from NMN:
Residential servicers, a sector that is grappling with a potential tidal wave of loan modifications, are beginning to hire “like crazy” according to Mary Coffin, a senior servicing executive with Wells Fargo Home Mortgage. Ms. Coffin, speaking at SourceMedia’s Loan Modifications Conference in Dallas, noted that new servicing employees working on modifications are receiving four to five weeks of training in order to deal with the volumes they are facing.
“When you think about the number of people being added, and this is one of the most painful subjects for me, our history had always been to train early and often to make sure we were ahead of the default, delinquency and foreclosure forecast,” said the EVP in charge of loan servicing and post-closing for the nation’s second largest player in mortgages. “We would hire people, bring them in and maybe start them in collections, easier calls, and over tenure let them encounter workout situations. We no longer have that advantage in this environment. We are hiring people by the thousands and thousands. It is very painful. The borrower has high anxiety and a lot of fear, complex documents to sign and return to us, and you are hiring people that get four and five weeks of training.”
She said servicers are going much deeper in collecting financial information from the borrower. Ms. Coffin described a transformation of servicers and what has evolved as the foreclosure crisis began and where the company sits today.
“In the old way of doing business, when the borrower first went delinquent, we would start with a repayment program. They don’t work to the point to where we have almost tried to get rid of them. It is a circular process that ultimately ends up with a different solution that needs to be found,” she told conference attendees.
“Today, we’re underwriting the financial condition of the borrower in order to pick the right solution that is sustainable. That is the first big change that has happened for servicers.”
The Wells executive noted there has been confusion regarding documentation under the government’s Home Affordable Modification Program, including re-requesting documents from borrowers and instances of losing documents.
“We are still dealing with pulling documents. We have gone back to the administration and I’d like to thank them. They already streamlined the documentation requirements for the HAMP. If we receive what are called the ‘critical documents’ then we are able to do the underwriting and the decisioning that we don’t turn the customer down if every paper is not signed perfectly. That’s a real plus,” said Ms. Coffin.
“We still have work cut out for us. We have customers where the administration has extended it four to five payments. We have a few borrowers sitting in that situation. We have heavy, heavy lifting to do in the next couple months to pull these customers through.”
Wells is trying to be as innovative as possible, working with external third-party providers, using phone calls, mail, door-knockers, branches, its sales teams, everything possible to help these borrowers get these documents in and finalized.
Wells is seeing short-term modifications as another solution for people who are able to regain employment immediately or who require only a short-term mod. It is taking an aggressive approach to the option ARMs from Wachovia. It is the one area where Ms. Coffin says they are doing principal forgiveness.
“We have lower redefault rates. Our key to these pay-option ARMs, if a customer is able to make a payment, we have to find a way to continue to allow that payment to be able to be made. What we are doing is restructuring the loan looking at net present value. It’s been very effective. Many of these customers need to be bridged from a negative amortization to an interest only. If you took them to a fully amortized product, there’s no way they are going to be able to make it. Over time, they will from an IO, step up, so there’s no payment shock.”
Early on, after analyzing its portfolio, Wells quickly saw that yes, HAMP was going to be a great tool and valuable to use, but it was not going to save 100% of their problems.
“Thirty percent to 40% of our portfolio who would be eligible for HAMP was coming to us for solutions. The remainder did not meet the criteria for eligibility. The biggest one was they were coming to us with DTIs below 31%. So, we also went to work on our in-house modification programs.”
This included the payment-reduction mod and the implementation of a full-quality review so no loan can go to a foreclosure before it actually goes through a quality review test to make sure all opportunities have been reviewed.
“These loans are going through multiple looks before they ever go to the foreclosure sale,” she said.
After the creation of the HAMP program, the volume for Wells jumped to over 40% of borrowers who were current on their mortgage that tried to get modifications.
“I knew from talking to investors, their biggest concern was the moral hazard of this program and people going delinquent to get a mod. The guidelines were not provided on default definitions. We worked to provide consistency.”
Because of all the attention on modifications “we went from a day when borrowers who were truly in need called to say, ‘What can I do?’ and we know what to do. Now we are sorting through hundreds of calls from borrowers who have been educated to some extent. We are still educating them on what you truly have to look like before you can get a modification,” she said.
I would love to hear some 1st-hand accounts of principal forgiveness. Until then I am very very skeptical
JK
I think principal forgiveness is vaporware. Once they open up that can of worms, there will be no stopping the ocean of applicants and strategic defaults. And I’ll be right there in line with them.
Agreed, principal reductions are another one of those things that will be hard to believe, even if I see it with my own two eyes.
Everyone keep an eye/ear out for one!
I have seen some of the terms on the Wachovia pick a pay mods. They are mods on loans that are typically already delinquent, and I think the principal loan reductions they are talking about are really reductions of outstanding neg am interest and delinquent payments. It is not that great a deal, unless you are a borrower whose priority is to stay in the house in the short term. They seem to be targeting a front end DTI of about 33%, and don’t care about the back end DTI from what I have seen.
For instance, take a deal that originated at 400K: a few years later with neg am and delinquent payments, it is up to $450K. What they do is write down a portion of the accrued interest and late charges to say $425K, and offer an interest only payment for 5-7 years starting at a lower rate, say 4.15% which steps up year by year to about 5% at the end of the interest only term. At the end of the term, the loan goes into an amortized loan for a 35-40 year period. At that point, the payment will jump big time.
