Obama’s Sound Byte on Loan Modifications

As Wall Street is well aware, when the President starts talking about you in rhyming sound bytes it’s probably not going to be flattering. And while not quite at the level of Johnny Cochran’s “If the glove doesn’t fit…” line, Barack Obama’s made for evening news byte, “If you have to pay, walk away” is at least memorable, especially for those in the private loan modification business. It was his way of introducing the “Homeowner Affordability and Stability Program” (HASP) which will initially be offered through FNMA and FHLMC. For the loan modification industry it’s a tough way to be treated after saving hundreds of thousands of homes from foreclosure over the last couple of years while the government looked the other way.  

So apparently there is a new sheriff in town named “Government” and he has a couple of deputies named “Fannie Mae” and “Freddie Mac” riding along side. Sheriff Government hasn’t been paying much attention to the whole foreclosure thing choosing instead to give away billions of dollars to inept financial institutions like Halloween candy at the end of the night. The $200 billion thrown at AIG is almost as much as the market cap of Wal-Mart, the second biggest company in the U.S. Meanwhile Deputies Fannie and Freddie are both penny stocks after losing 97% of their market value over the last year. With resumes like this, it’s safe to say that not everybody believes that this posse is the end-all answer to this country’s growing foreclosure problem.

Should homeowners follow the “If you have to pay, walk away” mantra and forsake loan modification companies completely? Here are some of the issues for homeowners to consider:

* Homeowners with a mortgage outside of the Fannie Mae/ Freddie Mac universe are not covered by the “Homeowner Affordability and Stability Program” (HASP).
* Mortgage balances greater than $729,750 are not eligible. End of story.
* Participation by lenders outside of Fannie Mae/ Freddie Mac is optional unless they accepted funds under the Financial Stability Act, also known as the bank bailout. Participation is mandatory if funds were accepted.
* One indication of the lenders’ willingness to participate in HASP is that many lenders that initially accepted FSA funds returned them to avoid being forced to follow the government’s marching orders.
* It is highly likely that any bank or lender that isn’t going to be forced into the HASP program is not going to join voluntarily. The reasons for this reluctance are very easy to understand. Financial institutions loath having deal terms crammed down their throats, especially when those terms are as costly as the ones in HASP.
* Mandatory concessions on both refi’s and loan modifications are more costly than what lenders are currently willing to live with.
* The floor for interest rates under the new program is 2%. The only way an institution can make money (besides servicing the debt) in this situation is if they’re paying lower rates than that to their depositors. This is a simplistic statement but historically banks made a living by lending at higher rates than they’re paying.
* While it’s true that HASP lenders are receiving government funds for modifications that work, that money is a pittance compared to the money they stand to lose by following the mandated formulas in the government’s program.
* It is a certainty that this is going to be a tough, long struggle for financial institutions trying to navigate their way back to some sort of normalcy. It is also a certainty that pulling loan concessions out of them is going to get much harder. Homeowners trying to go it alone should be prepared not for a sprint, but for an uphill marathon.
* For those homeowners covered under the FNMA/FHLMC umbrella, flying solo is not going to be a picnic either. Publicity for HASP spoke of saving millions of homeowners from foreclosure. Picture those homeowners working through the complexities of their mortgage on the phone with newly hired “helpers” who are as new to the loan modification process as the homeowner. Each phone call has the potential to last for hours. The experience could be very much like calling the IRS to ask about foreign tax withholding on April 14th. Now imagine 500,000 callers asking the same question that day. Can you say quagmire?

Whenever the issue of fees comes up regarding loan modifications, there is always a well-intentioned and sincere group stating that homeowners can and should do their loan modifications by themselves for free. The problem here is that an extremely high percentage of homeowners would be considered novices in that process. For many, terms like ”neg am” might as well be Latin. Also left out of the equation is the time commitment to get a modification completed. The hours spent pursuing a loan modification have intrinsic value whether the sacrifice is time not spent with family, at work, or goofing off.  Another issue is the assumption that a novice homeowner cum negotiator is going to cut as good a deal as an attorney with hundreds of successful loan modifications on his resume. And finally, as case study after case study shows, the fees paid to a professional to execute a loan modification usually turn out to be one of the best investments that homeowner will ever make. Consider that the cap for participating mortgages in HASP is $729,750. The bigger the mortgage balance, the bigger the monthly payment. It’s exactly here where the savings on an attorney driven, successful loan modification can be huge over time, delivering a massive return on the fee/investment made by the homeowner.

So the Obama administration is the new sheriff in town and has joined the ranks of the naïve but well-intentioned group of loan mod fee abolitionists. It all remains to be seen how HASP is going to play out but the program isn’t for everybody, abstaining lenders included. Homeowners will still need attorneys to get their loan modifications done with optimal results. And It’s still a game for the pro’s whether the sincere, well-intentioned, and naive know it or not.