Countrywide Home Loans, who used to be the largest home mortgage lender before being acquired by Bank of America, reached a settlement agreement with several state’s Attorneys General regarding their huge pool of subprime loans.

One of the tenets of that agreement is that Countrywide will proactively modify 400,000 loans to more “reasonable” terms.

But that’s easier said than done.  According to my research, many of the loans Countrywide made are owned by outside investors who were not party to the agreement Countrywide made and are balking at taking less money than they are owed.

In fact, Mr. William Frey is suing to prevent Bank of America (owner of Countrywide) from performing the loan modifications since, according to Frey, doing so is in violation of the contracts that investors hold with Countrywide.

So who is right?  Mr. Frey, who advocates that contract law should be followed in this and every case?  Or BOA/Countrywide/Attorneys General whose agreement requires that this circumstance be judged as an exception to contract law?

Your thoughts and opinions are welcomed and encouraged.  Thank you for reading RealEstate.BryanEllis.com!

Yesterday, I told you about the lending industry’s resistance to mortgage modifications as a solution to the foreclosure crisis.

It turns out that there’s another huge reason for lenders to dislike the use of mortgage modifications:  Mortgage Modifications usually don’t work out.

According to Lender Processing Services, a mortgage payment processor that monitors 39 million of the 50 million mortgages in America:

• “For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment”
• “More than half end up delinquent after several post-modification payments”

Let’s put this in plain English terms:

If 1,000 mortgages are modified, 250 of them will make at most one payment under the modified terms and then will default again

Of those same 1,000 mortgages, more than 500 of them will end up in foreclosure yet again after only a few months.

My friend, these are awful statistics demonstrating that the problem isn’t the mortgages, it’s the borrowers who never should have had a loan (of any type) to begin with.

Before the more sensitive among you get your panties in a wad, take note:  This isn’t a suggestion that all foreclosure victims are fundamentally bad people.  I know there are lot of people who had good jobs and were fully qualified for their loans are now unable to avoid default due to layoffs and other legitimate issues.  But those aren’t the folks who are at the heart of this issue:  It’s sub-prime borrowers who never should have gotten the loans in the first place, regardless of the terms.

Thanks for listening to today’s rant.  Now let’s get back to some practical application:

Short Sales, as I’ve mentioned in the past several days, are going to be a key going forward.  And frankly, it might be helpful to point out the horrible stats about mortgage modifications to loss mitigation reps when you’re negotiating short sales.

FOR 100% FREE SHORT SALE TRAINING, CLICK HERE RIGHT NOW.

As always, your comments are welcomed here at RealEstate.BryanEllis.com - and I encourage you to join our free upcoming Short Sale Training.  Have a great day!

Last week, mortgage industry representatives made an interesting admission to lawmakers:

Mortgage modifications aren’t doing the trick.

According to Tom Deutsch, Deputy Executive Director with the American Securitization Forum:  “While critically important and increasingly employed, industry-led loss mitigation initiatives, including loan modifications, are not a panacea for declining home prices, mortgage defaults and foreclosures.”

Just like yesterday’s discussion of the massive changes to the $700 Billion Bailout Plan, this has direct ramifications for real estate investors.  Please read onward…

I’m not a mortgage industry insider.  I don’t know whether Mr. Deutsch’s statement is fact or a convenient creation of stubborn mortgage lenders.  Either seems possible.

Nevertheless, some reasonably plausible explanations exist for the stated weakness of mortgage modifications as a foreclosure avoidance tool:

• According to Michael Gross, Bank of America’s managing director for loan administration loss mitigation, a lender doesn’t necessarily have the authority to modify every loan, since many loans are subject to contractual obligations with underlying investors (Bryan’s Interpretation:  I suspect this is, in part, a coded way of saying that to modify a mortgage may inhibit the lender’s ability to profitably pay out on their deposit account obligations such as CD’s and savings accounts)
  
• Many home owners have multiple mortgages, and there’s no way for one mortgage holder to force the other mortgage holders to simultaneously modify their terms.  (Bryan’s Interpretation:  If Lender A and Lender B both have a mortgage against a property, there’s no way either of them are going to agree to take a loss unless the other lender takes a loss too.)
• Resistant borrowers who are in over their heads and just don’t care anymore are refusing to seek or accept mortgage modifications.

I think the real reason the mortgage industry is making a play to convince lawmakers that mortgage modifications aren’t working is in the hope that the government will offer further direct financial aid to the mortgage lenders.  After all, the mortgage companies succeeded in convincing our Very Stupid Congress that the entire world would fall apart without government intervention, so why not try the same thing again.

As it turns out, a Very Stupid Congressman, Democrat Barney Frank of Massachusetts, was very quick to demonstrate his lack of ability to creatively think when he said:  “I believe we now have a situation that requires legislation.”