Wells Fargo seems to be pushing these with the Wachovia pick a pays, and seem very resistant to processing mods under the Federal HAMP program which would give the borrower a lower initial payment from what I have seen. They keep repeating the standard line that they can’t do HAMP mods unless they are fannie or freddie loans. Although I did hear that they would start considering HAMP for the Wachovia loans as of a few weeks ago
Principal reductions make no sense at all, morally or in practical terms. Sorry if I’ve posted this example before and it’s redundant:
100 underwater owners, each able to continue paying. All will seek principal reductions if allowed, costing the bank the full amount of underwaterness of all of these potential walk-aways. Alternatively, if you do nothing, only 40 of them will actually walk away. You let those deadbeats go and only have to pay for the underwaterness of those 40 rather than the 100. Aggregate that over the entire country. It’s unfathomable that this could ever happen except in the rarest of circumstances.
I think that Kingside is right where the principal reductions, are reducing the amount of neg am interest accrued and not reducing it past the purchase price. It kind of makes sense to forgive late payments and the accrued interest since you didn’t actually loan that money out. You probably made a little money on the minimum payment they were making anyways, so it’s a lot different than cutting the principal below the original loan amount.
The only principal reduction you will see will be if and when Washington bites the bank lobbyists dreams and hits the taxpayers with the losses. I think we will see it before the 2010 elections. They will stick it into the next 10,000 page tarp that nobody will read. They already backed down from the cramdown because the band lobbyists would not allow the banks to take the hit…….after all…..who really runs our country ?
http://www.calculatedriskblog.com/2009/11/unsolicited-principal-reduction-offer.html
CR had this recent post about this, where the payments were brought down to affordability, but the loan was also stretched to 40 years, with a balloon payment coming due at the 30-year mark.
If this were offered to borrowers, there would probably be a lot of takers. Borrowers would be able to stay in their home and avoid the stigma of a foreclosure. They would simply be looking at the payments and believe in mantra that real estate prices don’t go down, at least in the long term. So, 25 years from now, they’d be able to sell to pay off the balloon payment and at least break even, or potentially refinance along the way.
Of course, the problem comes in for the borrowers who aren’t offered the principal reduction. Will they take that sitting down?
BottomFisher – it isn’t just about the banks, the moral hazard is at defcon 1 levels. You start reducing principal for people who speculated, lied on their loan applications or who are just making a “business decision” and walking away and every single person out there with a mortgage will get in line with their hand extended.
Just think of it this way:
You know where the apartment complexes are in your community? Well from now on about 40% of our single family home neighborhoods are going to be straight forward rentals. Absentee owners, flippers (who never intended to become landlords) and disgruntled homeowners caught in homes deeply underwater.
What this will do to our neighborhoods is the next chapter in our downward spiral.
Maybe I’m getting this whole thing wrong. Maybe this is how homeownership is suppose to work.
I have a friend in Charlotte, NC who has a neighbor who was helped out by a loan mod. My friend wasn’t sure about the details, but thought the principle was reduced and the interest on the loan was reduced to 3.5% for 3 years and then to 5% fixed afterwards.
Seems like a hell of a deal. Perhaps the homeowner knew someone in the bank. My friend is thinking that he should stop paying his mortgage and get in line.
Seems like a hell of a deal. Perhaps the homeowner knew someone in the bank. My friend is thinking that he should stop paying his mortgage and get in line.
I just have a feeling that many of these deals aren’t that much of one in the end. I just suspect that the banks are adding a catch to many of these loans (like they did the first time around) to make money on the back end.
One consequence of keeping borrowers in their homes, with whatever means are at the banks’ disposal, is that it will keep down the supply of homes on the market. I think we’ve already been seeing that.
Limiting supply and increasing demand is driving prices up or at least helping in their stabilization.
How long can the government and banks keep this going? Will the economy completely recover in time? V-shaped, L-shaped, W-shaped recovery?
Ronald,
I thought that CR stated that this was a “debt collection service”. I also called the number and discovered that you can wait on the line for quite a while and find nothing out.
Seems more like a carrot to get the delinquent borrower to call them.
As stated above, there is significant moral hazard to principal forgiveness. If they want to throw the borrower a bone and write off accrued interest, that may be in their favor, but principal forgiveness is unlikely to happen for anyone but friends of Dodd.
Of course, I’d be happy to take a retroactive one for the house I sold.
Chuck Ponzi
Kelja,
I also know someone who got their loan modded.
Principal is 240K, house is worth roughly 80K, if that (High desert).
Got a loan with a .01% interest rate (no joke) fixed for 3 years. No principal forgiveness, but monthly payment about 70% off.
As far as I can tell, when the bank can borrow at 0%, they’ll try to forestall foreclosure; which was the other option when he was 14 months delinqent, and bank had failed to foreclose in that time (bank hadn’t even sent a notice of default in those 14 months). Bank is Bank of America.
Loan mods may seem like a good idea to the bank, and might keep some people in their houses (compared with the last bust), but it’s another form of “Extend and Pretend”. Unless the housing market triples in the next 3 years, this person is likely to just walk away again. There’s just too much debt on the property, which is the case for many, many properties in SoCal.
Chuck Ponzi
Loan mods may seem like a good idea to the bank, and might keep some people in their houses (compared with the last bust), but it’s another form of “Extend and Pretend”.
I think the bank feels that the price of the house is not likely to go down much more. So, if they can get 4-5 years of more payments (even at 0%, because of the principal payments) while borrowing at 0% interest they are making money on the deal. The homeowner is likely making money because their new payment is less than rent. 4-5 years payments + selling at 80K looks like a better deal than selling at 80K today.
Chuck,
I forgot about CR’s follow-up on that “loan mod.”
It seems like the whole economy is in an extend and pretend mode. Businesses that can’t get loans from banks are forced to pay high rates on the bond market in order to stay alive. I see it as a game of chicken against the overall economy and against competitors. Which one will swerve first?