Mortgage modification nation: Who really deserves a cheaper mortgage?

Nelcisco, a regular commenter here, is now working in a booming field in California -- loan modifications.  We talked today and he told me he's worried that loan work-outs might become trendy -- even for borrowers who don't really need them:

"My biggest concern is that people who are not in distress and not in need of a loan modification are going to start pursuing loan modifications. And that’s where it’s going to get ugly. That’s where you’ll see the backlash."

Reporter David Streitfeld explores the same thorny issue in Friday's New York Times: How do you determine who really deserves a loan modification that reduces their mortgage payment? How do you prevent people from deliberately defaulting their way into a lower payment? And what do you say to the "sober souls" who borrowed responsibly and keep on paying the mortgage on their upside-down houses while everyone around them gets a break?

“Why am I being punished for having bought a house I could afford?” asks homeowner Todd Lawrence of Norwich, Conn. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

This is going to be messy. If banks are cutting deals, everyone is going to want a deal. Pimco's Paul McCulley tells Streitfeld, "“If the lunch truly is free, the demand for free lunches will be large."

Also quoted: economist Peter Schiff, who says underwater borrowers will strongly consider defaulting in order to get government help: “If the government says, ‘Prove that you can’t afford your house and we’ll redo your mortgage,’ then people are going to try to qualify,” Mr. Schiff said.

Two cents: This story is a reminder of a key factor in the housing bubble that started all this: The American consumer shares and spreads business tricks and trends at lightning speed; the American government, by contrast, is very slow to catch on. So, during the bubble, consumers quickly learned from each other how to buy real estate with no money down, how to suck the equity out of their homes and spend it, how to squeeze into a big house by paying a tiny teaser rate. There's little evidence government regulators learn as quickly -- during the bubble, they simply didn't notice the degree to which consumers had embraced risky, and ultimately disastrous, borrowing.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Comments

[The Original RZ]

As much as I hate this, there are some who need help. I say that if someone has a death certificate for a spouse or divorce papers (and thus went from a two-income household to one-income) or a pink slip from a job, they can get help. Everyone else is on their own and too bad.

[Todd in WeHo]

Peter's point that the American consumer picks up tricks & trends at lightning speed and Dan's point that government and business did not prepare for unintended consequences both support my argument for Laissez Faire Capitalism. Let the consumers and businesses who made this mess sort out the details and leave the rest of us out of it. "I'm from the government and I'm here to help" doesn't work for anyone.

[Shaking Head in Disgust]

What's the worst thing that happens to someone who can't pay their mortgage and loses their house to foreclosure?

Answer: They Rent.

THE HORROR!!!

[bigunit]

The same unlicensed mortgage bankers and scam artists have reinvented themselves as Loan Modification Specialist.

[mike]

TAKE FIVE IS RIGHT

the only reason people are in this situation is because it was so turn key. any type of loan modification will eventually require more bueracratic paperwork than 99 % of these type of people can take. i think in the end interest rates between people with an excellent credit score and anything else will be vastly different.

[TakeFive]

"Nelcisco, a regular commenter here, is now working in a booming field in California -- loan modifications."

Nelcisco:

Which side are your working on - the homeowner or the lender?

[tew]

TakeFive states "there will be some abuses..."

The entire program is abusive. Savers are abused to benefit speculators - they see home prices inflated while they'll get to pay more in taxes.

People who have strived to get a better job with more pay are abused - they see their neighbors get a mortgage reduction while they still struggle to pay theirs.

The people at large are being abused to save a small group of ineprt, corrupt, and greedy borrowers and lenders.

[Bob in Los Angeles]

Today, October 31, 2008, Sen. McCain tells us, if he's elected President, that the federal government will buy the mortgages of homeowners drowning in debt resulting from their purchase of homes they could not afford.

1) Will this save the economy or help John McCain get votes?

2) Isn't this redistribution of wealth? To be precise, he's taking my wealth and paying other people's mortgages, not mine.

[CeW]

"You want lunch, go WORK, EARN money, and BUY your lunch. I'm so sick of this socialistic communistic system we developed. My god, can somebody wake up and scream."

Laker, bailing out these people, banks etc who took full advantage of unbridled CAPITALISM ie capitalism without regulation, is not socialism.The government is bailing out the fall-out from unbridled capitalism. Applied to the banks, it is corporate welfare. Bailing out the ones who bought more house than they could ever afford, is in the long run also corporate welfare

[Legal Eagle]

HI Pete, Many of these loan modification folks that aren't attorneys are actually committing misdemeanors that subject them to a fine $10,000 and imprisonment up to a year. And that is for each deal they do!!! It's only a matter of time before the state cracks down on them.

Please have them review California Civil Code sections 2945-2945.11.

I'd be wary of having people consult anyone other than an attorney for loan modifications!!!

