There are a number of loan modification proposals out there for underwater homeowners. Virtually all of them however, claim to be only for homeowners who actually occupy the property– not for investors and speculators. Here’s one such example:
NEW YORK — The Obama administration is seeking to force the nation’s five largest mortgage firms to reduce monthly payments for as many as three million distressed homeowners in as little as six months as part of an agreement to settle accusations of improper foreclosures and violations of consumer protection laws, six people familiar with the matter said.
Here’s what this proposal is supposed to accomplish:
[P]unish banks for violations of state law and federal regulations; provide much-needed assistance to distressed borrowers; stabilize a deteriorating housing market; and dissuade firms from abusing homeowners in the future.
Plans such as Obama’s, however, do not take into consideration one large group of people– the “fake” owner-occupiers. These folks fall into two categories. One group consists of the less-than-honest speculators who noticed that they could obtain better financing and insurance rates if they claimed that all their properties were their primary residence. The other group consists of people who were owner-occupiers at one point, but have since decided to rent their property out due to difficulty selling and/or being underwater. Either way, these folks might be the owner-occupier “of record”, but a loan mod won’t keep them in a home they aren’t living in.
One example of an attempt to assist a fake owner-occupier comes to us courtesy of our friend and correspondent M.R. in Tucson, AZ. M.R. told us about a residence in Tucson that has been occupied by tenants since it last changed hands in 2007. According to the Pima County tax records however, this property is owner-occupied. While passing the property last week, M.R. discovered the following:
[I] noticed a sign posted on the side door. So, I ambled up the driveway for a look-see. Turns out that the house has just gone into foreclosure, and the sign was posted by some real estate agency. It was offering the now-departed and never-lived-there homeowner $3,000 to move out.
So what percentage of owner-occupiers are fakes like this one? No one knows. It would take a lot of time and manpower for lenders to determine what is and isn’t owned by a fake. There is the very real possibility though that fraud [and claiming on your mortgage application that you are purchasing a home as your primary residence when it’s actually an investment property is one type of fraud] can end up paying for the perpetrators when lenders are forced to rush this determination:
The number of targeted modifications ranges from one to three million, and the time frame to restructure those loans ranges from six months to as many as 18 months, people familiar with the matter said. Stiff penalties would be assessed if banks failed to meet their quotas. The penalties would make noncompliance costlier than modifying troubled mortgages, these people said.
That’s a lot of mortgages to modify in a short period of time, and not a lot of time to determine whether the owner is,in fact, in residence. In many programs where the onus has been on the borrower to show that they qualify for a loan mod, there has been a shortage of applicants because so few homeowners qualified. In a situation where the onus is on lenders however, the fakes and fraudsters could end up being the beneficiaries.
The lenders want Fannie and Freddie to share the financial burden of such a plan. If that were to be the case, the burden would be shifted to the taxpayers.
Should the administration really be so anxious to punish the lenders for violating mortgage regulations [which happened sometimes, but not in all cases] that they are willing to reward individuals who are just as guilty? [which again, happened sometimes, but not in all cases].
The Obama administration is in a hurry to do this:
“It’s very important that we try to bring this to bed as quickly as we can,” Geithner told the Senate Banking Committee.
How will rushing this initiative through achieve the stated goals? Isn’t massive fines for lenders liable to make for massive litigation if this is implemented before the extent of the violations are known? While this will help a small percentage of homeowners, doesn’t previous experience already show that the majority of borrowers are unlikely to qualify and/or benefit from this? Won’t this uncertainty tend to destabilize, not stabilize, the housing market? Isn’t it not only likely to dissuade lenders from taking advantage of homeowners, but dissuade them from lending at all?
What good does it do to bring the housing market to bed quickly if you are just going to give it insomnia and nightmares?