The Trouble with HAMP

It's distressing that the people in Washington who seem to be making up the rules as they go along seem to be willing to keep bailing the sinking ship instead of fixing the leaks.

HAMP, the program envisioned to mitigate the foreclosure disaster is a disaster in and of itself. Elizabeth Warren, the Chairman of the Congressional Oversight Panel told Treasury Secretary Timothy Geithner:

"We only have three months left with hundreds of thousands of families facing foreclosure. Is it time to rethink whether or not a mortgage foreclosure prevention program that is based on a group of servicers whom you describe as having done a 'terrible job' is a program that perhaps should be redesigned?"

We've been telling people mortgage modifications are not what they're cracked up to be for over six months: The Fairy Godmother and the Mortgage Modification Myth

Given that HAMP was designed by, and for servicers who have their own financial best interests in mind, any approach that relies on them to fix something they really don't see as broken is doomed to fail. And unlike Washington, the financial entities that own the servicers are thinking long term.

They have been for some time. The list of acquisitions by giant firms like Bank of America, JP Morgan Chase, Credit Suisse and Citi reflect the fact that mortgage servicing can be incredibly profitable even when foreclosures mushroom and REO inventories grow.

The financial services industry is an extremely patient lot. Even while the housing market founders, their potential customer base is shrinking. Fair Isaac reports that 25% percent of Americans have credit scores below 599, up from the 15% historical norm.

Some of that is represented by foreclosures - one of those can take 150% off a borrower's score and as of the end of March there were 1.2 million in process. No one wants to talk about what an application for a mortgage modification does to the applicant's score but you can be sure it's not a boost. And if a borrower walks away from a Fannie Mae mortgage there's an even more ominous threat:

"Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie-Mae-backed mortgage loan for a period of seven years from the date of foreclosure. ... Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on loans in jurisdictions that allow for deficiency judgments."

All-too conveniently, Fannie Mae gets to determine what 'capacity to pay' or 'good faith' mean in a workout with even the most obdurate or incompetent servicer.

As we have complained over the years, credit scoring (which fueled the rush to the disaster of automated underwriting) is fundamentally flawed and not only because of the GIGO (Garbage-In, Garbage-Out) syndrome.

Not knowing how the scores are used and applied, most people simply see a number - as do automated underwriting programs. A mortgage applicant that has only had that new auto loan for a few months but is successfully paying it on time may have the same score as someone who has a few late payments on credit cards.

The real issue is still simply one of borrower ignorance and too many players in the industry willing to take advantage of it.

Take a few minutes to watch the "Insanity" video (at right) to see where we believe the answer lies.

Craig and Dave

More on loan mods - beware of scams

Well it looks like someone is getting the message - The Loan Modification Scam Prevention Network is a consortium of organizations trying to get the word out on the proliferation of scammers trying to take advantage of borrowers who are in trouble.

The lead organizations of the effort include Fannie Mae, Freddie Mac, the Lawyers' Committee for Civil Rights Under Law (Lawyers' Committee) and NeighborWorks America, among others, with representatives from key governmental agencies, such as the Federal Trade Commission, the U.S. Department of Housing and Urban Development (HUD), U.S. Department of Justice, the U.S. Treasury Department, the Federal Bureau of Investigation, and state Attorneys General offices, as well as leading non-profit organizations from across the country.

Visit their site for more information: http://www.preventloanscams.org/

As we've been warning for many months, anyone who knows the least little thing about mortgages and is willing to cheat people is coming out of the woodwork to try and make money off of victims of the subprime mortgage schemes and frauds.

Some of them are even being prosecuted and sentenced to jail time but it's like trying to stop a flood while the rain is still falling up-river.

And Google isn't helping anything. A search for "mortgage modification help" brings up mostly lead generation sites for entities who allegedly provide assistance. Titles like "Government Mortgage Bailout" with lots of red white and blue and a bald eagle to boot (with only a tiny disclaimer at the very bottom) and "Fed Mortgage Loans" with a picture of the White House and links to various government sites (and no disclaimer at all) are nothing more than lead harvesters.

Some are clever enough to conceal the fact that they aren't associated with an actual attorney. Others are similarly clever enough to imply they are - when they aren't. Some have ceased operations but still show up in the searches.

The worst of the worst lead borrower victims into the conspiracy-driven "debt elimination" schemes and the world of anti-government so-called "sovereign movement."

While government agencies are often monolithic and unresponsive, in this opportunistic environment we are suggesting that after you do a little research at the above mentioned prevention site that you then start with HUD rather than risk being lured into a scam on the 'net:

Find a HUD Counselor

The only other option we would recommend is your own, trusted attorney - but the reality is, they aren't having a huge amount of success, either.

