Why Mortgage Modification Isn’t Working The loan adjustment success rate is just one percent By Arkadi Kuhlmann
This article appears printed with permission ING Direct and originally appeared in the Opinion column of the Jan. 20, 2010 edition of The Wall Street Journal.
For those who take the position that foreclosures are always comps with equal weight as sales, occurring within the conventional market, they are wrong, too. In this case, the appraisers only data lies within the old comparables at $400,000, current listings as low as $300,000, a sales contract of $300,000 and two foreclosures averaging $225,000. The answer lies somewhere in between the $225,000 and the $400,000, and it is up to the appraiser to determine where the value lies within this range of central tendency. Just how accurate are foreclosure comparables, and how much weight must they carry? While we will not attempt to resolve the dilemma of placing a value on the hypothetical property, we will attempt to lay to rest the part a foreclosure should play in a value decision by an appraiser. First, foreclosure properties are often very comparable to many subject properties being sold and requiring appraisals. The appraiser not only is able to use them in determining a value if they are comparables which have sold within a market, he or she has a responsibility to report them and to consider their effect on value. Second, many foreclosed properties simply do not provide unadjusted value indications that are consistent with the relevant market for subject properties. They are not consistent with market values, and while the appraiser is bound by Uniform Standards of Professional Appraisal Practice (USPAP) to report and consider them, they must be adjusted appropriately, if, and when, used as comparable sales. When considering foreclosures as comparables within a market, the appraiser must consider how the properties were sold. Were they sold at auction at the courthouse steps, as in the example? Was the buyer able to gain access to the property in an effort to perform a physical inspection? Were they sold by a realtor, representing a bank, after the properties have already
passed through to the bank through the auction process? If sold by a realtor for a bank, was adequate time given for normal marketing or did the bank want to sell the properties quick to get them off its books? Also, what was the physical condition of the comparable foreclosures? Were they damaged; had they been repaired; had they been remodeled? Did the buyer have adequate time to obtain financing to support the purchase? Finally, foreclosure properties are very similar to any other property considered as a comparable. If there were circumstances, such as poor physical condition, lack of inspection access, inadequate loan application time or a compulsion to sell quickly, allowances must be made for these differences. In some cases, the differences may be so significant that the comparable is rendered useless or of little value. In such cases, the sale should be reported, but not included or given weight as a comparable sale. In other cases, only slight adjustments or no adjustments may be required. Whatever the case, the appraiser is required to consider all comparable sales, occurring around the time the property is sold. Whether the comparable is a foreclosure or a more traditional sale, the appraiser is required to give consideration to the data it provides and use the information appropriately. If the appraiser uses a foreclosure as a comparable sale, this does not mean that he or she is wrong. It may mean that he or she is just doing his or her job. It may have qualified as a comparable, and may have been the only relevant data from which to render an objective opinion of value. Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, e-mail charlie@elliottco.com or visit his company’s Web site, www.appraisalsanywhere.com.
• Rapid Rescore (NO DOC) • Score Increasing Tools • Monthly Credit Score Monitoring (SCORE WATCH) • Instant Credit Reports • Same Day Credit Supplements Here’s what our customers are saying: “My loan officers have been closing more loans by running credit reports through PCS’s credit scoring services”
FEBRUARY 2010
Learn more about our services by calling, Lorenzo Pugliano, President and CEO at 631-299-2084. www.platinumcreditservices.com
ALABAMA MORTGAGE PROFESSIONAL MAGAZINE
continued on page 34
continued from page 28
www.NationalMortgageProfessional.com
Last year, more than two million Americans lost their homes to foreclosure. This year, that number is expected to be even higher. Foreclosure takes a huge toll on homeowners and their families, and sends shockwaves throughout the economy. Yet since the start of the recession in 2007, more than five million homes have been taken back by lenders. The Center for Responsible Lending (CRL) estimates that as many as 13 million more homes could fall into foreclosure over the next five years. To combat the foreclosure epidemic, the Obama Administration created the Home Affordable Modification Program (HAMP) last February. As part of this program, the Treasury Department plans to spend up to $75 billion in financing mortgage “modifications” for struggling homeowners. The modification process changes the terms of the mortgage with the aim of making it more affordable, typically by reducing a borrower’s “… up to 99 percent interest rate, lowering his monthly payment, or of eligible homewaiving or reducing past charges. Unfortunately, owners struggling HAMP has had less than stellar results. with their mortgage Since the program began, more than three payments have been million homeowners have become eligible for assistance. In turn, mortgage servicers have unable thus far to reached out to these borrowers, initiating the modify their loans.” modification process. Roughly 760,000 homeowners have received loan modifications on a trial basis. But just 31,000 modifications have been made permanent. That’s a success rate of just one percent. This means that up to 99 percent of eligible homeowners struggling with their mortgage payments have been unable thus far to modify their loans. A big reason for HAMP’s limited success is that the government is suffocating banks with counterproductive accounting rules. Under current law, if a bank modifies a mortgage, it must record the write-down as an expense on its books. For example, if a homeowner’s monthly mortgage payment is reduced by $400 per month for 24 months, the bank has to report that it “lost” $9,600 ($400 times 24 months). The bank, though, didn’t lose any money—it’s still scheduled to receive the totality of the loan principal, just less interest. This rule, for obvious reasons, makes banks reluctant to modify. They don’t want to take the “loss,” which can get very big for larger mortgages with long modified periods. So there’s a huge financial disincentive to offer modification. The incentives are misaligned elsewhere, as well. Mortgages are often sold by the original lender to a third-party investor. Problem is it’s often not in the interest of that outside firm to modify the original loan. In fact, mortgage servicers get additional fees if a home forecloses. Similarly, if a mortgage has been folded in with other loans as part of a larger financial device, such as a mortgage-backed security, modification could reduce the monthly cash stream that device generates. Another obstacle comes from auditors and regulators, who are imposing an ever-increasing load of paperwork on customers and banks looking to modify. In many cases, there are more forms needed to modify a loan than to get a mortgage in the first place. Finally, regulators haven’t done enough to protect banks from “strategic defaulters”—that is, homeowners who aren’t facing financial difficulty, but purposely underpay (or stop paying) their mortgages in the hopes of getting a
value nation
31