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Editor’s Note: In a Livinglies survey of HAMP trials, we found that most modification offers vastly exceeded the proceeds from foreclosure. Prior to the brief era of securitization the result would have been obvious: the bank would take the modification offer, perhaps with a little negotiation to get it up a little higher, and then NOT foreclose because the money was better in the modification. Not so in securitized residential loans. But it is still the case in non-securitized residential loans where Banks are accepting traditional “workouts” on both residential and commercial real estate.
- So what is the deal? Why would anyone, given the choice between less money and more money, take less money? No reasonable person or business would do that unless there was a compelling reason. If there is no compelling reason, or if the reason is illegal, then we are left with a perfectly good program that is not being used to modify mortgages to allow people to stay in their homes.
- The trial modification is not what it sounds like. It is a continuation of the same policy that put the person in the path of foreclosure destruction in the first place. Besides the defective loan that was guaranteed to fail in the first place, based upon fraudulent appraisals of the value of the property, the Banks universally told people that in order to apply for modification they had to be at least three months behind in their payments. So a person who was current went three months behind in their payments only to find that there was no modification, and there was only foreclosure awaiting them with no help in sight.
- The servicers and others in the securitization chain pretended to be lenders when they originated the loan and foreclosed on it and pretended to be performing authorized services when they “considered” the loan modification request.
- The trials were meant to deceive and did deceive most people into thinking that the Banks had accepted something meaningful when in fact they had kept the old loan terms, added the past due payments to the back end and maintained the payment level that the borrower could never afford because of the reset on interest or the end of the teaser period in which the borrowers were deceived into thinking that the loan was serviceable because the Bank would merely refinance as property values went inevitably higher.
- In short, trials are only a way of creating some public relations effect, kicking the can down the road that Banks want — a foreclosure so there is no possibility the loan will survive. The farce in which the servicer refers to the investors as authorizing the trial or rejecting the modification is a blatant effort to achieve foreclosure and to close out the loan as “failed.”
- Why do they want failed loans? Because they used the defaults on the loans that the Banks had created by instructing the borrowers not to pay as a basis for declaring that the loan pool could not pay in accordance with the terms of the mortgage bond issued to investors. This declaration was what triggered the payment of insurance, bailouts, and CDS payments.
- Of course that bond payment was already impossible because of the giant chunk that the investment bank took out of the investor funds prior to funding the loans which the investment bank declared was “trading profits.” With 30% of the funds gone, there was no pool that could do anything but eventually go belly up. And because the securitization documents allowed the investment bank to use the investors money in the pool to pay the bond (using the investors’ money to pay themselves back on the bond) they could keep the Ponzi scheme going.
- The entire scheme was based upon getting as many homeowners into a “default” even though the servicer was continuing to make payments to the creditor investors. It was so counter-intuitive that even now lawyers and Judges have great difficulty understanding why a Bank would declare a default, lower the value of the collateral by creating a distressed property valuation and then foreclose leaving themselves with the liability of maintaining the property.
- The reason is simple: the servicers made money based upon the loan principal which they continued to collect from other streams of revenue. And the bigger reason is that if the loans actually performed and were paid off, there was a huge liability equal to or greater than the profits made by investment banks in selling the loans multiple times and creating bets on the pool that were guaranteed to fail.
- The bottom line is that the investment banks will crash if the loans are paid off by the borrowers because the entire spread they took from investors without investors knowing it plus the proceeds from insurance and resales of the same loan will all be up for a full accounting and return of money paid under the false pretense that the pool failed because of homeowner defaults.
- The pool didn’t fail because of homeowner defaults.
- The pool failed because it was started with less capital than the investors knew and because the Banks embarked on a policy of making absolutely certain that as many homeowners as possible could be shoved or coaxed into stopping payments — payments that were actually continued to be made in most cases by the servicer.
More failed HAMP trials end in foreclosure
by Jon Prior
Mortgage servicers are putting more failed Home Affordable Modification Program trials through foreclosure than they were one year ago.
According to Treasury Department data released last week, 10.6% of the more that 615,000 canceled HAMP trials completed the foreclosure process as of Nov. 1. That’s more than double the 4.4% of failed HAMP trials foreclosed on as of November 2010.
While foreclosures are increasing, alternative modifications on these loans are dropping. Of the canceled HAMP trials, 39.7% went through the bank’s own private programs, down from 45.4% over the same time period, according to Treasury data.
Foreclosure completions as a percentage of borrowers never accepted into HAMP trials are lower but still increasing as well. Of the 1.8 million borrowers denied a HAMP trial, 7.6% completed the foreclosure process as of Nov. 1, up from 5% one year before.
Roughly 26.5% of these borrowers received alternative modifications, which held flat over the last year.
The increase in more foreclosure completions on failed HAMP trials occurred at nearly every large servicing shop participating in the program. Citigroup (C: 29.60 -3.71%) saw the highest jump. Of the 71,808 HAMP trials it canceled, roughly 13.5% completed the foreclosure process as of Nov. 1, up from 3.1% one year ago.
At Ally Financial (GJM: 21.37 +0.23%), the percentage increased to 12.8% from 6.4% over the same period. At JPMorgan Chase, the increase went to 11.3% from 6.2%. And at Bank of America (BAC: 6.795 +2.80%), the largest servicer in the program, 9.3% of failed HAMP trials went through foreclosure compared to just 1.9% the year before.
The highest percentage is currently held by OneWest Bank. It foreclosed on more than 19% of its roughly 20,000 failed HAMP trials, up from 10% last year.
Interestingly, Wells Fargo (WFC: 30.18 +1.93%) has one of the lowest percentages of completed foreclosures on these mods at 6.7%, almost the exact same percentage one year before.
This could be a sign servicers are both skirting poorer performing private modification programs or the data is beginning to reflect these higher redefault rates.
According to the Office of the Comptroller of the Currency, 17% of the 108,000 HAMP modifications began in the second quarter of 2010 went 60 or more days delinquent within one year. That’s compared to a 31% redefault rate for other private programs.
D. Corwyn Jackson, whose company The Corwyn Group helps to train housing counselors for foreclosure prevention, said servicers are getting mixed signals from the government-sponsored enterprises Fannie Mae, which administers HAMP, Freddie Mac and other stakeholders across the country.
“The servicers are mandated to stick to the agreed upon foreclosure time lines by state,” Jackson said. “But other stakeholders such as nonprofit housing counseling agencies across the nation are requesting servicers during the negotiation to exhaust their loan workout options before starting the foreclosure process.”
The GSEs charge servicers for taking too long to complete the foreclosure process under specific, state-by-state guidelines. Servicers are expected to still consider the borrower for the GSE programs, but time is of the essence. BofA, for example had to pay Fannie and Freddie $1.3 billion in foreclosure delay penalties in the first nine months of 2011.
GSE policies and the failed HAMP trial foreclosure rates is beginning to show in the overall economy. Over the same time period covered by the Treasury data, the shadow inventory of homes in foreclosure or on the verge it has been declining. According to CoreLogic (CLGX: 13.54 +0.45%), roughly 1.6 million homes sit in this inventory, down from 2.1 million in November 2010.
Write to Jon Prior.
Follow him on Twitter @JonAPrior.
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