Credit This!

April 12, 2010

Secrets the Banks Do Not Want You to Know

I am usually skeptical when I see a headline shouting, “Shocking Secrets Uncovered”, “Long Lost Document Found”, “Scandal Revealed” etc.  The news source under the guise of public service will disclose what the authorities do not want you to know.  They tout that their source revealed what so and so has been hiding from you, the public, for all these years.  The headline also implies the source, maybe the author and possibly the publication have inside sources that others don’t have and they may be risking their health, reputation, access or future business by reporting this salacious story. 

Occasionally, stories with sensational headlines truly turn out to be revealing or ground breaking like when Washington Post journalists Bob Woodward and Carl Bernstein broke the Watergate scandal that ultimately led to the resignation of President Richard Nixon.  Most of the time these headlines are tabloid, affect almost nobody or contain bad news that will cost you money.

That being said, I have compiled information on multiple banks, talked with dozens of homeowners, reviewed information and documents pertaining to dozens of individual home mortgages, and have concluded that something unprecedented is occurring in the world of mortgage banking.   Mortgage lenders in many cases are behaving in a way that is straight out of the financial twilight zone.  If you didn’t look beneath the surface, you would think the banks are forgoing profit in their mortgage divisions because it is the right and humane thing to do.

If you have watched the evening news over the last 18 months, read the paper or online news sources, the mortgage banking industry has been thrown under the bus for predatory lending, making bad subprime loans and refusing to work with homeowners who are unable to afford their payment.  President Obama, Treasury Secretary Timothy Geithner and other administration officials have scolded the banks for not doing enough to help homeowners who are in trouble.  Banks are losing the public relations battle and for some reason, do not want to trumpet the plans they have enacted that are keeping thousands of homeowners in their homes.  Instead of giving the devil his due, I will substitute the banks in his place.

Wachovia Bank, now owned by Wells Fargo, is modifying an astounding number of mortgages in California.  Some homeowners who have real struggles but are not in danger of losing their home to foreclosure have been approved for a Loan Modification anyway.  One client I spoke to applied for a Loan Mod on a whim to see if Wachovia would give them a lower payment, and much to their surprise, Wachovia said YES. 

Wachovia is regularly forgiving $50 to $100,000 in principal loan balance so the homeowner can have a lower payment, even though the borrower is managing to get by.  However, most approved for Loan Mod’s could not afford the home without concessions from the bank.  One homeowner in Vallejo California I spoke with showed me the 1099-C tax form Wachovia sent to him.  I could not believe my eyes; Wachovia waived $312,000 in principal balance on his loan.  The homeowner shook his head and smiled at his good fortune.

A source who works for Chase Banks mortgage department, commented that he is shocked by the number of homeowners who are between 12 and 18 months past due their mortgage and still live in the house.  Chase foreclosed on the property months ago and is allowing the homeowner to live in the home rent free.  He said Chase is waiting for the market to turnaround before taking further action. 

Bank of America is working to absolve homeowners of their sin when they chose Countywide Mortgage to finance their home purchase.   Bank of America is modifying former Countrywide loans in some cases without the borrower being delinquent on the mortgage.  I thought Loan Mods are for homeowners who are in danger of losing their home. 

Indymac Bank was another casualty of the credit crisis, but has some awesome deals if you can get it.  Indymac was absorbed by OneWestBank, which is owned by Michael Dell and George Soros,  modified the mortgage of our client, by offering an interest only note for 10 years at the low rate of 2.5%.  YeeHaw…

The $64 thousand dollar question is:  Why are the banks suddenly working with the homeowners?  The banks did not receive a transplanted conscious and feel sorry the people who cannot afford their home.  As with all for profit companies, the bottom line is money.  The banks see that their future cash flows and return on investment is greater by working with the homeowner than by kicking the proverbial family of four to the curb when they default on their house payment.

Banks are looking to get rid of toxic assets ( i.e. bad mortgage loans) as fast as possible.  By writing down the principal balance on a mortgage that is upside down or underwater, the bank reduces the total dollar amount of toxic assets in its portfolio and is able to reduce the higher cash reserve ratio the FDIC requires on this category of loan.  It could also be used as a mechanism by the banks to mask risk just before quarterly reporting.  Show a reduction in high risk mortgage loans to the investment community before actually having to report the loss. 

Kick a homeowner out of the house and they get mad.  They strip the property of stoves, microwaves, sinks, AC units and other appliances of value.  The newly homeless take their anger out on the properties’ drywall and windows.  The bank, as the new property owner, needs to replace these costly appliances and fix all damage to get the best price for the home.   Empty homes attract squatters.  Take all these factors and multiply it by the exposure your competition has in the market and your misfortune is further exasperated by continued suppression of home prices.

Sadly, many homeowners still do not have relief.  They do not qualify for a variety of reasons.  See my blog titled Loan Modification Basics, Part I for the criteria banks look at when making a Loan Modification decision. If you have equity in your home, the bank has no reason to modify your loan.  They will foreclose on the property, sell it to the highest bidder and move on. 

If you owe more on the home than it’s worth, the bank does not want the house.  It will modify the loan if you qualify or wait until the home value rises.  Banks do not want to be in the real estate business.  The second component is that you are technically insolvent.  This means that your debt or liabilities are greater than your assets.  If you have other assets such as stocks and mutual funds, the bank would like to see these assets liquidated and applied to the mortgage loan.

Why do the banks not want this information to be public knowledge?  What if all the homeowners in a hard hit market who are upside down applied for a Loan Mod?  The banks would be overwhelmed by Loan Mod applications and the potential for crashing home values in selected markets would markedly increase.  The ripple effect within the bank, the community and economy as a whole could be remarkable.

Fortunately for the banks, the readership of Credit This! is limited.  If you know someone in a hard-hit real estate market who is struggling to make his or her mortgage payment, this blog may serve to encourage him or her.  If you have a mischievous side and wonder what would happen if, have at it.


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