Fitch Ratings (a financial/credit market analysis firm) has released a very disturbing alert – and it’s one that I think you and I as real estate investors can almost certainly profit from.
This news concerns the “Delinquency Cure Rate”. Here’s what that means: If a person with a mortgage starts to get behind on their payment, that mortgage is described as “delinquent”. Then if that person later brings all of their payments current before foreclosure, that loan is said to be “cured”.
Well, here’s the problem: According to Fitch Ratings, the cure rate in the years of 2000-2006 was 45%. This means that for that time period, nearly half of every home owner who fell behind in their payments ultimately got caught up.
But that number has changed dramatically. Presently, the default cure rate is 6.6% – this means that far less than 1 in 10 people who fall behind on their payments are able to bring their loan current and keep their property out of foreclosure.
This is a bad, bad statistics – it means that not only is our national foreclosure rate at historically horrible levels, but those people who fall into foreclosure seem to have a near zero probability of escaping that problem.
However, this appears to me to be an opportunity for savvy real estate investors. One idea I have for capitalizing on the current environment featuring high foreclosure rates and low cure rates is to focus more on loan modifications. Personally, I know very little about loan modifications, and I’m not really interested in learning everything about them…
…but I do think it’s worthwhile for us to have a way to profit from them, such as offering loan modification solutions to the foreclosure victims we encounter so regularly in our business.
What do you think? What are some good ways to capitalize on the current market circumstances? Share your thoughts with us in the comments area below!
As always, thank you for reading http://realestate.BryanEllis.com!
You have a very good observation here but we all have an even more serious problem here.
Loan modifications sound like a great idea on the surface but almost all of them are new horror stories looking to be somewhere! Few and I mean very few loans get modified. The lenders had no real interest in the past doing this and even fewer have an interest now largely because of how they can use TARP money to reshuffle their books.
As an aside the whole damn TARP thing has in general screwed most of us in ways we do not even know about yet.
The biggest problem is getting a loan mod that actually helps the client, most give them more fees, and often payments that are larger than what they had. They more often than not take away what equity the person may have had and put them even more under water than they were.
The biggest problem looming about loan mods for someone wanting to get into this is many states are putting more regulations on this and putting alot of people in prison for loan mod fraud or levying fines for improper practices.
The talk of loan mods by the government is a total boondoggle and if you look into the details of attempting one you will quickly see why it is mainly a way for unscruplous people to take money from people who really need help.
One of the many reasons for so many more people going into foreclosure is because of the false hope of a workable loan modification helping them. Of the few million attempted only a very small percentage are accomplished and even fewer are workable because they do not have a reduction in value of the loan principle and any improvement in terms is most often destroyed by the new fees levied by the lender. Forcing the borrower into foreclosure more certainly than before.
Now with that said a very few loan modifications work so what about them is good?
I do know the ones that work involve reduction of principle, reduction of monthly payment amount, no new fees levied. These are the only ones that are ethical in my view. These are not easy to come by. So what ideas do you have to make these type of loan mods happen?
You are right on the “money”. We added competent (that’s the key word) loan modification services for the owner occupants who qualfiy for MHA programs BUT or main focus is assisting investors who have multiple underwater defaulted homes modify those loans simultaneously. eg. an investor with 17 rental properties in 3 states, and the eighteenth property is that investor’s home. We are 9 months into this project. We are getting some of those loans modified, some are going to be short saled–not economically viable no matter what the numbers are.
Now you need to have access to an attorney on your team, not only from a compliance standpoint but also to spot the issues that will give you leverage from violations arising at 3 different stages–origination and fundng of the loan, servicing of the loan and post default period.
The last named area is most ignored and should be the most important—all those calls to the servicing aqent where you cannot get through, or if you do get through-nothing has happened etc–those are absolutely predatory lending practices–then it is time to get out of the loss mitigation arena and get to the folks who are responsible for the loss mit. units—get to the current note holder and work down from there–you will get results. We are a full service quick-turn wholesaling company using virtual and other cutting edge proven techniques to get our deals funded, quickly sold in a variety of different markets—-the way we have implemented assisting investors who have been forgotten by the bailout plans has added a completely different dimension to our business–in the last 2 years our post modification default rate has been less than 10% which is proof that loan mods work if you properly take the time, on the actual numbers of your client and match them to the deal offered by the lender/servicing agent—that is a rubber meets the road moment–as they say, the truth is in the numbers–if that does not work that property should be short saled.
btw, our highest souce of leads—referrals (word of mouth)
Barry
The previous comment is an absolute falsehood! While i agree that in the early days of modifications little was getting done and the re-default rate was high, since the obama plan was put into effect banks that took tarp money were required to modify loans. the way it works is that you try to take the homeowner to 31% of their income by re-setting the interest rate to as low as 2% for 30 years. if that doesn’t work you go to a 40 year term and if it still doesn’t work you decrease principal until the numbers work!