In any event, other than paying your attorney a retainer, don't pay anyone in advance for help with your mortgage. And don't expect things to happen quickly, especially if you don't have an incredible amount of documentation in-hand and are prepared to demonstrate with detailed proof that you can afford to pay for the house.

Craig and Dave

The Fairy Godmother and the mortgage modification myth

Today we saw the administration roll out another public-relations effort to somehow push mortgage servicers into the position of actually modifying loans on a permanent, as opposed to trial basis.

This time, instead of just handing them a few extra thousand dollars to try their best, now Washington thinks they’ll be able to embarrass them into doing something on behalf of the victims of predatory lending.

This is a really cruel thing to do to people who are hoping to keep their homes. Millions of people are reading the news and hoping they’re not going to have to be forced into finding alternative places to live.

It’s hard for us to understand why Washington can’t fathom the fact that mortgage servicers don’t have to do anything but look out for their own interests.

Washington helped Wall Street make this infernal machine and is simply powerless to control it when it runs amok.

The number of loans that will actually be modified is statistically invisible. Most will turn out to be little more than forbearance agreements to give the servicer time to figure out whether or not the borrower how much the borrower can pay – while collecting the bonus from the government. When it turns out that the borrower can’t afford to live where they live, well, we all know the outcome and that is foreclosure.

Worse yet – these alleged “modifications” indemnify the servicer against any legal action the borrower might bring for not only past actions but future abuses.

So here we are again, back to preaching that the only real solution is for people to stay out of these situations.

The Fairy Godmother isn’t coming, and nothing Washington can do or is doing is going to save the average victim of predatory sub-prime lending on a long-term basis.

If you’re going through the process of trying to get a modification, we strongly recommend you have a plan B and a plan C. The last thing you want is to come back to a house you think is yours and find the locks changed and your belongings on the street or in a storage space.

Craig and Dave

It's Getting Stranger by the Day

Like the TILA rescission trend we wrote of some months ago, there is another strategy gaining traction in this foreclosure tsunami, the produce-the-note defense.

It can work sometimes. It's VERY dependent on the judge and how he or she feels about the rules for standing of parties to bring an action to their court. But it's almost always a temporary delay because any case dismissal under these circumstances is done "without prejudice," which means the plaintiff can sue again as soon as they produce the required evidence of standing or sue on behalf of the correct party.

From what we've seen, the creditor's bar is working to educate their side of the legal profession as fast and as furiously as the consumer defense community is educating counsel on how to use it to defend against a foreclosure.

We don't believe this is territory for a borrower to head into on their own. It isn't a matter of the loan terms and conditions or TILA or RESPA violations. It's a matter of court rules, and those areas of the law vary from state to state and district to district.

One size does not fit all!

Craig and Dave

The Crowd is Getting Larger

Unless you live in a cave somewhere or just never watch any television or listen to the radio, you may not be aware of how many people are getting into the "debt ______________" business - pick a word: elimination, relief, reduction, consolidation, rescue, etc., etc.

It's like the opening day of fishing - the crowd knows there are going to be lots of fish and what we call "at-risk" borrowers are nothing more than fish to them.

The problem is, a lot of them want you to pay them up front before they actually do anything. Some of them aren't licensed. Others are actually nothing more than web sites used to collect your information to sell as leads to the debt or credit repair market. And as the news stories keep demonstrating, a lot of them are complete frauds and some can get you into illegal activities.

How can you determine whether or not they're legitimate?

The sad answer is you really can't be certain. But our recommendation is to NOT pay someone else to do something you can do for yourself. This isn't a plug but you can pretty quickly determine if you can do this with a simple tool like Charles Phelan's free downloadable guidebook (see links at right).

We've had a link to it for as long as we've been on the 'net, and no, we have no business relationship with him. It's just the most practical thing we've seen in helping people decide if they can do it themselves - and we strongly believe most people can.

So, some simple rules if you really feel you can't handle the task of negotiating down your debt on your own:

1 - Don't pay in advance and understand exactly how much you're paying in fees.
2 - Don't fill out any details about you and your financial situation on a web site form.
3 - Don't deal with any company that does not have a physical address and phone number.
4 - Make sure the company you're dealing with is licensed to provide their services in your state.
5 - Don't do anything verbally. Any and all agreements must be in writing and signed, including by someone at the company.
6 - Remember that "Consumer Credit Counseling" is a non-profit industry funded and controlled by the credit card companies. They may or may not have your best financial interests in mind.
7 - NEVER give a company authorization to take money out of your checking account automatically.
8 - Remember, if you do reduce your debt by more than $600, it will be reported to the IRS and you will owe taxes on the forgiven amount (at whatever your income tax rate is).

