Yesterday’s article "Is 103 Months to Clear Housing Inventory Too Optimistic?" included an excerpt from the WSJ’s "Number of the Week: 103 Months to Clear Housing Inventory," suggesting there were at least 103 months of housing inventory yet to hit the market. Patrick Pulatie, CEO of Loan Fraud Investigations, wrote to me that he believed the 103 estimate was far too low.
One of Pat’s reasons was that "the HAMP modifications will have a failure rate of at least 75%. That is due to the Debt Ratios that the mods are approved at. In Feb, the mean ratio was 59.8%. In Mar, it was 62.7%, which to increase that much, most every Mar approval was far above the 62.7 number."
In this article, Pat discusses the HAMP loan modification program in more detail.
Over the last year, I have been watching the HAMP modification program with great interest. I have wanted to believe that the Federal Government would actually put into place a loan modification program that would help homeowners, though I knew that this was likely false hope. The results are now in, at least in my opinion.
HAMP is a fraud. Nothing else can be said otherwise. The Government has once again put into place a program that will not help homeowners. Instead, HAMP modifications will end up postponing homes foreclosures for a period of time for modified loans, but, most will end up losing the home in the end, except for a “very” lucky few who actually make it. I cannot believe that the Government expected anything other than the HAMP program would end up being a failure. To understand what to expect, we must look inside the numbers.
In March, the February results for HAMP were released. Key points of the update were:
* 1.3 million total trial modification offers.
* Almost 1.1 million trial modifications have begun since the program began.
* 72,000 new trial modifications started in February.
* More than 170,000 permanent modifications granted to date.
* 91,800 other permanent modifications offered and awaiting acceptance.
* 0.9% permanent modifications cancelled
* 8.8% total modifications cancelled, 88,663 total
If one looks at these numbers and compares the numbers to Dec and Jan results, it appears that HAMP is becoming a “Great Success”.
However, the numbers are circumspect if one considers that “trial modifications” are modifications that have been started without any verification of income, or confirmation of meeting HAMP guidelines for modification. The lender must over the trial period determine whether the homeowner meets HAMP guidelines, and if not, the homeowner is declined for the modification and the foreclosure process continues.
It is bad enough that trial modifications are started without determining whether the homeowners meet HAMP guidelines, but look inside a couple of selected numbers. The February review states:
* Front End Debt Ratio – from 45% to 31% – Median Point
* Back End Debt Ratio – from 76.4 to 59.8% – Median Point
The Back-End Debt Ratio is the key to understanding how effective HAMP will be. The “Median” Debt Ratio means that 50% of all modifications are above the Debt Ratio and 50% are below the Debt Ratio. The HAMP statistics state that the Mean Back-End Debt Ratio is 59.8%. What does this really mean?
Debt Ratios are calculated by taking monthly debt and dividing it by the total Gross Income, before taxes. Front-End Debt Ratios are calculated by taking the Housing Payment consisting of Principal, Interest, Taxes and Insurance and dividing by Gross Income. Back-End Debt Ratios use all debt, housing plus consumer debt for calculating the Debt Ratio.
Prior to the housing boom, under traditional Underwriting Guidelines, the acceptable Front-End Debt Ratio would have been 28% and the Back-End Debt Ratio would have been 33%. As standards loosened, it became 31% to 38%. By 2006, Subprime loans allowed 50%-55% Debt Ratios and traditional loans were 45%. We have seen how those debt ratios worked out.
The Government is “bragging” about having the Mean Back-End Ratio at 59.8%, so half of the loans are above 59.8%. But during the Housing Boom, 59.8% would have meant being declined for a loan due to a lack of an ability to repay the loan.
What has changed to make 59.8% acceptable? Nothing!!!
To further understand how these loan modifications will fail, let’s take a look at the numbers in greater detail. The “homeowner” for this scenario has verified income at $10,000 per month.
* Total Gross Borrower Income of $10,000.
* Front End Debt Ratio of 31%, means Housing Payment of $3,100 per month.
* Back End Debt Ratio of 59.8% means total Monthly Payments of $5,980 per mouth.
Wow!!!! There is $4,020 left over for the homeowner. OOPS!!!!!! Not so fast……
The Income of $10,000 is Gross Income. So let’s change the numbers a bit.
* If a homeowner has a $10,000 per month Gross Income, and he has a great accountant and tax guy, he is in a 33% bracket for Federal and State Taxes, Social Security, Disability and other Deductions.
* After deductions, his income is $6,667 per month, take home pay.
* Subtract out the 59.8% Debt Ratio and he has $687 per month to live on.
* From the $687, he must cover food, fuel, utilities, medical insurance, clothing, phone, cable and other miscellaneous expenses. And, if he has several children, these expenses continue to mount.
