Part 3 – In studio with us today on this fine New years eve is Dan Havey, the co founder of the modification hotline as well as the author of The Foreclosure Sharks a great white paper he put together. He is also the author of Real Estates Future and this segment we are talking about loan modifications and some specific information.

You also have a great story to tell about this to. Well unfortunately I have too many stories about people who have had to go through foreclosures, bankruptcies, loan modifications. The one story I want to talk about real quick is a friend of mine who unbeknownst to me went out and did a loan modification on her own and not to get into a whole bunch of technical details on it she ended up getting a pretty decent interest rate because they actually cut her mortgage payment in half and she was pretty happy about that.

She owed a little bit more than the house was worth, she wasnt terribly upside down, but by the time they got done with her she certainly was going to be because the modification, and actually I should not call it a modification, I should call it a forbearance agreement, what they did to her was to say, OK we will cut your interest rate in half, we will cut your monthly payment in half, but we will take all of that deferred interest and tack it onto the back end of the loan. So that by the time her interest rate went back to where it had been, it was going to adjust up over the next five years, so that within that five year time period she was actually going to owe $60,000 in back interest on top of the principal balance that she had before she went to go talk to her bank.

What kind of a deal is that? I didnt think it was a very good one and she ended up eventually not taking it and just recently let the house go back to the bank, because she just looked at it and said, Wait a second here, I am already $20,000 upside down, by the time Im done with you guys I will be $80,000 upside down and so great I get a cheaper payment for a while. She moved into a rental property that was even cheaper then what she would have had to pay to stay in the house and from what she tells me the house is nicer.

Some of the unfortunate scenarios that come up that we get to see. Unfortunately we talk to lots of people that have similar situations, trying to do these on their own and it is possible to do a loan modification on your own. We know that, the program is designed for you to do that. The problem is it generally does not work out.

The re-default rate on loan modifications done on your own is significantly higher than loan modifications facilitated by an attorney that is representing you, for a number of reasons. Number one you have to pay an attorney to represent you. The other is that I think you are going to get a better modification based its not just a negotiation between you and the loss mitigation department for the bank. We are talking about using a professional attorney who is a trained negotiator to negotiate on your behalf with another attorney. By the way, theyre not talking to the same loss mitigation people in India that you may be talking too.

Here are some numbers that just came out from John Dugan who is the Office of the Comptroller of the Currency and they did a study of the loan modifications that have been done to date. In many cases these were forbearance agreements, not loan modifications. If an individual talks to his bank, generally speaking he will not get the same as result as what an attorney would do, so most of these are really forbearance agreements. And in that case, 36% had defaulted or were 30 days past due after 6 months and 58% were in default after 8 months. Again that is 58% in default after eight months and I saw some numbers the other day and unfortunately I didnt bring them in with me today, that according to some study of the very few modifications that have been done using an attorney, I say very few, but it is still thousands or tens of thousands, but few compared to what is getting done directly with the bank, the number is only like 5% of the ones done with an attorney have re-defaulted and again I dont have the numbers with me so I cant site the source…

Duration : 0:5:47

Duration : 0:5:45

Part 4 (Excerpt)

1099 C is for Cancellation of Debt Income Only, not for Interest Rate and Payment Reduction

So for people who find themselves in a very difficult situation considering these options whether it’s a loan modification or a short sale, whatever they need to do to relieve themselves of this particular burden of a mortgage, that for whatever reason they’re no longer able to maintain, they are not always considering the tax ramifications associated with taking a specific course of action, like this example the short sale option.

Right there is actually two pieces of tax component here, you have the forgiveness of debt income that we talked about, they still have the fact that you sold your house and you have to see if there was a gain on that. Over and above the cost basis of the home.

We talked about the 1099Cs a few moments ago, did you say that the lender sends a copy of the 1099C to the IRS? Absolutely.

Now I’m the guy for a few minutes ago who bailed on $400,000 and sold it for $300,000 am I going to get a copy of the 1099C if I haven’t given my lender my new address. Well that could be a problem, they will send it to the last address they have on record for you. And as a homeowner it’s my problem.

The IRS will get a copy, so they will look for it on your return, if you forget to put it on then you’re going to get a friendly notice from the IRS.

If somebody is going to do a short sale, its a fairly civil transaction and when I say civil I mean going for a short sale is horrible for them and their family, but it beats the alternative which is foreclosure, and I think the real problem is when there’s a foreclosure and the guy just walks away and moves off to El Centro California, he’s the one who’s really getting hurt.

