Mortgage Modification – Bankruptcy – Creative Financing

What is Net Present Value, the NPV we hear about so much? And what is NPV analysis?

NPV is what your mortgage is worth to the bank in today’s dollars. In deciding whether to foreclose or allow modification the lender compares the amount of money it will net if it forecloses versus the present value of the income stream it will receive over the years if the lender allows modification. Future payments are reduced to present value. The math is a bit complex, but you could learn how to do it if you set your mind to it.

To make it simple, I will give an extreme example. If your home is worth $300,000 even in this difficult market and you owe only $100,000, then the lender will recover its entire $100,000 if it forecloses. If the lender modifies your loan by lowering the interest rate, it will not recover as much money. People with lots of equity in their home certainly will not get a Making Home Affordable HAMP modification. The rules do not allow it. Maybe they will get an in-house modification, but the lender is not obligated to give one. Generally a lender will give a borrower a forbearance agreement – which actually raises your payments by requiring you to make your regular payment plus a portion of the arrearage until you catch up.

What if your home is worth only $250,000, and you owe $300,000 on your mortgage, then the analysis gets complicated. Off the top the lender is going to lose $50,000 plus the cost of foreclosure plus possible costs for repairing the property. If the lender gives you the 2% rate for five years, followed by 3% for a year, 4% for a year, and the Freddie rate for the balance of the loan, the lender is going to lose interest it might earn by lending out the money to someone else. The two different losses must be compared.

Note: Your lender does not consider the balance owing on your second mortgage in doing its NPV analysis.

The lender must also factor in how likely you are to default over again. If your expenses are very high, if your income is low, if you have a poor record for paying your debts, those are factors which weigh in favor of a foreclosure.

In Washington lenders are required to perform an NPV analysis under the new law passed July 22, 2011. A borrower who has been denied modification and is facing foreclosure can stop the foreclosure by demanding mediation. If the lender is going to lose less by modifying than by foreclosing, then the lender cannot foreclose. See the bill which enacted this law. The steps involved in mediation are set forth in RCW 6.24.163.

The cost of mediation is $200. The application for mediation must be filed through an attorney or a licensed non-profit foreclosure mediation group.

See this example of an NPV analysis done by Wachovia, which now is owned by Wells Fargo. This borrower was turned down because his debt load was too high and his income was too low.

The property is further underwater now than when he was previously considered. Further, the Borrower has been through Chapter 7 bankruptcy and has shed a lot of debt. Also there is more income in the family because we are counting the income of the Borrower’s children – which is allowed.

We are confident that we can succeed in getting a modification for this client.

11-21-11

From NG:

Dear James,

My daughter was here this evening  and we were discussing how our loan modification is going right now, explained to her how mediation works. She is so worried that we’ll lose the house. I told her not to worry and not to lose hope because if the mediation fails then we’ll file Chapter 13.

She is so worried because she’s hoping that once this loan modification is all finalized she’ll move in with her husband and their 19-month old son. It’s better if they move in because our grandson wants to stay with us all the time.

It will be economical for them and for us because we’ll split the mortgage payments so Alex and I can start saving for our retirement.

I explained to her that Chapter 13 won’t change the existing term (30 years interest only) of our loan and won’t reduce our principal balance, but we have 60 months ( 5 years) to pay the arrears in addition to our regular monthly mortgage payments.. Did I understand this correctly?

**Question on the Chapter 13: When we stopped paying for our mortgage in 2009 it was like $3,331 a month.. If we file for Chapter 13 are we going to pay that $3,331 plus arrears? The total arrears will be divided by 60 months, is that how it works? Since it will be a lot of money $3,333+ arrears, is the court going to reduce the payment we’re going to send to the trustee?

After 60 months that means we’ll just continue paying our regular payments to the bank?

At this point do you think it’s safe for my daughter to move in or wait a little while till after the mediation?

I don’t want to rush their moving in but at the same time they are only wasting their money on their lease to own house, they’re paying $2,100 a month.. They are due for signing (another 2 years) again next month.

Thank you so much, we are very grateful for your help, it gives us peace of mind.

Sincerely,

NG

***

Dear NG:

I never make guarantees, but I would say that your chances of keeping your house are very strong.

The fact that we can force mediation means that foreclosure is delayed six months or a year. That opens a big window during which settlement can be negotiated.

The investor will be better off with modification, so the investor is our ally against the greedy servicer, who makes more money if the servicer forecloses. Mediation gives us time to identify who the investor is and to reason with him.

Also, instead of dealing with underlings, I will be dealing with attorneys.

Sincerely,

James Robert Deal , Attorney

***

The situation here is that NG has a steady income and can pay payments which will retire the loan over 40 years. NG qualifies.

NG is dealing with Wells Fargo, servicer for the XYZ mortgage backed security pooled fund.Wells says it cannot modify the loan because the pooling and servicing agreement does not allow it. I want to see that pooling and servicing agreement.

I am not convince that Wells Fargo has even talked with the representative of the XYZ fund. By law Wells must tell us who the investor is and how to contact him or her.

Washington’s new law requiring mediation before foreclosure, will save borrowers’ homes and save investors a lot of money. It will slightly reduce servicer income, but servicers should negotiated their pooling and servicing contracts better.

JR

Keller Rohrback LLP has announced that a class action has been filed in the United States District Court for the Eastern District of Washington on behalf of all mortgagors in the State of Washington whose home mortgage loans are serviced by EMC Mortgage Corporation and who (a) have attempted to obtain loan modifications of their loan terms from EMC; and (b) have made payments pursuant to a “Repayment Agreement,” a Home Affordable Modification Program (HAMP) trial modification plan, or any other temporary modification plan.  Read More