loan modification- how does it work?

[Ash Housewares]

When a “homeowner” (aka money renter) defaults on their ARM reset and tries to modify their loan into something with more manageable terms, how would the process work?

Presumably they’d call the loan servicer (IndyMac, CFC, whoever) and explain the situation, but then what? In most cases it will be some hedge fund or pension plan that owns the mortgage, and doesn’t that owner have the ultimate say in any loan modification? So wouldn’t the servicers somehow have to track down the owners before the loan modification could take place? That could be a nightmare. The owner might be in Shanghai, Amsterdam, or the office down the street. Maybe I’m missing something, but I don’t see how these loan modifications can work in a timely or efficient manner. It seems it would take months to track everyone down and agree to new terms.

Am I missing something here? Anyone care to enlighten me?

[DaCounselor]

The servicer’s permissible modification actions are spelled out in the pooling & servicing agreements. The servicer generally gets to make the call on modifications so long as it will not run afoul of the interests of the investors. There is no necessity to track down the security holders for modification approvals.

[jficquette]

As we all know, misrepresenting information on a mortgage loan application is a federal offense.

It will not be hard for mortgage companies to figure out that a person calling in for loan modification lied about income etc if they look for it.

This is why any loan bailout is problematic because the vast majority of these people in trouble broke federal law with misrepresentations of income etc.

How can this be overlooked?

John

[SD Realtor]

Counselor one thing that I have been hearing is that investors may be queried to allow more substantial modification of existing service agreements in order to provide greater leeway to rewrite existing loans. In essence the investors are being given an ultimatum to take a lower return or lose the entire nut. I am not sure if this is a reliable piece of information I was given or not. Didn’t know if you had heard different.

SD Realtor

[HLS]

You seem to have forgotten that they know excatly where to find these “investors” with their monthly income, so they also know where they are to discuss defaults.

Because defaults were never considered when these portfolios were sold, it’s a matter of shock and denial right now to many.

Until they realize that some return is better than no return, it’s going to be messy.

Hedge funds by nature do not need to disclose their losses or net asset value. There are HUGE losses that have not been disclosed, including cities, counties, pension funds,
and bank money market funds that are NOT FDIC insured.

All the talk about the “bailout”…I can’t wait for a meeting of distressed homeowners who want to hold it at Starbucks. After going out for a yuppie dinner, They will drive up in Hummers, wearing designer clothes and jewellery, complaining that they just cannot afford their mortgage payments.

Qualifying for bailout should be easy in my opinion.
A YES answer to any of the below disqualifies you from bailout help.

1)EVER been to Starbucks ?
2)Do you shop at the mall ?
3)Did you car cost over $30K ?
4)Do ALL adults in the home work less than 50 hours a week ?
5)Does your home have cable/satellite TV AND does each person have a cel phone AND do you have a video game player ?

[DaCounselor]

SDR – I haven’t heard many details regarding servicer/investor interaction but I wouldn’t be surprised to learn that your info is correct. This situation is complicated by the fact that some MBS holders have insured against defaults, and the insurance payout on a default may be a better result for the investor than accepting reduced returns. So the investor may actually be better off with a default as opposed to a mod. In this circumstance, the investor can take the position that a mod goes against their best interests and threaten suit against the servicer if mods are undertaken. I haven’t heard of this happening but I haven’t been in that specific loop recently. I do, however, personally know two hedge funds that insured CDO tranches that they don’t even have on their books (via credit default swaps) and they are screaming bloody murder about potential mods that will wreck their insurance payout. They have a big problem with standing to sue so all they can do is make noise.

There are alot of angles on this mod stuff. It’s nowhere near being played out yet. But if the servicers don’t get moving soon they’re going to be a day late and a couple of trillion dollars short.

[SD Realtor]

Thanks DaC –

Agreed… it will be interesting to see how it all plays out.

SD Realtor

[Anonymous]

1)EVER been to Starbucks ?
2)Do you shop at the mall ?
3)Did you car cost over $30K ?
4)Do ALL adults in the home work less than 50 hours a week ?
5)Does your home have cable/satellite TV AND does each person have a cel phone AND do you have a video game player

Hm. Buying ground coffee at Starbucks isn’t that huge of a luxury. And family cell phone plans can be cheaper (or nearly as cheap) as a land line.

Hairshirt is fitting a bit tight, I think.

[bubba99]

I know that some of the CDO’s have insured themselves against default, but I can’t find any details about how many, or how much. Or even if the insurer is sufficiently liquid to really payout.

The insurance bankruptcies may be the next shoe to drop.

[Author]

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