Owner’s Choices: Short Sale versus Loan Modification

Recent legislation encourages loan modification in an effort to decrease the number of foreclosures. If you are meeting with homeowners, see if one of their goals is to keep their home.

The new rules on loan modification provide relief for people who have had financial difficulty, but remained current on their payments. There are also some new programs for those in imminent danger of foreclosure, and those who are already up to 60 days late on their payments.

These programs are only for a family’s principal residence. It does not apply to second homes or investor owned properties. Loans that were originated before January 1, 2009 are eligible for modification.

Loan servicers will follow a series of steps specified in the programs to reduce the homeowners’ monthly payments in order to first bring the amount of the payments down to 38 percent of gross monthly income. As a second step, the government will share in the obligation to lower the payments even further to 31 percent of borrowers’ income. The first step in the process involves reducing the interest rate down to as low as two percent. Next, the term of the loan can be extended to up to 40 years. As a last resort, the principal of the loan can be reduced. The homeowner’s monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association dues and/or condominium fees.

There is a payment to the loan servicer from the government to encourage the completion of this process. Also, if the borrower makes the mortgage payments on time for three years, there is a principal reduction payment by the government to the lender as a reward to the borrower for staying current on the financing.

To qualify, the borrower must still be employed and show the ability to make the payments after the adjustment. The loan can be well over the 80% of the value of the home that is required for refinancing. In fact the loan can be over 100% of the value of the home, so that people who want to keep their homes, even if it is worth less than the amount of the loan, can get their payments in line and stay in their home. The borrower gets only one loan modification, so it better be right the first time, because there will be no second time.

Loan servicers will use a net present value (NPV) test as a standard to judge each loan that is at risk of imminent default or is at least 60 days delinquent. The NPV test compares the net present value of cash flows with and without modification. If the test is positive – meaning that the net present value of expected cash flow is greater with a modification – the servicer must modify the loan. If the NPV test returns a negative result, loan modification is optional.

To see the Guidelines issued by the US Treasury, click here. For details on the Making Home Affordable Plan with all of its modification opportunities, click here. For all the details on the Financial Stability Plan that is part of this initiative, click here. Executives from Housing and Urban Development emphasized that access to the loan modification program is free and they warned homeowners to beware of rescue scams that claim to charge a fee for a government modification

For owners who have lost their jobs, this program will not work. If the owner needs to sell the home to move to another area, or if there are other personal issues such as divorce, these programs will not change the choice of pursuing a short sale. But for families who want to refinance out of a bad loan but have been prevented from doing so because the value of the home has fallen or the loan qualification requirements have become too severe, this new program should work well. In the next few weeks the loan servicers should be set up to review applications for loan modification.

For people who want to stay in their homes, this could be a godsend, if they qualify. There is no moving, no tax consequences, no effect on credit scores and no emotional trauma. For those who have to move, the short sale, deed in lieu of foreclosure or foreclosure itself are still the choices.

February 12, 2010

Citi’s Foreclosure Alternative Allows Homeowners to Stay for Six Months

As one of the nation’s largest mortgage servicers, CitiMortgage is still contending with a deluge of foreclosures that just doesn’t seem to be abating, despitestepped up mitigation efforts and government relief programs. On Thursday, the company announced a new pilot initiative that will allow distressed CitiMortgage borrowers to avoid foreclosure and remain in their homes for six months if they agree to sign over their property deeds to the lender.

In addition, Citi will provide relocation assistance to help borrowers transition to another residence at the end of the program. This expanded deed-in-lieu-of-foreclosure program is being piloted in Texas, Florida, Illinois, Michigan, New Jersey, and Ohio, beginning February 12.

“At CitiMortgage, we’re committed to finding every solution possible to help families facing foreclosure. However, the reality is that not every homeowner has the financial ability to remain in their home,” said Sanjiv Das, CEO of CitiMortgage. “The goal of the program is to help homeowners make a smooth transition into the next chapter of their lives.”

In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for up to six months without making mortgage payments under its new Foreclosure Alternatives Program. At the conclusion of the grace period, the company will provide a minimum of $1,000 to help the borrower move. Citi will also provide

relocation counseling by trained professionals and will cover certain monthly property expenses if the bank determines the borrower can no longer afford them.

Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner’s association and escrow fees, will be determined on a case-by-case basis considering the borrower’s specific financial circumstances, the company said. As part of the agreement, borrowers must maintain the property in its current condition and agree to bi-monthly meetings with Citi’s relocation professionals.

According to CNN, Citi will also forgive any difference between the value of the home at time of repossession and what the borrower owes – once the deed goes back to the lender, the borrowers walk away free and clear.

Citi explained that before a borrower enters the Foreclosure Alternatives Program, they must first be evaluated for a permanent mortgage modification. For those who do not qualify for a modification or another solution, CitiMortgage says it will explore the possibility of a short sale, and if that’s not feasible, then the borrower may be considered for the deed-in-lieu program.

In order to be eligible, homeowners must hold first mortgages with a clear title owned by CitiMortgage, occupy the property, and be at least 90 days delinquent on their mortgage payments.

As it evaluates the progress of the pilot program, CitiMortgage said it will assess whether or not to expand the program to other parts of the United States. The initial pilot is expected to help as many as 1,000 families.

