According to RealtyTrac’s U.S. Home Equity & Underwater Report for the fourth quarter of 2014, over 7 million homeowners (13 percent) still have combined loan amounts exceeding their property’s worth by at least 25 percent. In many cases, their credit cards are maxed out, a missed payment can result in interest rates as high as 28 percent or more, and they can’t obtain a loan modification because their credit scores or the value of their home is too low. What are the realistic options for climbing out of a credit mess?
When you or your clients find yourself in a financial mess due to circumstances beyond your control, you have a number of options. Do you walk away from your home when your mortgage exceeds its value? Do you default on your credit cards and/or declare bankruptcy? Alternatively, do you stay the course and do your best to climb out of the mess?
When I had six surgeries in a 12-month period coupled with the recession, our 42-year-old business partner dying of cancer, and a 20 percent drop in our property value, we were facing the same hardships so many Realtors and their clients faced. Even when people can show hardship, however, obtaining a loan modification can be a daunting proposition.
Cleaning up the mortgage mess
In our case, the jumbo loan market had dried up completely in the summer of 2007 just as we were completing construction on our new home. The lender couldn’t sell the loan on the secondary market. Thus, even though we had an 800 credit score, 20 percent down and a written pre-approval, the lender tried various maneuvers to avoid funding the loan. Two weeks before closing, the lender gave us one choice of accepting its predatory loan terms or we would have lost our entire down payment that had been advanced to the builder.
Over the last five years, I have continued to pursue modifying our predatory loan. I was bounced from department to department, all with the same answer: This has to be handled by a different department. I finally learned that the loan was part of a group of mortgage-backed securities and supposedly could never be modified.
A consumer attorney advised us that we had a strong case against the lender for predatory lending. The challenge was that we were past the five-year limit for filing a case.
I then heard about the Consumer Financial Protection Bureau. I filed a complaint with them and that brought the lender to the negotiation table.
We were referred to the lender’s Home Preservation team, but, despite the reams of documentation, the underwriter couldn’t qualify us for a 2-3 percent loan modification. The reason? It couldn’t make our loan payment “affordable” since we were self-employed. What’s laughable is that our current payment is more than double what the “affordable” payment would have been. I suspect part of our challenge is that we have never fallen behind on our payments.
To top this off, the underwriter required us to set up an escrow account to collect property taxes monthly before it would consider the modification. That raised our monthly payments by 45 percent without the benefit of the loan modification. Moreover, we may be unable to remove the impound account.
We submitted more documentation and then received another rejection. Apparently, the underwriter did not understand the permanent changes we had made that directly impacted our profit and loss statement (P&L); its drive-by appraisal was also $70,000 low; and the third issue was that we needed to pass something called the NPV, or net present value, test.
According to a story on Bankrate.com: “Mortgage servicers use an NPV test to decide which action is more profitable (or less unprofitable) in the long run: modifying the loan and accepting lower monthly payments,” or “not modifying the mortgage and possibly tipping the borrower into foreclosure.”
Besides the redefault rate, the NPV calculation makes guesses about the length of time until a default, the self-cure rate (i.e., the borrower brings the loan current), the current property value, as well as the projected value a year from now. The NPV also estimates how much it will cost the lender to foreclose, including everything from legal fees to utilities.
Two factors in this equation — the home’s projected value in a year and the real-estate-owned discount — must be calculated using the guidelines established by Fannie Mae and Freddie Mac.
The home preservation team advised us it would be happy to resubmit the loan if we had more income, if its drive-by appraisal was too low, or if there were some other change in our circumstances.
Like most short sales during the downturn, persistence is the name of the game. We will appeal and ask for a different underwriter who hopefully has a better understanding of our business P&L. Even so, I suspect our merry-go-round ride is nowhere near being finished.
Resources to protect homeowners
The first thing that homeowners who go for a loan modification must understand is that any error in your submission package will result in a denial. Second, you must carefully document everything. Any discrepancy can result in a denial. Third, the lender will most likely do a drive-by appraisal that will probably be low. You will be charged for a second appraisal. The hurdles are partially due to federal regulations, but the lender does control all but two of the factors on the NPV test as noted above.
If you or your client find yourself in dire financial straits or have become victims of predatory lending, here are two additional resources:
The National Association of Consumer Advocates has been helping homeowners to keep their homes and to fight predatory loan practices. One of the current causes is urging a ban on forced arbitration that it feels prevents consumers from having their day in court.
2. Consumer Financial Protection Bureau
As noted above, we had no luck with our lender until we filed a complaint with the CFPB. As one mortgage professional put it, “The CFPB has aggressively pursued lenders who engage in predatory loan and credit practices. It’s the one agency they actually fear.”
Credit problems often go hand-in-hand with mortgage problems. For those who are having serious financial challenges, did you know that credit card interest rates can sometime be negotiated to zero without the help or the expense of a credit agency? See Part 2 to learn more.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles and two best-selling real estate books. Discover why leading Realtor associations and companies have chosen Bernice’s new and experienced real estate sales training for their agents at www.RealEstateCoach.com/AgentTraining and www.RealEstateCoach.com/newagent.