Really, Barney?  Have you ever met a problem that didn’t require legislation?  Remember, Barney ole pal, you were instrumental in creating this subprime crisis (along with your buddy Democrat Senator Chris Dodd from Connecticut) when you legislatively paved the way for the subprime crisis and refused to do anything constructive to resolve it.  But I digress…

Forgive the brief rant.  It still galls me that there is overwhelming proof that Frank and Dodd were among the primary architects of this mess, yet they still have the nerve - and the full support of their party - in speaking out about it.  Yet again, I digress…

Here’s the connection to real estate investors: Just like yesterday’s analysis of changes to the $700 Billion Bailout plan, the news that lenders don’t want to grant mortgage modifications will probably further pave the way for more short sales since short sales are actually a final solution for lenders rather than a temporary “stop the bleeding” type of action, and therefore probably (though not certainly) a preferred way to deal with the problem of defaulted mortgages.

One way or the other, I’m convinced that short sales are going to become a tool of supreme importance during the next 12-24 months.

That’s why I’m placing extremely high importance on finding some good short sale training to provide to you.  I’m not a short sale expert, so I’ll seek out a bona fide expert on the topic and share them with you via free teleseminar and/or webinar as quickly as possible.

Do you have a preferred short sale expert from whom you’d like to hear?  If so, sound off below.  And also, tell us about your experience with mortgage modifications in recent months so we all know what is really happening in the real world of mortgages.

Thank you for reading RealEstate.BryanEllis.com!

*** BIG NEWS:  Bryan will host the nation’s leading expert and educator on Short Sale Investing in a private FREE webinar on Tuesday, November 25.  Click here to register (no cost).

If you were expecting the $700 Billion bailout plan to mean that the government might purchase some home loans and in so doing stabilize the real estate market, think again.

This has some significant ramifications for investors and best strategies - please pay close attention!

Treasury Secretary Hank Paulson held a press conference last week during which he stated that the bailout fund - originally designed to fund a “troubled asset relief program” (TARP) - would no longer be used to buy bad mortgages from troubled lenders.  Instead, he’s going to use the money to bail out all manner of businesses including insurance companies, credit card companies and automakers.

It’s difficult to refuse to point out how incredibly right I was to oppose the bailout plan, but just because an opinion is right doesn’t make it the popular one.  (!!!)

Nevertheless, a practical ramification of this policy change is that lenders will become more aggressive about directly avoiding foreclosures. This will happen in at least two ways:

• Lenders will continue to announce new mortgage modification programs designed to keep home owners in their homes.  (Several major lenders have already announced such programs.)
• I suspect short sales will become more commonplace, and ultimately easier to perform

(More on short sales in a moment…)

While it’s deplorable that the government completely lied to us about the purpose of the $700 Billion bailout bill, I do think that this is ultimately a good thing for the real estate market and for real estate investors.  The best solution to the real estate crisis is to let real estate values find their true levels, after which buying will resume…

…which is exactly why I suspect short sales to increase significantly in frequency and importance.

(For our new readers, a “short sale” is an agreement by a mortgage lender to accept less money than is owed on a property due to changing market conditions and the inability of the borrower to pay the loan.  Essentially, it’s a last-ditch effort by the lender to avoid foreclosing the property.)

My friend, do yourself a favor.  Take every opportunity you can to learn about short sales, because I expect they will be a huge part of our business in the next year.  And when you know how to do short sales well, very large profits on each deal becomes distinctly possible.

What do you think - how will the change of purpose for the $700 Billion bailout fund effect the real estate market generally and real estate investors specifically?

As always, thank you for reading RealEstate.BryanEllis.com.

I’ve seen reports recently about the stark contrast in availability of financing when comparing traditional lenders to credit unions.  Apparently, credit unions as a group are not suffering from the “credit crisis” like the big mortgage lenders and banks are.

In the interest of full disclosure, note that what I’m sharing with you here is based on my research, but not my experience.  I have never done business with any credit union.

According To Realty Times, “credit unions avoided writing subprime home loans and other easy-money mortgages. They also shunned selling packages of mortgages to Wall Street moguls who packaged them into now low- to no-return securities.”

If this is true, it suggests that credit unions may be on the verge of a boom, as they can offer capital that isn’t available elsewhere.  So for your own home, and for homes you are attempting to sell to buyers, your local credit union may be a good funding alternative.

However, credit unions generally use a more traditional and detailed application/approval process than other lenders.  With credit unions, your credit history does matter, your down payment does matter and your ability to pay does matter - so nobody should expect “subprime” treatment.

Nevertheless, the unique structure of credit unions (as non-profit financial institutions that generally hold their own notes long-term) can mean a greater availability of capital.

What I am not certain of is whether credit unions offer financing for investment properties.  If you know the answer to this, let us know in the comment area below.  Or if you have other experience with credit unions - positive or otherwise - please share it with us so we can all make an informed decision.

Thanks for reading RealEstate.BryanEllis.com!