Sunday, December 26, 2010

Atypical Mortgage Modification Shines Light on Serious Housing Problems

Gretchen Morgenson's article in today's Business Section of The New York Times is vital reading for everyone in America who is concerning about the continuing and alarming housing crisis. She discusses the atypical case of Robert and Amy Ahleman, who are a construction contractor and a financial services employee, respectively. When they missed one payment on their small home their loan servicer immediately began charging default fees and sending threatening eviction notices.

At the current rate, the Treasury Secretary's main foreclosure prevention program, HAMP, will stop about 700,000 foreclosures, much fewer than the 13 million expected by 2012. Unfortunately, Elizabeth Warren, the Harvard Law Professor who fought so fiercely for a consumer advocacy program with enforceable powers that was left out of the financial reform bill, was named to a special advisory role on the Congressional Oversight Panel, which was created in 2008 to monitor financial markets and those who regulate them. It is basically a ceremonial role.

HAMP (Home Affordable Modification Program) was devised under Treasury Secretary Timothy Geithner. Under it, loan servicers (which are often owned by large banks) are voluntarily coerced to modify mortgages to prevent foreclosure. They are paid $1,000 per modification. Foreclosures don't benefit anyone but the servicers. The homeowner is evicted, the property values of the surrounding areas go down, and:

Investors who hold the loans in securitization trusts are also hurt by foreclosures, because recoveries on these properties are so low.

Consumers feel (and are) less rich, they spend less, and because many mortgages are underwater (that is, the homeowner ends up holding a mortgage that is more expensive than the plunging value of their home), people are less mobile so if job opportunities dry up in their region, they are less able to move to an area where jobs are growing. Mobility was always a staple of American capitalism.

Foreclosures are much more lucrative to loan servicers than what the HAMP program pays:

[L]oan servicers can profit significantly by pushing borrowers into foreclosure. It gives the servicers more opportunities to keep charging lucrative fees and little incentive to seek a modification.

As Kurt Eggert, a professor at Chapman University School of Law in Orange, CA said:

"I think a big part of the problem is that nobody is effectively holding servicers' feet to the fire to say 'where are the loan mods that you should be delivering that help both borrowers and investors?"

After the Ahlemans, desperate to save their home, filed for bankruptcy in late 2008, their servicer was changed to Litton Loan Servicing, a unit of Goldman Sachs. Ms. Ahleman asked Litton repeatedly for a modification but heard nothing back. Finally, after a reporter contacted Litton, they quickly responded by cutting the Ahleman's variable interest rate from 9.3% to a fixed rate of 4.5% (about the current fixed rate in the marketplace). It also agreed to waive its $38,882 in arrears on their mortgage which included late fees and legal costs. Remember, Litton did not respond to the Ahlemans for months. That certainly increases late fees.

Meanwhile, the bank that held their second mortgage at a 12% interest rate, Banco Popular, wrote off the Ahlemans entire loan of $62,000, which also included late fees.

Under the terms of the new loan, the Ahlemans' mortgage obligations dropped from almost $250,000 to roughly $198,000. Their monthly payment fell from $1959 to $1376.

The Ahlemans have since made all their payments and don't use credit cards any more. "If we can't pay cash, we don't buy it," said Ms. Ahleman.

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