Say Good-Bye to Mortgage Modifications. That ship has sailed!

For the average homeowner, a cramdown, voluntary mortgage modification and/or any sort of life preserver from Washington DC are ships that have already sailed. Now that the Banks have demonstrated their clout in Washington, the average homeowner can expect nothing.They have left the average homeowner to drown.

I'd wager a couple of bills that the banks are not even thinking about programs to save homeowners from foreclosure. They have a bigger fish to fry. I would bet a new plan of action is being put into place to recover from this mess. Think about it for a moment. Banks need to attract investors to recover. Investors want to see results; portfolios that are doing well. How will those portfolios be built? I'm guessing, but have you noticed at the foreclosure auctions, banks are starting to accept bids FROM OTHER BANKS (their friends) that are 50% less than the face value of the notes? What a brilliant idea. The bank selling at foreclosure gets to take a 50% write-off for the loss. The bank buying the property ends up with a property for 30% off fair market value. When the buying bank goes to sell at fair market, they show a profit to investors. Now the bank looks like its on the right track for its new investors. All the banks come out smelling like roses after this whole mortgage fiasco.

I have a client who will remain nameless for client confidentiality purposes. But he is representative of what I have observed in the past week. He has a $400,000 mortgage on his house. He asked the bank to reduce his mortgage to $300K and that he would pay 6% interest on the modified loan. My client's house is worth about $280K. The bank said no.

Unfortunately he was too far behind to do a Chapter 13 and catch up on the arrearages. But might I point out to you that those arrearages would never have existed BUT FOR his lender telling him that they would not consider a loan modification unless he was 3 months behind on his mortgage! My client was left with no alternative but to let the house be foreclosed upon.

When the house went to foreclosure, EMC sold the house to US BANK for about $150,000.00. This means that EMC will now book a $250K Loss on this investment. HOWEVER, US BANK will spend another $15 to $20K on eviction/relocation fees and may be another $15K to clean up the property and resell it at $280K. US BANK will be able to show a clean return on its investment of nearly 30% return. . . numbers investors will find attractive. It will then be business as usual for US BANK.

EMC will look bad to its investors, but those investors will have moved on to banks like US BANK. EMC perhaps will simply disappear as the fall guy for a mortgage industry who suffered chronic and severe anemia!

Let me point out something however. The banks will not be successful in this endeavor unless they actually have properties going to foreclosure sale; a LOT of properties going to foreclosure. The banks won't achieve the foreclosure numbers it needs to make this policy work with a broad policy of encouraging loan modification. It seems transparent that this is why recently so many of my colleagues and their clients are failing to achieve en masse positive modification results.

Let's get real. The financial incentives offered by Obama's plan amount to throwing a kid a penny and asking him to go clean out all the cow pies in a 30 acre cow pasture. I wouldn't count on seeing the banks voluntarily provide fair and reasonable loan modifications in the future.

Without the stick of a cram down the banks have already moved on to their bigger fish to fry! Your average homeowner in America will be merely the kindling to fuel that fire!