Many lenders are now being more realistic in the loan mods they give because the early ones that just wrapped in all past amounts have gone back into foreclosure. I have heard success rates of only 20% getting their loan mods approved. It is because people try to do it on their own or with the help of a non-profit and if the figures are off by even $10 they get turned down. Unfortunately there are many loan mod companies that are scammers. In California if you are a broker and want to charge an upfront fee you need to get your agreement approved by the DRE. Attorneys do not have any restrictions on advance fee. A large attorney backed firm in CA got closed down as they took money from 3000 and only helped 300. There sales force overwhelmed their processing department. I know of a wholesale processing firm which you can use for all or just your overflow work. If you pre-qualify someone to see if they meet the criteria for a mod then take the fee and process quickly you will stay out of trouble. One way to work it is a two stage payment. First payment when the paperwork is done and second payment when loan mod is approved. If they do not get approved for a mod, you can try short sale – pretty much all the same paperwork. If you decide not to get directly involved I am sure you could find someone that you can get a referral fee from them.
Show me the numbers where the Obama plan is happening.
Barry,
Sounds like you have a good system that is well thought out, too bad so many others are not willing to do the follow through that is so very important in loan mods.
I have several friends that have found themselves mired in this situation in California, Oregon and Arizona. Most have gotten into bed with some of the worst people and one is involved with the right people. She will get her loan mod, her principle reduced and currently not having to make her payments as per a relief agreement all parties signed.
I find it kind of amazing how hard it is to steer people to the good loan mod outfits like yours seems to be. I say that because you are mentioning all of the elements of what it takes to get an effective loan mod. Keep up the good work!
Loan modifications may work for some, however, I believe that your statistic points to something else. Let’s face it, a large number of homeowners got into trouble buying more home than they could really afford. With the decline in equity, now they can’t use their property as an ATM machine.
This is an issue that involves credit worthiness. Better credit deserves better rates. The focus should be on strenghthening an individuals credit to the point they can get good rates. That means changing a mind set. It might sound a little harsh but everyone isn’t cut out to be a homeowner.
I saw the need for loan modifications to be added to my business and have done so very easily by using a great non-profit company contrary to HomeLoanPro’s comment. This company provides all the backoffice support and is completely transparent. They knock out loan mods day after day. Not only that, they provide a plethora of financial services for clients such as credit restoration, debt settlement, property tax reduction, etc. all of which I get paid a piece of the action. Life is good and getting better.
This problem is big enough that there is room for non-profit, for-profit, and (some would say) even government solutions and still the need is overwhelming. What there is not room for is all the scammers out there ripping people off. I rarely hear about a truly successful “do-it-yourself” loan mod. When the payment goes up I would not call that a loan mod. The lenders don’t seem to mind calling it a loan mod and the homeowner thinks they got one. But those failures get lumped into the loan mod pile and are used as evidence that loan mods don’t work and that they have a high failure rate. A loan mod should be a permanent (excluding job loss and other unforeseens) solution to the homeowner’s problem IMHO.
One lender had a distressed homeowner convinced she could not do a loan mod on a non-owner occupied.
“Just call your lender about a loan mod because it is free” is some cheap advice that is likely worth everything you paid for it.
Dmeir104,
I agree, the only one I have seen being consistent and realiable is also a non-profit, maybe the same one. Sure sounds like the same one reading what you posted.
I think the easiest way for loan modification for a homeowner in distress is to buy the loan at a discount from the bank and modify the loan to suit the circumstances of the homeowner. As owner of the note, that could be by adding the missed payments to the end of the note or changing the terms of the note. Also, get the homeowner into a credit repair service so they can later refinance when they have repaired their credit..