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Sunday, November 9, 2008

Loan Modifications: The Perversion and Genius of Free Markets and Capitalism

If you think that real estate is depressed right now, you are about 99.5% right. The market as it stands is in general totally depressed. On the other hand, the market, as it stands, also provides opportunities for those mortgage professionals willing to take advantage of it. For instance, anyone involved in buying, selling, or marketing foreclosed properties has lots of business right now. A second opportunity has also surfaced in the last couple months. That opportunity is known as loan modification.

What is the hottest business since subprime and over priced homes bought with unaffordable loans? Answer: Loan Modifications!!!! Everyone is doing it. Well, almost everyone.

I don’t think there is one mortgage professional or real estate professional that is not performing loan modifications, short sales and even bankruptcy’s. Some legally, but most illegally and many have absolutely no idea what they are doing and it’s not about helping people, it’s all about the Benjamin’s.

But hell, they have to find some ways to pay that BMW 525 (they had to down size from the 750) and their also soon to be foreclosed homes because they are trying to get a loan modification too! So, the easy targets are the same people that made them thousands and millions.

Good and qualified borrowers tend to have loan terms that are better than the market currently affords. No one seems to be buying and everyone is attempting to sell. Instead of focusing on good qualified borrowers, of which there are few, mortgage professionals instead focus on bad borrowers, really bad, and attempt to get them a loan the market would never allow on its own. Yes, you read that right. The current market makes it difficult for just about anyone to qualify for a loan. The market also has lots of very unqualified borrowers in loans they can't afford. As such, loan modification, obscure and irrelevant until months ago, is now the hot sector of the market.

Loan modification is the process by which borrowers in loans they can't afford, get loans that are affordable by the very bank that currently holds their mortgage. If 8% is too unaffordable, the bank will make it 6%. If the $250,000 balance is too much, it may even be possible to lower that as well. There is plenty wrong with this but let's leave that for a minute. Let's first focus on what is good about this process.

The blossoming of the loan modification niche is the finest in free markets and capitalism. The opportunity to still do well in bad markets is the real reason that free markets and capitalism are the best forms of economies. Anyone can figure out how to make money in real estate when that is hard. It is the true capitalist that can do well in a bad market. Loan modifications offer just such an opportunity. There are a lot of people that are hurting with their current mortgage. If they could just have their terms improved a bit, they would be able to pay the loan back. Unfortunately, they don't qualify for a better loan. Yet, is it really in the best interest of the bank to foreclose rather than try and make the loan more affordable? That's how the niche of loan modification is ballooning.

Now, former and current mortgage brokers are all entering this niche. A lot of banks are being pro active. For instance, many banks with a lot of option arms in their portfolios are recruiting mortgage professionals to perform loan modifications of these loans prior to these loans adjusting. Mortgage professionals are scouring areas for high foreclosure concentration and sending out advertisements for this new mortgage tool. Banks have made this business more friendly for mortgage professionals by generally requiring that a representative communicate with the bank on a loan modification rather than the borrower themselves. As such, such services are usually mandatory.

Just as a couple years ago, sub prime mortgages were given out with little more than a heartbeat. Many of these same folks are now being given just as much consideration for loan modification, and there's an awful lot of astute mortgage professionals there to take advantage. As such, from this terrible bear market, a niche has grown that allows the wise professional to take advantage.

Now, what is the down side? What exactly does a loan modification encourage? Let's think about who does and doesn't get a loan modification? It isn't the QUALIFIED borrower that will get their loan modified but rather the UNQUALIFIED. So loan modifications encourage getting loans you can't afford. The more loan modifications there are out there, the more people will know this is their last option. It's a rather good option. You get a loan you can't afford. Then, you get in trouble, and for your trouble, you are rewarded with new terms that are likely better than if you were qualified to begin with.

If this becomes a niche, a growing and flourishing niche, it will also ultimately reward, en masse, all those borrowers that recklessly got themselves in over their heads. That will lead to more of this behavior. Stated loans grew in popularity specifically because they grew in popularity. Much of the popularity of stated loans came from word of mouth. One person told another one how they got their massive house, and soon everyone wanted to do the same. The same thing will soon happen with loan modifications. It will also lead to a class warfare. Good, qualified borrowers will soon be screaming bloody murder. Imagine if you are paying on time. Imagine if you took out a loan you could afford. Now, imagine if your neighbor, who didn't, now has a better loan than you specifically because they didn't do what you did. The more popular this niche gets, the more trouble it will breed to the market as a whole. Yet, the current state of the market means it will get more popular. Loan modifications are both the genius and perversion of free markets and capitalism.


Anonymous said...

mike, do you know how the loand modifiers make money and how much they make? are they being dishonest in the process?

mike volpe said...

Modifiers make money one or both of two ways. First, they usually charge the borrower a flat fee. Second, they often get paid by the bank. Are they dishonest? Certainly, they can be. Often modifiers present the borrower as something they aren't. Sometimes they take their modification fee knowing full well that the modification has little chance of surviving. The modifiers are dishonest not because they have to be though, but because it is often in their nature.

Scott said...

Its not mentioned here, bt the HARP program is another stimulus behind a lot of the new re-fi business.