the risk of loss to investors decreases the incentive for granting loan modifications decreases. Do not put yourself into a position where you have exhausted too much time. If you need help seek it out sooner rather than later.
If you or someone you know is in need of a loan modification please contact me at 760-692-5950 or by email at Michael@lawofficesofmg.com. I offer free consultations and the promise that I will tell you the truth, not just what you want to hear.
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.