“That is the proverbial drop in the ocean,” said Byron Koste, director of the Colorado Real Estate Center at the University of Colorado in Boulder. “That will have no impact at all. The only impact it has is that 1,000 families are better off.”

The latest report from the  federal government shows that as of the end of December, there were 11,170 homeowners in “active trials,”  for loan modifications. The trial modifications are required before the loan can be made permanent. Colorado ranked No. 19 in the nation for the number of active trials and permanent loan modifications. The 1,072 permanent loan modifications represents 8.8 percent of the trials, which is slightly better than the 8.4 percent ratio nationally. Nationwide, at the end of December there were 787,221 trial modifications and 66,465 permanent modifications. The goal of the program is to provide 3 to 4 million homeowners with lower mortgage payments through 2012.

Banks have no incentives to modify loans

Koste said he is surprised that there were even 1,072 permanent loan modifications in the state. Even though a focal point of the Obama Administration’s year-old $75 billion war on foreclosure is modifying loans to keep people in their homes, banks have no incentive to play along, Koste said.

“There is no bank in a hurry to write down a loan,” Koste said.

For example, if a bank writes down a loan so the borrower saves $700 a month for two years, the bank needs to write off $16,800 – 24 times $700. Arguably, the bank is not taking a loss – it’s just making less interest on the loan.

It actually typically hurts a bank less to let the home go into foreclosure, and become what is known as a REO, or Real-Estate Owned, Koste said. “Banks have a formula where a certain percentage of their loans can be REOs,” Koste said. “But write-downs go straight to earnings.”

Even though bank foreclosure are expensive, most banks would rather put off the cost to the future, than take an immediate hit to the bottom line, he said.

Koste said banks need incentives to make loan modifications.

“We need to spread the pain, and spread the gain,” Koste said. “The pain is to the banks, and the gain is to the homeowner. There’s a disconnect. Things are misaligned. It’s a mess.”

He said everywhere he goes, he hears horror stories from homeowners who try to work with banks to modify their loans.

“Extend and pretend is alive and well,” Koste said. “When people talk to their banks, their conversations just  seem to disappear into the ether. Sometimes, months later, someone will respond. Everyone is dragging their feet. For the people who process the loans payments, this is new to them and they are not even sure what the rules are. They don’t know what their bosses, the people who actually invested in the loan, will or will not accept or what they can offer.” Another complication can be in the loan had been folded into a financial instrument such as a mortgage-backed security. Modifying individual loans in the security can reduce the monthly cash stream to investors.

Modification activity poised to rise

But a surge in permanent loan modifications may be coming in the next few months, said Shannon Peer, director of Housing Counseling at the non-profit Brothers Redevelopment Inc. in Edgewater.

“The big wave of temporary modifications did not start until June, July and August of last year,” Peer said. “What I have heard from several loan servicers is the end of three-month trial periods they were not ready to provide permanent loan modifications, because of the sheer volume.”

He said a lot of modifications were only made permanent last December and January.

“I expect more permanent loan modifications will be offered,” Peer said. “It will be interesting to see what happens over the next couple of months.”

He said some of the frustrations with distressed borrowers is that the loan servicer requires them to fax the same information more than once. And some homeowners mistakenly think that loan servicers will call them to remind them of what documents they need to provide at a future date. But he said they should not expect any follow-up calls and should be responsible for providing all the necessary information by deadlines.

“Because these companies are such large entities, something we have noticed is a communications break down between the borrower and the servicer,” Peer said.  ”One of the things our counselors are educating the homeowner about is regarding providing all the necessary documents. We don’t want our homeowner clients to be denied because they did not provide the proper documentation at time. Our counselors, at the first meeting, tell the homeowners to bring documentation – including pay stubs and bank statements – which helps. It does take a lot of persistence on the part of the homeowner.

Modification a lifeline for one homeowner

Michael Gunstanson was extremely persistent with his lender, and his hard work and determination paid off. He was one of the lucky ones who received a permanent loan modification.

“It was a godsend,” said Gunstanson.

His new permanent loan from JP Morgan Chase dropped his interest rate to 2.25 percent from 5.75 percent. That cut his monthly payment to about $950 from about $1,700.  In the sixth year of the loan, which will be amortized over 40 years, the rate will rise to 4.5 percent, where it will stay for the next 34 years, unless he pays it off sooner. He also will need to make a $30,000 lump sum payment when he pays off the loan.

The monthly savings is more than $600 payment on their 2005 Dodge Durango.

“So for us, it’s like losing a second car payment,” said Gunstanson. “Not only can we afford to stay in our home now, but if I get a high-paying job out of state, we could rent our home.” He said homes in his Lakewood neighborhood are renting between $1,400 and $1,600 a month.

The loan modification sounds like a good one, both for the homeowner and the lender, said Jeff Bernard, principal of Bernard Real Estate Analytics.

“A real key point is that now he can rent it,” Bernard said. “Whether he rents it or owns it, he will still retain significant cash deductions.”

Bernard said it sounds like the lender will recoup much of the money it lent at the back-end of the loan. And it may very well take all of the appreciation, when the home is finally sold, with the $30,000 payment, he said.

Indeed, one of the concerns for banks, the Obama Administration, and society, is the number of people who have had their loan modified, and still do not make payments based on the lower amounts. “I seem to recall one estimate was that 42 percent of the people who had their loans modified, still didn’t make their payments,” Bernard said. In some cases, it was because the payments were still not low enough, and other types it was because the home was so under water – that is, the mortgage is worth more than the home – they believed doesn’t make economic sense to throw good money after bad. Bernard said some people may even try to buy another home at today’s discounted prices, and let their current home go back to the lender. He said in many of those cases, the homes are expensive and are held in one spouse’s name.

“There is a lot of game-ship going on right now, and I think some homeowners are looking for ways to game the system,” which they think has treated them unfairly, Bernard said. He said some people feel like they are throwing their money away for at least the next five years, by continuing to make mortgage payments on their homes, so they choose to walk away, even if they can afford the payments.

“I do think loan modifications can be a great thing for a certain portion of the population,” Bernard said. “But what I think what we have learned is that for a certain portion of the population, they just should not own a house. A few years ago, we believed it was the American Dream and everyone should own their own home. But I think a large percentage of the population is better off renting.”

Another homeowner considers “strategic default”

One homeowner who lost a well-paying job about a year ago, is seriously thinking about renting a two-bedroom apartment for $600 a month, and returning his home just south of Washington Park on two lots to his lender in a “strategic default.” His home is underwater – that is, his mortgage his worth far more than his home.

He currently is working two jobs for about $3,550 a month, and his interest-only mortgage payment on his $384,000 loan is about $2,130.

“Obviously, the math does not add up,” said the homeowner, who asked that his name not be used.  Efforts to modify the loan with the lender have been fruitless, and just last Friday he talked to a counselor for the Obama administration’s Hope for Homeowners program, who was not optimistic he would be able to get his loan modified.

A few years ago, he could have sold his home for $500,000 to an infill developer that would have scraped his bungalow. He said he has had one nibble from a developer that indicated he might be willing to shell out $389,000, but the prospects do not look good because of the glut of expensive homes on the market.

He said his lender, U.S. Bank, said it might consider a short sale, in which it accepts less than the mortgage amount, but it would expect him to pay the difference.

“Uh, hello… If I’m going to screw my credit, I figured I might as well just walk away owing the whole amount and paying nothing,” he said. “But, to be honest with you, if the developer doesn’t come through, I really think my best option is a “strategic default.”

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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