So in the event that somebody takes a course of action, and I know that Velocity financial and Michael Barnes, youre not necessarily advocates for that short sale approach. It’s not normally the best course of action, we’ve been talking about loan modifications and it would help me when I talk to clients, or people who call from radio broadcasts who asked questions about loan modification process as part of a financial strategy, help me with some of the tax ramifications. Let’s say that I have a loan and I know the best thing for me is a loan modification, am I going to be faced with a 1099? A tax bill at the end of a loan modification?

Yes, the first of the two tax implications will apply which will be the debt forgiveness part.

I didn’t mean to interrupt you Mike, well I said there are several different types of loan modifications, I believe are you asking about when the loan modification is where they actually do forgive some of the debt?

Thats a point, I know there’s been a lot of discussion on the use of the TARP funds especially from the federal government regarding these banks that qualify for some of these funds, they have to do principle reductions for their mortgages. So let’s say there isn’t a principal reduction involved, from that aspect, its not a taxable event that could take place, since I’m not reducing my principal, I’m simply getting a reduction in my term or my rate.

That’s right, the only time that taxes would come into play is when the principal gets reduced because thats forgiveness of debt.

So let’s take that one step further, whatever mortgage interest I’m able to deduct on my taxes may be impacted if it’s a lower percentage, right because youll be paying less interest, but there’ll be no surprise 1099 coming your way if its just an interest modification.

One of the things that I like to make thing clear is that were trying to do the best for you the homeowner so you can stay in your home. The situation I’m talking about, the $400,000, the lender is more likely than not is not going to forgive $100,000, however the same lender is more than willing to reduce your interest rate so that your payment would be the same if they have done the principal reduction, because it’s not a permanent loss for the bank. If there is someone out there who’s telling you that they can have your mortgage reduced by tens of thousands or hundreds of thousands of dollars, it’s not going to happen and I doubt it’s going to happen anytime soon.

Duration : 0:5:58

Part 7 (Excerpt)

The old rules no longer apply and Suze Ormond should know that.

We have Dan Havey the author of Real Estates Future in the studio today.

Michael, I was just curious, back when I got into the industry many, many years ago there used to be a rule of thumb that if you were going to refinance you had to lower your interest rate by at least two percent and I know as time went along and products changed that really became unnecessary, but I am just curious in todays mortgage market its a lot different than we were dealing with even two years ago. Is that still true that there is a 2% rule? Whats going on now?

I happened to catch Suze Orman on television and she was talking about mortgages, the caller who called in to the program, the question became I believe similar to what Dan just asked, her comment was that basically if you’re in 6% interest rate or above now is the time to re-fi. That is what she said, a blanket recommendation. I know a lot of people put a lot of credence into what she says, maybe you could speak to that, the lowest interest rates you’ve seen in your career, you have been doing this for a while.

I have, and they are. You know there was a lot of speak the last couple weeks about the Fed, the Fed funds rate by the way is the lowest it’s ever been in history. As of this week the discount rate is to the point that banks are lending money to each other at nothing, the Fed funds rate for intrabank lending is at zero, the problem is the banks don’t have any money.

To be serious about the refinancing, because its a serious topic, I think people are starting to see their mail boxes filled with lots of advertising crap about refinance. I believe that doing the refinance is no different from doing a loan modification or buying a house, you need to sit down with the human being that’s local, that you can know is a legitimate source. You’re going to give all this personal information about you, your family, your kids, your Social Security number, you want to make sure you have somebody there that you know whos legit.

In regard to the old rule of thumb 2%, nothing could be further from the truth, and I will expand, but to the point of Ms Ormond that if youre at 6% or higher, that is a blanket statement and blanket statements never work. We just did a refinance for a guy who was at 5 1/2%, and it makes sense. Every situation is different, as far as how much do I have to lower my interest rate to make it work? It depends on the type of mortgage that you get.

The only type of loan to get today in December of 2008 is a 30 year fixed. I know that one of the things that was really interesting to me, and that you and I have referred clients to one another for several years, so we share a number of clients, were familiar with those families and those households, and this is Wednesday, on Monday and Tuesday of this week I’ve had seven phone calls from clients who you’ve already done loans for, refinances for, asking if this is the time to refinance a loan that is only a couple years old.

And I know in several of those cases the answer is yes you’re actually helping families right now with that process. I am and we do. To answer the question, you need to determine what the payback term is, in other words when your refinance is done it’s a new loan, there’s the title insurance, appraisals, lots of different things may need to be done, not in every case, but in most cases there are costs associated with that. The cost has to be offset by the amount of savings. Its a breakeven analysis

Absolutely it is, the shorter the breakeven the better the loan. I am working on a case right now which is going to be done in the next couple of days where the guy lowered his interest rate by an1/8 of a percent and it made sense for him. It’s not for everybody, 2 percent or lower, 2% is significant, now you’re talking about really significant savings in terms of cash flow…

Duration : 0:6:31