While CitiMortgage has done deeds-in-lieu and short sales in the past, the company says it is increasingly looking to them as alternatives to foreclosures.

“We hope others in our industry will join us in helping distressed borrowers across the country,” said Das.

Das told CNN that he knows of no other big servicer with a program like Citi is implementing. “This is a deed in lieu on steroids,” he said.

February 11, 2010

Homebuilder Buys $3B in Troubled Real Estate Loans from FDIC

One of America’s largest homebuilders is getting into the loan restructuring business. Lennar Corporation said Wednesday that it has purchased two loan portfolios from the FDIC with a combined unpaid balance of $3.05 billion.

Lennar paid $243 million for the portfolios, which include 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships. But the Miami-based builder says it’s no stranger to working with troubled mortgages.

“Acquiring and working out distressed real estate loans was a large and extremely profitable part of our business during the last major real estate down cycle in the early 1990s,” said Stuart Miller, president and CEO of Lennar

Corporation. “We are pleased to return to this business and honored to partner with the FDIC to manage, work through and add value to these portfolios of real estate loans.”

Miller says the company has been preparing to invest in the distressed loan space for the last two years and has been closely watching the market to identify “the opportune point of entry.”

As part of the deal with the FDIC, Lennar receives a 40 percent stake in the limited liability companies created to hold the loans. The FDIC will retain a 60 percent equity interest in the companies and will provide $627 million of nonrecourse financing at zero percent interest for seven years, Lennar explained.

Rialto Capital, a subsidiary of Lennar, will conduct the day-to-day management of the portfolios and the loan workouts, and will contribute up to $5 billion toward the acquisition, Lennar said. Rialto is a real estate investment management company focused on distressed real estate assets.

A Rialto related entity is also a sub-advisor to Alliance Bernstein in one of the eight Public Private Investment Program (PPIP) partnerships sponsored by the U.S. Treasury to purchase residential and commercial mortgage backed securities.


February 11, 2010

Housing market logging gains (Charlotte)

Charlotte area home sales, prices up again


By Stella M. Hopkins

Posted: Wednesday, Feb. 10, 2010

The Charlotte-area housing market continued posting gains in January, with home prices and sales now showing several months of steady increases.

The average sales price last month was $200,592, up 6.1 percent from January 2009, according to results released Wednesday by the Charlotte Regional Realtor Association. That’s the third consecutive month with a gain and slightly stronger than the December increase, for transactions through the association’s Carolina Multiple Listing Services.

The number of houses, townhouses and condos sold last month rose 8 percent from a year ago during the deepest part of the slump. January marked the fourth month of sales gains and is particularly notable because it is typically a slow month.

The number of pending contracts – deals signed but not yet closed – was about the same as a year ago. However, pendings were up 25 percent from December, a sign of rising demand. Experts expect sales will strengthen through the spring, in part because of several hefty tax credits for deals signed by April 30.

Today’s Rates

30 Yr Fixed – 4.875%

30 Year FHA – 4.750%

15 Yr Fixed – 4.250%

30 Yr Fixed Jumbo – 5.625%

5/1 LIBOR ARM – 3.625%

7/1 LIBOR ARM – 4.125%

10/1 LIBOR ARM – 4.625%

If you know anyone that may be in a distressed situation with their home and faced with a potential foreclosure, have them contact me anytime (phone or email). We have a solution to help many homeowners.

February 9, 2010

House Committee to Investigate Obama’s Modification Program

The House Committee on Oversight and Government Reform has launched an official investigation into the federal government’s foreclosure prevention program.

According to a statement from the head of the committee, the probe was triggered by complaints that servicers have been slow and inconsistent in modifying loans under the Making Home Affordable (MHA) program, and are not communicating clearly with eligible homeowners.

Chairman Ed Towns (D-New York) says he’s a strong proponent of efforts to ease the burden on struggling homeowners but has received “concerning information” that the administration is not fully living up to its pledge to help borrowers mitigate foreclosure.

“While I applaud Treasury’s efforts, numerous concerns have been brought to my attention regarding the effectiveness and efficiency of the MHA program and the extent to which it has assisted struggling homeowners,” he said.

In a letter to Treasury Secretary Timothy Geithner, Towns wrote, “… it is my understanding that Treasury has thus far refused to reveal in detail how it defines ‘net present value’, one of the key criteria for homeowner participation in the mortgage modification program.”

Towns added, “Moreover, if a homeowner is denied a permanent mortgage modification, the specific reasons for the denial are not revealed. Finally, Treasury has not established a process for homeowners to appeal the denial of a permanent mortgage modification.”

The latest figures from Treasury show that servicers have initiated just over 900,000 trial modifications, but according to the Congressional Oversight Panel, home foreclosures across the nation have increased faster than the rate of new HAMP trials, by more than 2 to 1.

Towns also noted that the servicer progress report issued last month demonstrates that certain institutions have made “dismal progress” in modifying loans, even though they service a large number of homeowners potentially eligible for HAMP.

Chairman Towns says he expects specific data requested for the investigation and a response to his inquiry from the Treasury Department by February 18.

Towns’ concerns echo similar accusations made by foreclosure counselors and distressed homeowners alike over the past several months that servicers still may not be equipped to handle the excess workload brought on by the government program and may be letting an unsettling number of borrowers slip through the cracks.