[Nelcisco]

TakeFive:

We're working on the side of the homeowner. What I do personally is ask qualifying questions to homeowner regarding his/her mortgage and create a financial profile for them and submit it to our compliance dept. based on their issues its either a go or no go. If its a go the borrowers financial data will go to the bank along with proper docs and hardship profile for the negotiation phase, our legal team will negotiate at the borrowers behalf which are experts in loss mitigation.
Let me know if you or anyone else need help. I'll give my personal e-mail so that I'll get it and not someone else in the firm. nelcisco@yahoo.com

[Nelcisco]

Legal Eagle is right, I wander if any of this is going blow-up and create a bigger mess than the subprime, this a legal issue not a mortgage refi and people need to know that. I know I can't negotiate this, my role is to help people understand their mortgage and whats ahead if they let it go and walk, I take the info and let the experts do what they do.

[MyLessThanPrimeBeef]

I have to be honest, I don't know much about loan modification.

But this is I do know, from history.

In 1862, France, owed 40 million francs by Mexico, sent an army to collect.

And even with that, they still can't manage their money.

Can we do less today?

[TrojanDLA]

Yes, I definitely believe that there will be those who will pursue a modification despite not being in "distress". I'm in the middle of it, so to speak, and I see the signs already.

I'm an attorney doing about 15 loan modifications per month with mixed success. The truth is that there are a large number of "investors" who own these loans and CAN NOT modify because the loan is part of a larger trust that does not allow the trustee to change the terms of the loan without approval from the beneficiaries (investors). So here's the problem - there are literally over 100 investors owning bits and pieces of a loan and you don't have a clue where they are located to seek their permission. If the trustee modifies this loan, he will be sued by the investors for doing so without consent. The government needs to step in and protect the trustee from lawsuits if they want more modifications.

On the other hand, 90% of my modifications are successful and my clients save more at the end of the modification than the attorney fees paid.

[Crash and Burn]

I want to emphasize here, this plan is not an "unintended consequence". It is a very deliberate attempt to take some of that $700 billion of your money and "privatize" it to the banks in the name of "helping" out the saps that were dumb enough to get bamboozled from the mortgage Industry/banking/wall Street.

Lets break it down.

1. The banks aren’t going to get their loan repaid now.
2. The sap that lives their now basically has 0 equity, but really no obligation to make good on the loan.
3. The bank will eventually have to sell the house at market value for a huge loss

If the government buys the house at the original loan value or close to it and then "Sells" it to the current occupant at current market value (which would be the same price as if they sold it to anyone), the guy in the house really gets nothing he couldn't have gotten himself if he had bought the house down the street except for loan forgiveness. On the other hand the bank just got a truckload of free cash and a risk free loan that is backed up by your tax money. This is the give away. This is spreading your wealth to the banks. This is crony capitalism. This is the system we have been living under the past eight years. Please stop saying this is bumbling social policy by government. It is not. It is a very deliberate attempt to subsidize the failures of the banking industry with taxpayer money. It will not help the economy, but they don’t care. They care about the banks getting their money back no matter how stupid the decisions they made.

[buz]

Anyone diligently paying their mortgate, especially if the value is now less than what is owed is a comlpete fool. Stop paying. Go into default and qualify for a "workout" from the government dummies. You will owe less on the home and pay a lower interest rate. We are now a nation of idiots and wimps and those that whine the most make the rules. This is not how I would run things but it is past time wishing for how things "should" be and realizing what "is"

[Countrywide Loan Modification]

Countrywide will start their free lunch. Bank of America bought Countrywide as we all know and now they are as of 12/1/08 going to put together a free lunch program that will contact everyone that has a special loan (MTA, Negative AM...) and tell them they qualify for a National Homeowner Retention Program. They will be doing principal as well as interest rate reductions. The details are being worked out but should ruffle some feathers for homeowners that do not qualify for the program because they were fiscally responsible. Must be some new trickle up policy.

[Loanie]

I'm a lawyer and everyday I help people get loan modifications. There's a small part of me that wants to get one for myself. I actually do make considerably less money than I did when I bought my home b/c with the economy being what it is I don't have as much legal work as I used to. My income has been cut more than in half. However, I keep paying a lot for a property worth less b/c I want to honor the deal I entered into. As I slowly deplete my savings to cover my mortgage I'm sure I'll regret not jumping on the loan mod band wagon myself! Maybe these lenders should offer more breaks to their reliable, yet struggling, borrowers -- like a deferment or forbearance without a lot of hassle. A few lenders will do it -- but usually for the wealthy interestingly enough.

[Joe]

I'm high-worth, successful and careful with my investments with a decent amount of wealth, assets and equity and living well within my means. I feeling growingly stupid in not being able to take advantage of the current situation to improve my position.

Where and how do I start this loan modification process - basically, I'd be willing to pay it off in 1 shot if I can get a really good deal. Are there long term dire consequences to this? I don't even need credit - it's only a convenience.

Thanks,

Viper