Home Loan Modifications: Has the Bloom Gone Off the Rose?

Not so very long ago, it was about as easy to get a home loan modification as it was to get a home loan itself. Interest rates were low, and it seemed everyone had money or could afford to take out a loan with a very high principal. In the wake of the financial panic that swept the nation in the waning days of the Bush Administration, a quiet epidemic of foreclosures has put a different spin on practically everything.

For while big banks may have been saved from the danger of financial collapse, a lot of ordinary consumers find themselves on the brink of ruin. For those with too much month at the end of the money, much of which is caused by a mortgage burden that seems far too crushing for them to manage, the question is what to do to keep from being swept away by the financial tsunami. For some, the answer lies in seeking relief through federal foreclosure relief programs. Many others, however, have begun to recognize that these programs are no more attractive than their equivalents of years past, and instead are attempting something really radical – simply walking away from the original loan.

The problem is rather simple. Many people took out too much money, so now they find themselves drowning in a sea of debt. We referred to this earlier as a financial tsunami. Indeed, to many it might seem like a financial hurricane which, in its way, is now just as devastating to the pocketbooks of the average homeowner as Katrina was to New Orleans. And when they look around at federal relief programs, they find no life raft. Why? Because the unfortunate truth is that the majority of loan modifications end up making absolutely no dent in the loan amounts that were originally borrowed during the heyday of the boom years.

Accordingly, it seems that such homeowners are left with only three viable options: (a) Take a financial hit now and attempt to sell short; (b) Promulgate a so-called deed in lieu; or (c) allow their homes to be foreclosed. Rashmi Airan-Pace, a real estate attorney with the Coral Gables firm Airan, Airan-Pace and Crosa, which specializes in foreclosure defense, recently secured a loan modification for a client in Miami Beach which reduced his monthly payment from $3,700 to $1,600. Unfortunately, this amount reflected only a reduction in interest under the Home Affordable Modification Program, pursuant to which a consumer’s interest rate could be reduced to a seemingly paltry 2 percent. The homeowner, still owing $470,000 on property worth less than half that amount, called Ms. Airan-Pace and proclaimed his intent not to sign the agreement. The incident caused Airan-Pace to reflect: “What motivation is there for a homeowner to pay a mortgage that is three times more than the property is worth?” She further proclaimed: “Many homeowners feel that if they take a modification now, a decade down the road, they’ll still be coming to the closing table with money.”

With an eye toward helping consumers like Ms. Airan-Pace’s client, the Obama Administration passed a $75 billion program aimed at protecting them from foreclosure. Unfortunately, lenders who issued loans to homeowners during the golden years have been reluctant to reduce the principal amounts on these loans, creating a huge mess for the Administration.

In December, 2009, a report issued by the Treasury Department released just this past Friday indicated that only 26 percent of all the permanent loan modifications issued across the nation (about 17,280) included as part of the agreement a permanent reduction in the principal or, as likely as not, a temporary reduction that gets tacked on to the principal amount at the time the loan expires. And while there are hundreds of thousands of mortgages which are 60 days or more in default, only 66,465 permanent loan modifications, representing about 2 percent of those loans, were issued to borrowers as of December.

In Florida, only 8,405 loans were modified. Of course, the economic news could improve significantly this year, but a fair number of real estate experts don’t believe that making homes more affordable will have as positive an impact on the lives of troubled homeowners, let alone the economy, as might be hoped for, especially in states like California, where the real estate market took a severe beating. . As of the final quarter of 2009, a staggering percentage of all mortgages in California counties are in the soup according to analysts at Zillow.com. Right now, despite the current desire of many homeowners for loan modifications, Ms. Airan-Pace predicts that many others will shun modification plans that fail to reduce the principal debt.

Meg Reilly, a spokesperson for the United States Treasury Department, recently acknowledged that the number of “underwater” mortgages is a grave concern, especially in places like California, Florida, Nevada and Arizona. Unfortunately, however, resolution of the problem involves more than just a question of ordering banks to cut principal payments. Part of the dilemma involves questions of fairness. “If we increase principal write-downs offered through the program, there are concerns about moral hazard — underwater borrowers with affordable mortgages could engage in strategic default,” said Ms. Reilly, further explaining: “Increasing incentives for underwater borrowers to become delinquent could increase the cost of the program to taxpayers and risk slowing the housing recovery.”

Indeed, many analysts already fear that 2010 will see an onrush of new foreclosures as adjustable rate mortgages (ARMS) reset and savings accounts are drained by protracted unemployment. Analysts at RealtyTrac, a firm based in Irvine, California, have compiled a list of reasons why they predict an increase in the number of foreclosures in the course of 2010, and have added strategic defaults to that list. Daren Blomquist, a spokesman for the firm, recently opined: “In some ways, aside from the ethical and moral obligations, it makes sense.” But Ms. Airan-Pace believes it’s not just a moral issue confined to homeowners, as some of the responsibility for approving loans on overpriced properties belongs to the banks.

Take the situation of Kathryn and Douglas Lomax who, in 2005, took out a mortgage of $499,000 for their Royal Palm Beach home. Not five years later, according to the Palm Beach County Property Appraiser’s Office, the market value on the property has fallen to $226,025. In an effort to keep their heads above water, the couple was granted a trial loan modification in May of 2009 after a cut in their monthly income caused by a reduction of work hours. The agreement reduced the interest rate to 2 percent and extended the loan agreement to 40 years. Seven months later, however, they are repeatedly sending paperwork to City Mortgage in an attempt to make the agreement permanent, all while default notices keep appearing on their credit reports. “We put $150,000 cash down when we bought,” explained Ms. Lomax, who does not want to lose the home. “To walk away from all that, I can’t even fathom it.” Several calls and emails later, and the couple has still received no satisfaction from City Mortgage.

Anthony DiMarco, executive vice president of government affairs for the Florida Bankers Association, says he is opposed to stalling tactics used by some lawyers to delay foreclosures, nor does he agree with strategic defaults, believing as he does that such stalls the admittedly difficult (though cleansing) process of moving foreclosures through the system and ends up costing lenders more money. Nonetheless, DiMarco admitted: “No one expected it to get as bad as it’s gotten. It’s like building an airplane while you’re flying.”

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