Sunday, December 27, 2009

Obama Administration Says Lying Borrowers Should Still Get Loan Modifications

The article reprinted below from the Washington Post is yet another illustration that the Obama Administration really does not understand the real estate industry or how it has come to be crippled these days. Given the simple fact that no one within the Administration actually worked in real estate makes all this comical---if it wasn't so sad.

Letting borrowers who misrepresent their income on loan modification applications actually get them is the height of absurdity. Why not just tell homeowners they can write down whatever income figures they want?

How about this idea? Tell applicants for payment modifications they can invent their income numbers. Just make them up. Pull whatever arithmetic comes into your head and write it down. Encourage creativity at the expense of accuracy and truth. Let the imagination run wild, statistically speaking.

In fact, why not throw a contest to see which mortgagor can misrepresent their income the most and give them a prize? Say a $25 gift certificate to Bed Bath & Beyond---as well as their mortgage modification, of course.

Excuse me, but wasn't part of the whole subprime mortgage meltdown mess caused by mortgagors getting loans they could not afford? Isn't that the real reason most loans go into foreclosure? Borrowers can't afford the payments? So now instead of inflating income to get a home, borrowers are intentionally underestimating their income to keep it. And getting a nice gift from Uncle Sam and the shareholders of banks who need to forgive loan interest or equity in mortgage debt in the process.

The Administration's foreclosure rescue program is a dismal failure and this is just one way the government is attempting to prop up a doomed public relations effort that is going nowhere fast.

Couple this boondoggle with the Obama Administration's Christmas Eve(!!!) decision to cover UNLIMITED losses at Freddie Mac and Fannie Mae and give each of these dinosaurs hundreds of billions of dollars of new capital to invest when they just lost hundreds of billions of dollars of old capital is stunning.

It is clear in Washington the inmates are not only running the asylum but have sold it to a timeshare developer.

Robert J. Abalos, Esq.


No consequences for lying borrowers

The Associated Press
Friday, December 25, 2009; 11:30 AM

NEW YORK -- The government shouldn't reward liars. But that's the effect of changes to the Obama administration's failing program to help homeowners modify their mortgages.

Until recently the rules were clear: if you grossly understated your income to qualify for the program, you had to restart the loan modification process. It made sense. After all, we got into this housing mess partly because too many people were dishonest about how much they made.

Fast forward to today. The federally funded Home Affordable Modification Program was aimed at getting banks to rework mortgages for homeowners in order to slow the pace of foreclosures. The government set a goal of modifying up to 4 million mortgages over the next three years.

The program isn't working like it's supposed to. Since March, just 31,000 homeowners have won permanent relief. One big reason why is that lenders are doing what they should have been doing all along - requiring things like proof of income.

How's the government responding? By letting homeowners who fudge their income numbers off the hook with little more than a wink and a nod.

"This isn't the kind of person the government should want to help," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank.

Under the $75 billion program, lenders are paid by the government to alter mortgages in hopes that cheaper loans will lead to fewer defaults. In most cases, modifications lower interest rates on home loans. Lenders also offer grace periods, longer repayment schedules or lower loan balances.

Borrowers say lenders are permitting trial modifications, but few are being made permanent. Lenders say borrowers aren't providing all the necessary paperwork to get loans permanently altered. Many lenders don't require documentation of income upfront. First, they'll make a verbal agreement with a borrower for a modification, and then verify the income once the trial period starts.

The government needs this program to work - and fast. That's the only way to explain the Treasury Department's waiver of a requirement punishing borrowers who understate their income by 25 percent or more when trying to get a modification.

That means a borrower who had told a lender he made $75,000 but was found to make $100,000 doesn't have to restart the modification process. Under the waiver announced Dec. 16, that person now gets to continue the trial period instead of being rejected immediately.

"During the housing boom, borrowers had every incentive to overstate their income to get a bigger mortgage," said Larry Doyle, who spent more than 20 years working in the mortgage business on Wall Street and now writes the financial blog Sense on Cents. "Now, they have every incentive to understate their income to get a bigger modification."

Treasury Department spokeswoman Meg Reilly says that discrepancies could be the result of mistakes or changes in someone's job or income during the trial phase. She also noted none of the eligibility, documentation and verification requirements for a permanent modification change under the new waiver.

Still, a difference in income of 25 percent or more is not a rounding error. The government should err on the side of caution with these people, not give them a free pass.

Doyle thinks that allowing dishonest borrowers to stay in the program sets a bad precedent. It also shows that lessons from the housing bust haven't been learned.

The housing market's collapse wasn't just caused by lenders issuing risky loans to borrowers who couldn't afford them. More than a third, or 4.3 million, of the home loans issued from 2004 through 2007 were for borrowers who provided no or little documentation of their income, according to real-estate data company First American CoreLogic.

When housing prices were rising, homeowners who couldn't afford their mortgages for whatever reason - lost jobs, wage cuts or a pileup of medical bills - could often sell their homes for a profit to get out of trouble.

It's a much different story today. About one in four homeowners are considered underwater, meaning their mortgage exceeds their home value.

That has led to a dramatic rise in foreclosures. About 2.2 million homes since July 2006 have completed foreclosure, according to foreclosure listing service RealtyTrac Inc.

The government knows that reducing foreclosures could go a long way toward stabilizing property values, which would help reverse the housing slump and ultimately aid the broader economic recovery.

Dishonesty fed the housing bust. Let's not let it ruin the chances for its repair.