Need a loan mod and chapter 7

[IBroke]

The principal-reduction will be determined on a case-by-case situation and in general, was always considered an option, not the rule. It really seems that Freddie Mac is not allowing it while others are. I was a bit confused because I thought all of a sudden, it wasn't allowed any more in general. And yes, there is a difference between "may" and "mustn't".

However, I don't see a reason why the 2nd mortgage has to approve anything. A principal forgiveness is in the best interest of a second lien holder. A high first lien makes a second lien worthless for decades to come because it's virtually unsecured. The lower the principal on the first lien, the earlier the second lien might have a value again.

In addition, only the TERMS of the first lien are changed. The lender stays the same so I doubt the second lien holder has much to say.

The NPV-calculation actually favors the borrower if there is NO principal-forgiveness.

The NPV-calculation should determine if a lender is better off with or without a HAMP-modification. A high principal-balance makes it difficult to deny a modification. Sounds strange but here's why:

If a lender is not willing to reduce the principal balance and doesn't want to modify the mortgage, it will be very difficult for him to come up with a negative NPV-evaluation. The reason is that without a modification to lower payments, the likelyhood of foreclosure is much higher. And if they don't reduce principal, they will lose that money right away and for good at the foreclosure. After all, a property is only worth what it's worth RIGHT NOW. Foreclosure-costs and property-managment expenses (taxes, HOA-fees etc.) are also due in that case. These factors lead to a positive NPV-evaluation, meaning the lender would be better off under the modification.

Now if they keep the principal up, chances are they might get the money at the end of the loan or whenever the loan is paid off early.

This might be the reason why many lenders prefer to hold on to their principal - but on the other hand, coming to a negative NPV that would allow them to deny a modification is much more difficult in that case.

And when the NPV is positive, they MUST modify.

[IBroke]

I'm confused, because in some of your posts you claim they offered you a principal reduction, in others you say principal forbearance. Which is it?

They offered us forgiveness of principal (about $200K) prior to the program. When asked about forgiveness WITHIN the program, they said it's negotiable.

Forbearance will be part of the modification anyway - no matter if they forgive or not. Without it, it will be impossible to reach the 31% - even over 40 years and/or 2%.

[hereforinfo]

I'm not sure you understand exactly how NPV works. Besides, the bigger lenders are permitted to use their own rates to determine NPV so the outcome may vary between lenders.

Freddie Mac backs about half of all mortgages in the US, so if they back your loan then their policies apply.

As far as the liens are concerned, the second lien holder has to agree to resubordinate if the modification is such that would risk the position of the first lien. The second lien holder gains nothing by doing this and is under no obligation, plus they put themselves at risk of violating ambiguous terms of their PSA's and litigation from the investors. They often use it as a negotiating tool to try and get the first lien holder to pay them to extinguish, which is unlikely to happen because doing so would then probably cause the NPV to become negative, making the modification a no-go.

The bottom line is that legally the modification has to benefit the investor first, as that's where the servicer's duty lies.

[2Bshinyandnew]

The NPV has me very confused as well. I mean, under what circumstances would the NPV be negative? If a loan is in imminent danger of default or is already in default, wouldn't a HAMP mod be more beneficial than foreclosure, even if there was equity in the home? I would think that 2% of principle is better than nothing, right? If the bank forecloses or the homeowner sells, even at a price high enough to cover the payoff, isn't that a loss of to the investor, compared to modifying and at least getting 2% of principle?

Any examples of a negative NPV?

[IBroke]

The NPV has me very confused as well. I mean, under what circumstances would the NPV be negative? If a loan is in imminent danger of default or is already in default, wouldn't a HAMP mod be more beneficial than foreclosure, even if there was equity in the home? I would think that 2% of principle is better than nothing, right? If the bank forecloses or the homeowner sells, even at a price high enough to cover the payoff, isn't that a loss of to the investor, compared to modifying and at least getting 2% of principle?

You hit the nail right on the head. In a market that bad and considering the financial circumstances borrowers are in to qualify for HAMP in the first place, It's hard to imagine that many lenders would be better off with a foreclosure.

In our case, the lender has the choice between a modification or foreclosure. Our principal-balance is about $500K and the value is at $350K. If I understand NPV correctly, the lender has to determine the future "cash-flow" under the two circumstances (modification or not). So how can the lender be better off with a foreclosure? Under the odification, the lender receives incentives PLUS interest-payment PLUS the option to keep the lien. These facts lead to a positive NPV.