You're going to see more and more stories about these companies in the future, mainly because it costs almost nothing to actually get into the business and there are millions of desperate borrowers to try and lure into the program.

There are some chilling examples of just how fraudulent some of them are. Take a look at this story about Ameridebt and Debtworks.

And finally, there really is no such thing as "debt elimination" that doesn't involve paying all or some of the debt back to the creditor. Buying into one of the fraudulent schemes that claim you don't actually owe real money or that you can use secret legal means to do away with debt can even leave you in serious legal trouble. Some of the newer scams claim you can assign your debt to another company without the approval of the creditor. Another one that has been around for years offers something along the lines of a "private international administrative remedy" which is legally meaningless (and can cost you upwards of $2,500 to find out).

Be careful out there!

Craig and Dave

Don’t plan on loan modifications - here's why.

If you’re out there facing trouble with your mortgage, something that has to be rattling around in your mind is “Could my mortgage get lifted off my shoulders?”

In two words, probably not. In a lot of words we’ll attempt to explain why.

Very recent news items have probably given a lot of desperate people a false sense of hope – primarily those about Indymac and Bank of America/Countrywide. Indymac is being operated by the FDIC and BofA is basically polishing its consumer image by modifying loans Countrywide still has control of.

A little dose of reality is in order – and trying to explain it in market and accounting terms would put most readers to sleep, so we’ll use an analogy.

Imagine you want to be a farmer (investor).

You look to buy farmland along a stream or canal coming from a reservoir that is fed by a large number of water sources - basically wells up in the mountains because you need to irrigate whatever you plant every month. The reservoir/dam operator tells you how much water they are committed to release every month. It’s supposed to be a fixed, total amount that will decline slightly over some long number of years in a fairly predictable schedule.

Now, there are four of you (farmers) looking at that total monthly amount of water – you (AAA) are conservative and think you know your production rate and what you’re planting and the return you’ll get from the comparatively small amount of water you need from the stream. You buy the more expensive property furthest upstream to make sure you’ll have the same amount of water every month and you get a contract that says you’ll get it. No more, no less.

The next farm operation down the line (BBB) is paying less for that tract of land because although they may get more water to use, that amount isn’t guaranteed every month. They’re a little more willing to gamble because they think the rainfall and snowpack in the mountains is probably going to be normal. They’re pretty sure they’ll get more than enough to get a decent crop, despite knowing that their water contract isn’t a sure thing. But the relatively lower cost of the land seems to make the difference for them.

(CCC) is even more of a gambler. They’ve had enough good years behind them to take a shot at some low-cost land. They’re going to get more water than AAA and BBB but just in case, (if they aren’t completely clueless) they’ll plant thousands of acres with drought-resistant crops and hedge their bets in other investments.

The real risk takers (DDD) come in and basically say they’re so confident the weather forecasters are wrong that they’ll plant anything and everything on really cheap land downstream. They’re blinded by the money everyone else at that level has been making down here on this end because the people who say how much water is coming have told them it’s never going to stop. For years now the whole darn valley has had all the water they needed. And better yet, if the reservoir actually dries up, with the contracts they’ve got, they could even own the upstream water wells that feed the reservoir and we all know it’s eventually going to snow and rain again, right?

These farmers, not really knowing much about canals, water gates, etc., hire an expert manager (the trustee) to get the water from the stream to their farms. Everything seems fine for a few seasons. The weather forecasters (raters) aren’t predicting low rainfall levels. The reservoir/dam operator manages to keep the right amount of water going into the stream to make the water manager and his farmers happy.

Now – here’s where things come apart.

The reservoir/dam operator (the mortgage servicer) is starting to have trouble with some of the water sources (the borrowers). Some of the wells that feed the reservoir are drying up or are being blocked. In fact, the snow and rainfall feeding some of the tributaries to the wells just didn’t happen (the list of possible reasons is too long to put here) or what they’re now finding out is that thing that was supposed to be a well was nothing more than a mud puddle. And there are even quicksand areas.

So what does the reservoir/dam operator (servicer) do? Call the water manager (trustee) and let him know there isn’t as much water coming from the dam. He has to reduce the flow to the DDD farmer downstream. If things get worse, DDD doesn’t get any water at all and CCC gets cut back, and so on.

So when some of the wells run dry, these holders of the lower tier water rights suffer.

But they went in knowing the risks based on the weather forecaster’s (raters) track record. What they didn’t know is the reservoir/dam operator was paying the forecasters.

It all worked well for so long that everyone in the game was happy with it. Food was produced, consumers were getting what they wanted and everyone in on the game was putting away a fortune to retire on.

But the weather finally changed. Snow stopped falling on the mountains and runoff dwindled, wells dried up and eventually the downstream farmers couldn’t even plant, let alone harvest a crop. Their low-priced land became worthless while farmer AAA was still doing OK.

