The Warren Group web page recently published a series of statistics from the Massachusetts Land Court that showed foreclosures initiated by lenders grew at an alarming 28% from 21,000 in 2008 to 29,000 in 2009. This increase in foreclosure activity can be attributed to a deep national recession accompanied by a 10% unemployment rate and a real job growth rate forecast of only 9%.
Still, the Warren Group data did show some signs of relief. A 33% decline was seen in the number of actual foreclosures from 12,000 in 2008 to 9,200 in 2009. Based on data from the foreclosuresmass.com web site, foreclosure activity in the first quarter of 2010 totaled 3,500. For the year this represents half the total number of foreclosures from the previous year.
These statistics show that the foreclosure rate is slowing down due to a modification program. “Mods in a Box” help to refinance borrowers towards affordable, long-term mortgages while adjusting an improved rate of return for banks and their investors.
What is the Federal HAMP?
The federal Home Affordable Modification Plan (HAMP) called for $50 billion to be taken from the Troubled Assets Relief Program (the TARP stimulus package) and used to help responsible homeowners avoid foreclosure. This plan helped struggling homeowners to make mortgage payments due to decreased income, job loss, or because their mortgage calls for higher payments after the introductory period sub-prime. As of February 2010, 29% of 3.4 million homeowners 60 or more days overdue have started some form of federal modification, which is close to 1.1 million people. The U. S. Treasury has estimated that 1.8 million loans meet HAMP requirements.
The modification program results are mixed so far. HAMP has been criticized for its tough rules. HAMP does have limits. The program will only consider senior mortgages for revision. It does not look to revise a second mortgage. Banks generally will only rewrite a second mortgage over a period of years so that they can spread out their losses. The other factor influencing the HAMP is the increase in foreclosures, indicating that there is a large demand.
What is the State Agreement?
The Tri-Town Transcript reported on March 24th that Attorney General Martha Coakley reached a significant settlement with Countrywide Financial Corporation (Countrywide) that will provide an estimated $18 million in loan modifications for Massachusetts homeowners. Countrywide was previously one of the nation’s largest mortgage providers. After Barack Obama became president, Countrywide was sold to Bank of America as part of the TARP financial plan to help troubled financial institutions.
The settlement, filed on March 24th in Suffolk Superior Court, expands an earlier agreement that Countrywide reached with 43 other state Attorneys General and the District of Columbia in 2008 for loan modification for certain delinquent borrowers. The settlement also builds on standards set forth in the HAMP, as administered by the United States Treasury.
What are the Key Provisions of the State Agreement?
Attorney General Martha Coakley’s agreement with Countrywide Finance will help homeowners to stay in their homes, thereby strengthening local communities and stabilizing the local housing market.
This two-tier agreement provides $18 million for mortgage modifications for Massachusetts homeowners. Mortgage modification means principal reductions of certain types of sub-prime mortgages like Pay-Option and Hybrid that are designed for people with lower credit ratings. These mortgagees, who are classified as delinquent, may qualify for HAMP eligible mortgages.
The bank will cut the principal owed on certain mortgages by 30 percent. The objective is to try to make these mortgages perform again. The bank estimates that it will be able to offer these enhanced principal reductions to about 45,000 people who qualify for a HAMP modification, for an estimated $18 million in total reduced principal statewide. The modification of the principal will help homeowners to make payments and lessen mortgage abandonments. Mortgage time frames may also be reevaluated, and some of the risk costs that are passed on to borrowers may be modified.
Countrywide Finance will also make a payment of $ 4 million to the Commonwealth. Of that, $2.4 million will go to Massachusetts homeowners who already lost their homes to foreclosure. The remaining funds will go to investigations and monitoring of the agreement.
The second tier calls for the establishment of a customer service unit that will travel throughout Massachusetts and neighboring New England states for face to face mortgage modification assistance, along with resources and information provided to homeowners. This reorganized unit will help to reduce legal costs and time associated with mortgage processing. Most importantly, mortgagees and their counselors/lawyers will have for the first time a contact working for the lender locally to amend mortgage agreements.
Factors Contributing to the Massachusetts Agreement
Bank of America (BOA), one of the largest mortgage servicers in the nation, is changing its business lending practices to give mortgage homeowners relief. The bank will forgive up to 30% of some customer balances. The main criteria for the mortgage modification are that homeowners must have missed at least two payments and owe at least 20% more than the home is currently valued.
Ieva M. Augstumus wrote in the March 24 edition of Business Week that BOA’s agreement with U. S. Attorneys General—including our own Martha Coakley—is multifaceted. This agreement resolves legal issues involving homeownership as well as the potential for more state and federal court cases. Court actions involve legal expenses that are astronomically high. These legal issues also paint banks with a negative image. Housing abandonment and physical deterioration and vandalism of properties cost banks thousands of dollars and destabilizes communities as well as the local housing market. Mortgage abandonment by homeowners costs banks money that they have to write off, which has a vastly destabilizing effect.
BOA concluded that mortgage modification of the principal would be less costly in the end than having homeowners walk away from mortgages. The lenders will still generate income from the mortgages, but sums will be compounded to include a loss of income. This modification will help to stabilize housing market in the end.
BOA is utilizing its experience in the mortgage industry and working with the Obama administration at ways to take mortgages that are underwater and turn them around. This modification of principal will greatly reduce foreclosures and make mortgages perform once again. The modification process will make money for the banks, although at a lower income level. It will keep people in their homes, and most importantly will help to stabilize the housing market and home prices. This will ultimately change the banks’ public relations image in the eyes of the consumer.
Bank of America is implementing a change in the mortgage industry that is overdue. Reduction of principals by 30% on a $325,000 mortgage to $200,000 will help to make the financial instrument work for all parties involved and still earn the bank money, though at a lower rate of return. According to the modification plan, in this example the $100,000 in reduced principal is placed in an interest free account. The bank will then knock off another $25,000 as long as the homeowner continues payments.
The downside to this agreement is that BOA will typically only modify first loans. They will only revise second loans only if they were the originator. Homeowners
will have to work with HAMP or initiate some renegotiation working with their counselor and the bank or the federal agency. The challenge for homeowners who are at greatest risk of foreclosure or have poor credit is to see the program through in very tough economic times.
Wells Fargo and Citi Group announced on the Yahoo Finance web site on the evening of March 24 that they have also started to implement the mortgage modification process involving principal reduction. Wells Fargo elaborated that it has modified 52,000 adjustable rate mortgages, meaning mortgages that have costs the borrower has paid following the Wells Fargo takeover of the Wachovia Corporation. The Wells Fargo program serves a total national population of 150 to 200,000 people. Citi Group announced later in the evening of March 24 that it was developing a mortgage modification plan to present to the U.S. Treasury for recommendation.
Another large lending bank, J. P. Morgan Chase & Company, declined comment, though their version of the program will likely be released shortly. If they do not respond in a reasonable 3 to 5 months, then Attorney General Coakley can threaten the bank with a lawsuit.
Coakley deserves recognition for her work in refusing to sign on the initial agreement, instead fighting for a plan that truly helps the Commonwealth and provides a larger rate of return. Coakley has done an outstanding job in persevering through a very complex, controversial issue, refusing to settle for a relatively lower figure in the amount of principal to be reduced.
I encourage Massachusetts residents to contact Governor Patrick and demand that he take the lead from Attorney General Coakley to get this plan implemented immediately. By this, I mean that all banks should have a mortgage modification program in place in no more than 1 to 2 months.