The only "cash-flow" the borrower would receive in case of a foreclosure would be the (very low) current market value MINUS the expenses of foreclosure AND maintenance-fees until the property is finally sold again.

[IBroke]

I'm not sure you understand exactly how NPV works. Besides, the bigger lenders are permitted to use their own rates to determine NPV so the outcome may vary between lenders.

Freddie Mac backs about half of all mortgages in the US, so if they back your loan then their policies apply.

As far as the liens are concerned, the second lien holder has to agree to resubordinate if the modification is such that would risk the position of the first lien. The second lien holder gains nothing by doing this and is under no obligation, plus they put themselves at risk of violating ambiguous terms of their PSA's and litigation from the investors. They often use it as a negotiating tool to try and get the first lien holder to pay them to extinguish, which is unlikely to happen because doing so would then probably cause the NPV to become negative, making the modification a no-go.

The bottom line is that legally the modification has to benefit the investor first, as that's where the servicer's duty lies.

I'm not sure if Freddie Mac is backing our loan but according to the documents we received so far, it appears our servicer used the samples from Fannie Mae.

How can a modification "risk" the position of the first lien? The first lien stays first lien, no matter if there is a principal forgiveness or not. You can also have a second lien with a higher principal balance than the first. The order of liens has nothing to do with the principal owed.

If a house is sold or foreclosed on, the first lien is paid off first, followed by the second etc. (if funds left). This is the reason why the second lien holder has a lot to gain under a principal reduction of the first. Once the market improves and the value exceeds the principal balance of the first lien, the second gains value again.

In my case, the second lien holder won't probably see a penny with a principal-balance of $500K on the first - unless the property-value exceeds that number. I think you agree that this ain't gonna happen soon - if at all. So why on earth should the second lien holder deny a principal-reduction on the first? Makes no sense to me..

BTW, a negative NPV does NOT automatically make a modification a no-go, although it certainly makes it less likely to happen. It just means that servicers aren't required to modify, but they still can. If the NPV is positive, they HAVE TO modify.

[hereforinfo]

Pages 4-5 give a pretty good description of the major factors in determining the NPV:

http://www.consumerlaw.org/issues/financial_distress/content/loan_modification/HAMPNPVModelOverview.pdf

Here's another way to look at it. Let's say you owe $100k and the house is worth $75k.

1. The bank can reduce your interest rate to 2% on the full balance of $100k over 30 years, earning just over $33k in total interest.
2. The bank can foreclose and sell the house for $75k cash, then loan that to someone else at 6% for 30 years, earning just over $86k in total interest.

Which option would you choose if you were the investor?

[hereforinfo]

How can a modification "risk" the position of the first lien? The first lien stays first lien, no matter if there is a principal forgiveness or not. You can also have a second lien with a higher principal balance than the first. The order of liens has nothing to do with the principal owed.

Any modification of a senior lien that increases the risk or decreases the security of a junior loan may cause the senior loan to lose its priority and be reduced to a subordinate position. (For example, increasing the principal balance or interest rate). In general a modification that reduces the payment would not likely decrease the security of a junior lien. But it's one of those gray areas and there have been court decisions in favor of the junior lien holder in cases where the senior made any type of modification to the terms without prior consent of the junior lien holder - the junior was promoted to the first position. Of course now the junior lien holder can use this to their advantage to try and negotiate a payment in order to extinguish or subordinate.

Also, keep in mind that having a second mortgage increases a homeowner's likelihood of default and this is a consideration for NPV.

[IBroke]

Pages 4-5 give a pretty good description of the major factors in determining the NPV:

http://www.consumerlaw.org/issues/financial_distress/content/loan_modification/HAMPNPVModelOverview.pdf

Here's another way to look at it. Let's say you owe $100k and the house is worth $75k.

1. The bank can reduce your interest rate to 2% on the full balance of $100k over 30 years, earning just over $33k in total interest.
2. The bank can foreclose and sell the house for $75k cash, then loan that to someone else at 6% for 30 years, earning just over $86k in total interest.

Which option would you choose if you were the investor?

Hmm, I think I would pick the modification - using the appropriate numbers:

Option 1: Foreclosure:
Value $75K minus expenses for foreclosure and maintenance/taxes/realtor until property is sold. Let's say $65K to invest at 6% for 30 years. Makes $75K in interest.

Option 2: Modification:
2% interest on 100K for 5 years, 3% for 1 year, 4% for 1 year and about 5% (slightly more) for 22/23 years.
Makes $74K in interest PLUS incentives through HAMP.

