Michael Olenick: Don’t Buy Mortgage Industry Hype on Mortgage Modifications

By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha)

The Mortgage Bankers Association (MBA) boasts that its members have modified over five million mortgages over the past few years. As a data analyst focused on patterns of foreclosure fraud, I’ve analyzed tens of millions of pieces of information. I was willing to take the MBA’s claims at face value but, years ago, came to the conclusion that the MBA and their members have a severe credibility gap.

Remember, the reason for advocating mods is that, properly structured, they are a win-win: investors take a lower loss than they would in a foreclosure, the borrower stays in his house, and another real-estate-price-depressing sale is averted.

But this “everyone comes out ahead” is not what I’ve seen. I’ve been able to check modifications, since they are recorded in public records. It quickly became apparent that while theses modifications are, at best, worthless, and more often than not border on an extension of the same predatory practices that resulted in the original mortgages.

These modifications are to mortgages as vultures are to predators, another opportunity to take one last bite out of people trying to keep their homes. Banks are “modifying” lots of loans, but to terms even more favorable to banks.

Palm Beach County, FL, recorded 2,242 modifications in 2009, 2,423 in 2010, and 2,066, year-to-date, in 2011 which when extrapolated comes nowhere close to the five million figure the MBA cites. I focused on Palm Beach County because it tends to be a bellwether.

There are permanent and temporary mortgage modifications; only permanent modifications are recorded. Reflecting the disparity between the relatively low recorded modifications, and the claim of five million modifications, the May 2011 Housing Report Card, published by the Dept. of Housing and Urban Development clarifies many modifications are temporary. May’s scorecard cites 1.5 million HAMP “trial” modifications, which are temporary and known to push families into foreclosure, 699,100 permanent HAMP modifications, 849,3000 FHA “loss mitigation” interventions, and 2.3 million Hope Now modifications, which are not classified as temporary or permanent.

I sampled 2-3 non-HELOC residential mortgage modifications in-depth from the beginning of each quarter in 2009-2010, the timeframe the Federal Government claims modifications resulted in the foreclosure slowdown of 2011 (as opposed to, say, the robosigning scandal which coincidentally became national news exactly the same time the slowdown began).

I noted but skipped HELOC and commercial mortgage modifications, though these modifications — especially “voluntary” decreases to outstanding HELOC credit lines — constitute a substantial number of overall recorded mortgage modifications. It is not clear whether the MBA and the Federal Government count HELOC credit-line decreases when counting mortgage modifications.

Finally, that leaves primary residential mortgages where servicers, trusts, or whomever happens to claim to own a mortgage, modifies the terms in some way. I did not “cherry-pick” the worst modifications; instead studying the first few residential modifications, from each quarter, that I came across.

In summary, I reviewed about two dozen residential modifications, finding only one with a principal reduction. <strong>The overwhelming majority were either cosmetic or detrimental to the borrower. Cosmetic modifications include extending the maturity date of the loan by a few years or a small reduction in the interest rates. Detrimental modifications include capitalizing outstanding interest payments, fees, and other costs, increasing the outstanding principal and monthly payment, sometimes substantially.

Let’s start with the only modification I found that reduced principal, book/page 24225/117, recorded Dec. 1, 2010. This loan, also the only one between private parties, was originated June 30, 1983, with an initial principal balance of $88,000 at 11.5% interest. The borrower appears to have paid the loan, at 11.5% interest, for over 26 years then asked for a modification. The lender then graciously dropped the balanced from $11,037 to $10,000, and dropped the interest rate from 11.5% to 7%. Given that the borrower had nearly paid off nearly the entire loan, and was paying far-above interest rates for a house with enormous equity and a long on-time payment history, I’m not sure I’d classify dropping $1,037 in principal as overly generous, but it’s notable for at least lowering principal in some way.

More typical is the loan modification on page 24058/951, recorded Sept. 3, 2010. That loan started had an unpaid principal balance of $284,000. The servicer/trust combo, Saxon Mortgage and Deutsche Bank, capitalized all past due amounts, unpaid interest, and unpaid fees — which often include larded-up fraudulent foreclosure fees — into a new mortgage, adding $62,337.39 to the principal and writing a new loan for $346,264.58. [Note – I know the numbers often don’t add up correctly, but I’m just copying them from official documents servicers filed at the Courthouse.] So the modification, that some poor Schmo likely sent a book of documentation to obtain, is a 22% increase in the principal outstanding. At least they lowered his interest rate, from 6.13% to 4.5%.

That modification is not atypical. Let’s look at book/page 23718/1200, recorded Mar. 2, 2010. This is a Fannie Mae backed loan, serviced by Wells Fargo d/b/a as America’s Servicing Company, though the work performed by First American Title’s “Loss Mitigation” department. This loan had an $122,400 in outstanding principal. Fannie and Wells Fargo generously agreed to increase this by $35,033.81, leading to a new mortgage of $157,433.01, a 29% increase in principal.

In some mortgages the lender doesn’t capitalize larded-on costs to the borrower, but does “lower” the interest rate or extend the terms. For example, in book/page 23570/149, recorded 12/1/2009, the lender, Wells Fargo servicing another Fannie Mae loan, graciously dropped the interest rate from 11-percent to 9-percent. Sounds great, I suppose, except that Fannie Mae by then had been nationalized by the US Government and was borrowing money for essentially nothing. Borrow for nothing, lend at nine-percent .. sounds like a deal that’d make a mobster blush.

