The phrase “Delinquent Mortgage,” once a foreign concept for many Americans, has now become part of our everyday vernacular. When nearly 4 million homeowners are currently 60 or more days behind on their mortgages, it is actually no surprise that citizens nationwide are buzzing about the housing crisis. That crisis is worse here in Las Vegas than it is in many other areas of the country and Las Vegas citizens are certainly feeling the economic pinch.
More than 60 percent of homeowners nationwide who have seriously delinquent loans are still not involved in any form of loss mitigation with their lenders, probably due to the frustration with the processes available. In fact, a recent performance report indicates that nearly half of the property owners approved for trial loan modifications have fallen out of the program. By the end of July 2010, approximately 616,839 out of the total of 1,307,489 HAMP three-month trial plans have been cancelled since the program began. This tremendous dropout rate may be due to the lengthy process of obtaining a permanent modification. For instance, as a result of the backlog, only 36,695 HAMP restructurings were converted to permanent status during the month of July.
For those who are already involved in loan modifications or short sales, the process may soon become even more difficult and time consuming as Fannie Mae and Freddie Mac have become more aggressive in forcing originating lenders to buy back bad loans. A report by Fitch Ratings illustrates that, in a worst-case scenario, the buybacks may result in a combined loss of between $17 billion and $42 billion for the nation’s four largest banks – Bank of America, JPMorgan Chase, Wells Fargo, and Citi. Considering these numbers, it is safe to assume that the process will become even more tedious.
Despite homeowners’ understandable frustrations with the short sale and loan modification processes, these avenues may preserve some homeowners’ rights down the road. For example, if a lender tries to pursue a deficiency judgment following a foreclosure, the homeowner has the ability to demonstrate efforts to work with the lender to mitigate losses. It is hopeful that the courts will not turn a blind eye to these whole-hearted attempts. As such, underwater homeowners should become informed, seek assistance from a legitimate source, and do their best to stay patient.
Kelle L. Kuebler, Attorney*
*Licensed only in New York and Connecticut
According to a new report from the State Foreclosure Prevention Working Group, a group of state attorney generals and bank supervisors across the country, loan modifications made in 2009 are forty to fifty percent less likely to be delinquent six months after modification than loans modified at the same time in 2008. Additionally, the report states that loan modifications which include a principal reduction have a lower rate of re-default. While the report recommends principal reductions due to the improved long-term success of the loan modification, principal reductions have been rare to this point. According to the report, only one in five modifications reduces principal. Moreover, the report shows that seventy percent of loan modifications actually increase the amount of principal owed due to the addition of penalties, fees, and late payments. The Home Affordable Modification Program (HAMP) provides for principal reductions as an alternative to its waterfall modification. However, due to the fact that government sponsored entity (GSE) loans are not eligible for principal reductions and reductions are optional, it is unlikely the principal reduction alternative to HAMP will have much impact.
Starting September 7, 2010, the Federal Housing Administration (FHA) will offer a new refinance program to qualifying underwater homeowners. To be able to participate in the program you must be current on your home loan, your credit score must be 500 or above, and the home must constitute your primary residence. Further, all lien holders related to the property must agree to the refinance and agree to write off at least ten percent (10%) of the unpaid principal balance. As most borrowers know, lenders are loathed to write off any of the principal regardless of the possible incentives. The program does, however, offer more incentives beyond new FHA-insured mortgages. The program contemplates certain incentives for any second lien holders to provide a full or partial extinguishment of the lien. HUD says interested homeowners should contact their lenders to determine if they are eligible and whether or not their lender agrees to write down a portion of the unpaid principal. Keep in mind that the present loan must be a non-FHA loan.
Before convening on its August break, the House of Representatives passed the Real Estate Jobs and Investment Act of 2010. The bill advances the real estate industry’s goal of increasing foreign investment in Real Estate Investment Trusts (REIT). The Bill doubles foreign investors’ allowable ownership interest in a REIT to 10%. Anything over that percent ownership is then subject to the Foreign Investment in Real Property Tax Act (FIRPTA). Congress hopes that increasing the allowable foreign ownership interest will stimulate the US commercial real estate sector with minimal fiscal impact.
Rarely does a loan modification include a principal reduction. The typical 
Beginning September 7th, the Federal Housing Authority (FHA) will offer FHA-insured mortgages to qualifying borrowers who have a non-FHA mortgage. To be eligible, the borrower must owe more on the mortgage than the home is worth, be current on the mortgage, occupy the property as a primary residence, qualify for the new loan under standard FHA underwriting requirements, and have a credit score of at least 500. Similar to the under-performing Home Affordable Refinance Program (HARP), the FHA program will have limited affect on the current housing situation because so many borrowers are behind in their payments and lenders are reluctant to write off a portion of the principal.