Considering the current market-situation, I would go with option 2.
The bank should be concerned that nobody is going to buy the property.

The 2% interest only applies to the first 5 years of the modification - there is no 30 year 2%-mortgage under HAMP. In addition, you have to deduct many foreclosure-expenses before the bank can actually lend the money again - whenever that might be. If the house is worth $75K, the bank won't be able to invest $75K and especially not right after foreclosure. There are simply too many properties on the market and values are still going down. You also forgot the incentives the lender receives through the program.

In addition to that, your example shows a "mild" picture of a mortgage. The assessed income of the borrower is also quite questionable. Reducing the interest rate to 2% and extending the loan to 30 years would mean that this potential borrower would only have a gross income of $1,800/month. That estimate includes an escrow-payment of $200/month. I don't know if that is realistic on a property valued at $75K. If it's less, the gross income would even be lower. I doubt this loan would start at 2% in the first place. It truely is wishful thinking that the majority of modifications under HAMP are on properties that are only $25K under water. I think $100K-$150K comes closer to reality and in that case, interest has a much bigger impact. If we are talking about higher loans, we might also be looking at 40 year mortgages = even more interest to the lender.

[IBroke]

Any modification of a senior lien that increases the risk or decreases the security of a junior loan may cause the senior loan to lose its priority and be reduced to a subordinate position. (For example, increasing the principal balance or interest rate). In general a modification that reduces the payment would not likely decrease the security of a junior lien.

Correct - that's what I was saying right from the beginning. We were talking about a principal forgiveness on a first lien. Forgiveness certainly doesn't increase the risk or decrease the security of the junior lien. The opposite is true. It INCREASES the security of a junior lien. I was talking about REDUCING the principal balance, NOT increasing it.

But it's one of those gray areas and there have been court decisions in favor of the junior lien holder in cases where the senior made any type of modification to the terms without prior consent of the junior lien holder - the junior was promoted to the first position. Of course now the junior lien holder can use this to their advantage to try and negotiate a payment in order to extinguish or subordinate.

As you said, if a modification turns into a disadvantage for the junior lien holder, the court has to act. But certainly not if the junior lien holder is better off due to a principal reduction on the senior lien.

Also, keep in mind that having a second mortgage increases a homeowner's likelihood of default and this is a consideration for NPV.

Or look at it this way: The second mortgage exists with or without modification. The likelihood of default if a second mortgage exists is even BIGGER if there is NO modification that reduces the total mortgage payment. So in regards to get a positive NPV, a second lien is not a disadvantage.

[hereforinfo]

Hmm, I think I would pick the modification - using the appropriate numbers:

Option 1: Foreclosure:
Value $75K minus expenses for foreclosure and maintenance/taxes/realtor until property is sold. Let's say $65K to invest at 6% for 30 years. Makes $75K in interest.

Option 2: Modification:
2% interest on 100K for 5 years, 3% for 1 year, 4% for 1 year and about 5% (slightly more) for 22/23 years.
Makes $74K in interest PLUS incentives through HAMP.

Considering the current market-situation, I would go with option 2.
The bank should be concerned that nobody is going to buy the property.

I was trying to keep it simple, but if you're going to figure in the cost of the foreclosure, you'll also have to figure in the cost of the modification and the risk that the modified loan will eventually default anyway. If that happens, then the lender continues to lose the revenue during default, will still have all the foreclosure expenses, and then may have to sell the property for even less if values have fallen more in the meantime.

Even though a modification may reduce the odds of default, the probability of re-default is still very high. Especially if there is a second mortgage, a high debt to income ratio, shaky employment history and other defaults. Much much higher than the rate of default on a loan they could make to someone with good credit, no history of default, solid work history, a hefty down payment, and cash reserves.

They could give you the modification and then 3 months later you could lose your job or have a reduction in income and then default starts all over again.

And I do agree that often the modification, based on your numbers above could benefit the lender more than foreclosure IF THE BORROWER DOES NOT RE-DEFAULT. But in the case of principal forbearance, no way. Because then a portion of the principal is earning ZERO interest for 30 years. Only in extreme cases would that benefit the investor.

You can argue about the logic behind all of this all you want. I'm not making this up, it is what it is. There's a reason for the NPV, and it wasn't just made up by a bunch of yahoos for the hell of it. It's a concept that's been used in the financial world for a long time. Trying to convince me that it's not valid will do you no good. I'm not the one making the decisions, just telling you the reality of what's going on, contrary to the way you think it should be.