As can be seen, there is no way over any extended period of time that this borrower will be able to continue to make the Modified Loan Payment and the other Consumer Debt. Either he will begin to miss payments on Consumer Debt and just make his Housing Payment, or he will simply give up on the mortgage and prepare to lose the home. There are no other solutions available, unless he attempts bankruptcy on the consumer debt and even that may be questionable.
(This analysis does not even cover what happens when the interest rate increases 1% per year after 5 years of being fixed. This will likely mean doom as well, unless income has dramatically increased for the homeowner.)
In summary, as I have shown in black and white and in the numbers, HAMP modifications are fatally flawed. For every person approved for a modification under HAMP, if they are above the MEAN Debt Ratio in the February analysis, the modification will fail. Even for people with just 50% Debt Ratios, modifications are still likely to fail.
Therefore, HAMP is a fraud!!! The Government knows this, and now you know this. The truth is that the government wants you to fail. Otherwise, the government would develop a modification program that truly worked.
What are the options for a homeowner? The only real option that exists is to hire a competent attorney to fight for you. Even then, there are no guarantees.
But, the Government and President Obama do not want you to do that. President Obama has publically stated that the lenders will work with you to do a good loan modification. He has also stated you should not hire a person to work on your behalf because lenders will do a modification for free. Yet, there are now stories in all 50 states where lenders are charging fees for loan modifications.
Senator Charles Grassley does not want you to do a loan modification. He had placed into the HAMP Guidelines a section that loans origination in fraud should not be allowed to be modified. What does he consider “fraud”? Loans that were stated income. So that is why income verification is required. What Senator Grassley conveniently “forgets” is that the lenders created the stated income loans. The lenders had homeowners sign 4506-T’s, Requests for Tax Returns that could be obtained from the IRS to determine if the income stated was accurate. But did the lenders check? No! If the 4506-T came back with different income, then the lender would have had to decline the loan. The lender would then be complicit in the fraud. (This does not even cover the fact that many loans were lender originated where the lender determined the income for the borrower and not a broker. But I guess that does not meet Senator Grassley’s definition of fraud either.)
Former California Governor and current Attorney General Jerry “Moonbeam” Brown does not want you to do loan modifications. He has stated that lenders will do modifications for free. And he stated that you should not go to loan modification companies or attorneys for help. He has even gone so far as to state that forensic audits are not effective and they should not be gotten. Yet, often the true “forensic audit” or “Predatory Lending Exam”, will be the only hope for the homeowner. Attorney General Brown does not want you to have your day in court to contest what the lenders are doing. (I wonder how much money the lenders have contributed to his campaign.)
The California Senate Banking Committee does not want you to do loan modifications. This was the committee that sent SB-94 to the governor for signing that outlawed the taking of advance fees for work by both loan modification companies and attorneys who do loan modifications. They would like to try to prevent upfront attorney fees for attorneys who file lawsuits for the borrowers.
Governor Arnold does not want you to do loan modifications. He signed SB-94 and has also stated that lenders will do loan modifications for borrowers.
So, we are faced with both State and Federal Governments who have no desire to help the homeowner in distress. Instead, they promote phony programs designed to do nothing but create the impression of a desire to help homeowners. All these programs are nothing more than smoke and mirrors.
Instead, the Government actively supports the lenders, providing TARP bailout funds, and helping people like George Soros buy failing banks in “sweetheart deals” that allow Soros to make even more money at the expense of the people of the US. Meanwhile, the people in the US suffer from falling home values, foreclosure, job loss from a poorly performing economy and other absurd programs that only help the special interests of government and their allies.
Where we go from here, I don’t know. What I do know is that the one country in the world that has been a “shining beacon” for the rest of the world is under duress and in serious financial trouble. If the truth be told, and it will not be told, the US is bankrupt, and due to the refusal of the Government to admit this, things will only get worse.
Yet, the government refuses to help out anyone except their “buddies”, banks and Wall Street. The is because the campaign donations necessary to remain in power comes from these entities. So, the homeowner will continue to suffer, and the lenders will continue to feed at the government trough.
What will happen to the Housing Market in the next few years, I can only guess, but it will not be pretty. Home values will drop again, likely 20% or more. Housing sales will continue to weaken, due to falling demand, falling values, lack of qualified buyers, higher interest rates, and greater unemployment.
Maybe, by 2020, we may see some return to “normalcy”, whatever that term will mean then. But, I fear that the future will be radically different than what we have known previously, or even now.
Patrick Pulatie is the CEO for Loan Fraud Investigations, at www.loanfraudinvestigations.com, a Predatory Lending Audit firm.