Better than Loan Modification
- 2. What are loan modifications? How do they work? Why would banks be willing to do them?
- 3. What is a loan modification? Modification of any term in an existing note Interest rate Term length Principal reduction* * 1.3% of loan modifications done between January 08 through May 08 resulted in a principal reduction. NY Times 07/23/2008
- 4. Wall Street Journal December 22, 2008 Of the loans that were modified in the 1 st quarter of 2008. 37% were 30 days late after 3 months. +50% were 30 days late after 6 months. WHY? No equity position. Home values continued to slide.
- 5. So how do they work? Example Mortgage Term Prior to Modification Current mortgage $250,000. 30 year fixed rate mortgage. 6.5% interest rate Payment is $1,580.17 Plus taxes and insurance.
- 6. Example Post Modification Terms Current mortgage $250,000. 40 year fixed rate mortgage 4.5%interest rate Payment is $1,123.91 Plus taxes and insurance. Savings of $456.79 per month
- 7. Why are banks be willing to do this? Banks want to avoid foreclosure – bad publicity On average the foreclosure to sale process takes 18 months Foreclosures are expensive Bank foreclosure sales receive on average 82% of current market value
- 8. Banks view their mortgage securities as a pipeline.
- 9. Impact of Poor Performing Notes Performing Notes for banks $1 in reserves supports $100 in loans Non-Performing Notes for banks $24 in reserves supports same $100 in loans Poor Performing notes create huge reserve issues for lenders and prove toxic to balance sheets – Banks must immediately fund the additional reserve requirement or lose their risk losing their federal banking charter
- 10. Loan Modification This does work. Currently the DRE has listed 12 companies that they have “approved” to take up front fee’s. There are many many more of them out there. In the past we work with a couple of them. They charge between $2,500 and $5,000.
- 11. There is a better way Note purchase – Third party purchases your existing note from the bank. Prior to purchase the third party complete a forensic audit on your note. Complete Review of Truth in Lending Disclosures Audit for HUD compliance Document case against lender to create strong negotiating position
- 12. So how do they do that?
- 13. Investor then approaches the bank Buying power when combined with audit documentation results in discounted purchase price from existing bank Portion of discounted price provided to homeowner in the form of immediate equity
- 14. Example Results for Borrower? The house is underwater here $100,000.00 The bank realizes a $300,000.00 loss. And receives replenishing capitol via government TARP program. Note $500,000.00 House $400,000.00 Value Note Purchase $200,000.00 @ .50% of Current Value
- 15. Investor Financed New Loan The home owner relieved of $200,000 in debt. The investor creates a new note at 75% of current market value. $400,000 (Current Value) @ 75% LTV = $300,000 (new loan amount) New loan has $100,000 in homeowner equity Homeowner's positive position encourages continuing payment
- 16. Next Step Complete Loan Application – Credit does matter Complete Contract – written guarantee Complete Statement of Information Foreclosure process is halted until pool reaches $40 million Principle Reduction Guaranteed or Fee is returned