Trouble is the BBB, CCC and DDD farms had placed side-bets that they’d be able to get water and produce a crop. And their backers (other investors) had taken those bets. See, if I’m a farmer and I convince you I’m going to have $XXX after I harvest the crops, you might give me $X to let me buy seed and diesel to do it. But when there’s no water and I can’t produce anything, you’re stuck. I don’t have a penny; if I’m farmer DDD all I’ve got is equity in some dry wells up above the reservoir that I’m trying to get the water company to sell or fix.

Keep in mind it’s the financial backers of the lower-tier gambling farmers that are getting bailed out in this recent $700B legislation.

Now, back to the subject of getting a loan modified.

That water manager – the trustee works for the farmers. The reservoir/dam operator (the servicer) has a contract with the trustee. It’s the Pooling and Servicing Agreement (PSA).

Those lower-tier farmers aren’t exactly happy when things get dry. They have problems of their own. Water is everything. They want it for the crops they have in the ground – getting it next month or next year or some years down the road is out of the question. It’s this season that counts partly because of those people they gambled with (and borrowed money from).

And just to bring this to a real-world scenario – “farmer” is not really just one person. A farmer in this story can literally be dozens of bond holding entities, none of which can make decisions for the others let alone come to agreement on something.

So the normal course of events is to foreclose on the dry well and try to sell it to someone who has water from somewhere else.

Let’s say for the purposes of this analogy that when the reservoir/dam operator (servicer) takes over and shuts off a well (forecloses), they also know some people who are trucking in X tons of water to the reservoir from prior auction sales. In fact, those tons of trucked-in water are a regular part of the business. So much a part that even if five wells go dry this month, their former small flows are more than replaced by the truckloads that came in from five foreclosures in prior months.

So the FLOW of water to the farmers is actually sustained if that earlier process of selling off dry wells keeps the future tanker trucks coming – for a while, that is. Eventually, without enough producing wells, even the truckloads can’t keep the reservoir level high enough. The water company is still supplying farmer AAA, farmer BBB is getting less than they thought, farmer CCC has had to cut back their operation and farmer DDD now owns a bunch of dry wells and is beating on the water company to produce water for him again by selling them off.

But before things get to that point, between the still-working wells and trucked-in water, the reservoir/dam operator may figure they can keep the farmers happy for quite a while. And they’re the only player in the game who really knows where the water is coming from and where it’s going. Why go to the effort of modifying a well-water agreement if you can keep your down-stream customers happy?

Now, if things have gotten bad and the farmers are making threatening noises, there might be a motive to negotiate something to get more water over a period of time. But without the agreement of ALL of the farmers the trustee won’t budge. Good luck with that.

Craig and Dave

The sky is falling, the sky is falling! Well, not really.

Wow is about all we can say, and not about the bailout or the hearings or the investigations - it's the way it's being portrayed.

The hysteria over what is going on in Washington and New York seems to be mounting, and the “news” media has stepped in to keep us all breathlessly flipping channels and surfing sites, listening to talk shows and of course – being saturated with advertising.

And a lot of people seem to believe something major is going to change in their loan situation; they’re not sure what it is, but maybe, just maybe the really ugly mortgage they’re in is going to get fixed or that the perpetrators of this mess are going to be punished.

It’s too early to know what the legislation is or isn’t going to let the Department of the Treasury do, but we believe it’s a safe bet that hiring several thousand people to redo troubled loans and provide great customer service isn’t going to be part of it (this is, after all, the home of the IRS). And we really doubt there is going to be a servicing bureau in the Treasury. They’ll probably see no need to change servicers.

Short view – NOTHING CHANGES on your loan. Long view – if you have a really bad loan in a really bad pool of similar loans and it gets bought by the Treasury, it all depends on what powers the Treasury secretary is given to deal with it and who they sell it to when they’re ready.

But still, you better not count on them negotiating a modification with you. Some sources indicate the way the law is currently proposed would allow the Treasury to cancel existing PSAs and auction the servicing rights to the highest bidder. At least one believes they’ll do what is known as a “cram down” where the principal balance will be forced down to the value of the property and the interest rate will be set to some viable fixed rate. We don’t think they’ll be equipped to do that on an individual loan basis.

The lending industry is fighting hard to keep that power out of the hands of bankruptcy courts, but if the Treasury department owns the loan, there apparently isn’t anything stopping them from doing the loan modifications across the board on a pool.

There may be some good news in the future for a certain number of borrowers, but given the fact that it’s a bureaucracy we don’t hold out a lot of hope.

In the mean time, the Fairy Godmother isn’t coming to help most borrowers.

Craig and Dave