[hereforinfo]

Correct - that's what I was saying right from the beginning. We were talking about a principal forgiveness on a first lien. Forgiveness certainly doesn't increase the risk or decrease the security of the junior lien. The opposite is true. It INCREASES the security of a junior lien. I was talking about REDUCING the principal balance, NOT increasing it.



As you said, if a modification turns into a disadvantage for the junior lien holder, the court has to act. But certainly not if the junior lien holder is better off due to a principal reduction on the senior lien.



Or look at it this way: The second mortgage exists with or without modification. The likelihood of default if a second mortgage exists is even BIGGER if there is NO modification that reduces the total mortgage payment. So in regards to get a positive NPV, a second lien is not a disadvantage.

That's your opinion. The lenders don't agree with you.

[IBroke]

That's your opinion. The lenders don't agree with you.

No, that's not my opinion. The majority on this forum understands that a principal forgiveness on a senior lien is something a junior lien holder appreciates. I have no idea why you don't accept that fact (I thought you already did. It is strange in the first place that you DISAGREE to my prior post although I stated you were "correct" - so do you disagree to your OWN post??).

[IBroke]

I was trying to keep it simple, but if you're going to figure in the cost of the foreclosure, you'll also have to figure in the cost of the modification and the risk that the modified loan will eventually default anyway. If that happens, then the lender continues to lose the revenue during default, will still have all the foreclosure expenses, and then may have to sell the property for even less if values have fallen more in the meantime.

Even though a modification may reduce the odds of default, the probability of re-default is still very high. Especially if there is a second mortgage, a high debt to income ratio, shaky employment history and other defaults. Much much higher than the rate of default on a loan they could make to someone with good credit, no history of default, solid work history, a hefty down payment, and cash reserves.

There are only 2 options: Modification or not. It's simply a fact that this is not a good "foreclosure-time". It is no coincidence that the lender didn't foreclose on us although we didn't pay mortgage for 2 years. If you disagree, please tell me why we are still living where we are living now. Now guess why the junior lien holder didn't foreclose, either and ask yourself what the junior lien holder might have done if we would have received a principal forgiveness on our first lien that would have put our balance below the market value. I hope you FINALLY get the idea...

They could give you the modification and then 3 months later you could lose your job or have a reduction in income and then default starts all over again.

And I do agree that often the modification, based on your numbers above could benefit the lender more than foreclosure IF THE BORROWER DOES NOT RE-DEFAULT. But in the case of principal forbearance, no way. Because then a portion of the principal is earning ZERO interest for 30 years. Only in extreme cases would that benefit the investor.

Well, IF...the borrower...That's a chance the lender has to take. In our days, there is no such thing as a 100% secure borrower. Foreclosure will always be an option for the lender - even under HAMP.

To get to principal forbearance, the situation wouldn't be much different. Let's say the mortgage would be $150K instead of $100K. $50K would go into forbearance. Now how should the lender be better off with a foreclosure? It's even getting worse for the lender. He STILL only gets the value ($75/65K) - no matter how much is owed. Under HAMP, he can at least keep the note in the high amount - for better days. He can't lend the potential forbearance money to anyone after foreclosure because it is a loss. Again, a very strange assumption..

You can argue about the logic behind all of this all you want. I'm not making this up, it is what it is. There's a reason for the NPV, and it wasn't just made up by a bunch of yahoos for the hell of it. It's a concept that's been used in the financial world for a long time. Trying to convince me that it's not valid will do you no good. I'm not the one making the decisions, just telling you the reality of what's going on, contrary to the way you think it should be.

I needn't argue much. You deliver wild scenarios and incorrect guidelines, I deliver fact-backed numbers.

I'm not convincingg you that NPV is not valid. Where did you pick up THAT nonsense?? The problem is that you aren't applying it correctly. In previous threads, you told me that the 2% interest won't last long and in this thread, it suddenly lasts for the entire loan because it fits your needs - so how seriously should I take your posts?

You are just trying to get every scenario into a negative NPV by using wrong numbers or guidelines (willfully or not - I don't know) and many opinions (principal forgiveness) that probably aren't shared by many users.

[hereforinfo]

The FACT is, most troubled loans are not getting modified. The lenders would rather foreclose. There are reasons for that. If you don't grasp that concept, I'm not going to keep trying to spell it out for you. Google may help.

The guidelines I quoted are directly from the gov and Freddie Mac web sites.

I didn't read anything else from your replies, couldn't get past the blah blah blah blah blah blah blah...

Denial, it ain't just a river in Egypt.