In another typical extend-and-pretend modification, book/page 23876/1267, recorded 6/2/2010, Bank of America’s Countrywide division extended the maturity date from Mar. 1, 2036 to Feb. 29, 2040. Maybe they thought this was a gesture of good-faith from a borrower that had diligently paid their $127,000 loan down to $109,527.

One of my favorite modifications is on book/page 23257/1716, recorded June 1, 2009, a Taylor, Bean, & Whitaker loan. TB&W capitalized an extra $25,853.51 to an outstanding $269,000 loan. It says something that a company whose Chairman is in federal prison for 30 years was more generous than the GSE modifications, in light that the GSE’s have received hundreds of billions of dollars of taxpayer subsidies.

None of these modifications, which capitalized garbage fees — including foreclosure fees so outlandish that a Florida judge went on a tirade about without any borrower complaining — are atypical. I simply grabbed a few from various quarters at the beginning of 2009-2010. I could review a larger sample size, but that would be a waste of time: the pattern was clear.

As if the unwillingness to modify loans wasn’t insult enough virtually every modification came with an affirmation that the underlying debt was valid, and the servicer/trust was the correct party. That is, people were essentially waiving their best foreclosure defense — that the servicer or trust does not have standing to foreclose because they did not lend money. In exchange they appear to be receiving .. nothing.

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  1. foreclosuredefendtty

    Too small of a sample. I have seen principal reductions (rare). Hard to see an advantage with a big principal increase. The payment is what is important if you want to stay in the house. Otherwise just stay as long as you can, maybe litigate to buy some time. Then push the reset button.

    1. chris m

      the sample size is sufficient. don’t be misled by the experience of defense attorneys, which is atypical and not a fair barometer of what the general public is being subjected to.

  2. psychohistorian

    Thanks for the posting Michael Olenick and the research behind it. I agree that your sample size is large enough to call the kettle black.

    It is a testament to the persuasion of the media that I have counseled a couple of friends that generally have better sense but were considering applying for refinancing on underwater mortgages. Since neither was in dire financial straits it made no sense to chase a “historically low” interest rate with underwater mortgages at this time, IMO.

    I am hopeful that the energy for the Occupy movements can start to educate Americans who have the parameters of their reality provide by the media they watch and listen to.

    Its no wonder that the slavery they endure is viewed as a feature rather than a bug by many.

  3. ForeclosureHamlet.org

    Excellent article & w/pioneer research into recorded modifications.

    Michael, for your next study, it would be so interesting to add the current market value listed at the property appraiser’s website. Expose the percentage of property value drop compared to the percentage of increase in mortgage principal balance!

    Thank you for this study.

  4. Yearning to Learn

    I could review a larger sample size, but that would be a waste of time: the pattern was clear.

    I disagree. It is true that the pattern is clear. but what we need is for a huge sample, so that we can silence the naysayers who will inevitably say “the sample is too small”.

    this is what the Federal Regulators SHOULD have done the last few years… that and look at all the original loans as well for fraud.

    then we could really “settle” this and move forward.

    I would love to have somebody look over 500,000 random mortgages in the HAMP program and look at the original loan documents, the mortgage modification process, and the outcome.

    Then bring that to a senate committee.

    Then we could imprison almost every Bank CEO in the nation

    1. CaitlinO

      A sample size of 1200 would probably give you a margin of error of less than 5% around estimates of numerical values like new principal, new interest rate, size of garbage fees, etc.

      That would be plenty big enough for the whole US.

      1. Michael Olenick

        That’s the point of findthefraud.com – to allow the public to look through massive amounts of documents. Government has the resources to do it, but they either have chosen not to or aren’t disclosing the results. But the data is too unstructured and time consuming for any single researcher. Tabular data — data in structured form — is easy enough to have computers sift through. But documents like mortgages, mortgage mods, assignments, affidavits, and judgments, really requires people.

        It’s interesting – they standardized the securitization business processes so that computers could easily fly through them, but left the underlying paperwork essentially in the form that it’s been in for 100 years.

        1. Richard

          The Mortgage Modification is a scam by the servicers. All they want is to paper over the current mortgage flaws with new paper that wipes out the homeowners defenses from the original loan.

  5. Steve Bradley

    I’m a real estate broker in California, and I can say that Michael’s information is absolutely correct. Not only are modifications refused for no good reason, the modifications granted are not real modifications at all.
    If the lending industry thinks that this sort of behavior is going unnoticed, they are crazy. Everyone knows this is what they do, except the people who are too stupid to observe obvious facts, the Federal bureaucracy, The Fed, and Congress. But I repeat myself.(to quote Mark Twain).
    This really IS the “elephant in the room,” and it’s about to get diarrhea…

  6. Alex

    Loan modifications are certainly not a cure-all remedy, they only really help some people. What is worst is the number of scam artists selling loan modifications but who do not actually do anything for homeowners and also the attorneys who charge thousands of dollars for something that a homeowner can simply do by calling the bank directly.

    Either way, people do have other options, such as a short sale which really gets rid of an underwater mortgage and avoids foreclosure (by selling the home. Anyone interested in this topic can learn about it here: hhtp://www.shortsalespeople.com

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