Loan Servicers Sloppiness Exposed

Posted on March 21st, 2009

For quite some time, there have been complaints that the reason why so many homeowners have defaulted, and foreclosure levels are so high, is because “they don’t have enough skin in the game.” The theory is that homeowners who have put little-to-nothing down on their home purchase are more likely to default than those who’ve contributed a substantial down payment, because they have less to lose if their home goes to foreclosure. By extension, it is believed that those with larger down payments will exert more effort to avoid foreclosure and keep their homes.

This line of reasoning seems both logical and intuitively on-target.  So, let’s apply the same thinking to the loan servicing industry.

In my avoid foreclosure series, one of the things that I focus on is that loan servicers are pretty lax in their standard of care when it comes to handling loans in default, and properties headed to foreclosure.

One of the fundamental reasons for this sloppiness, in my opinion, is that the loan servicer has very little to lose if a property goes to foreclosure. The monthly servicing fee on any one given loan is a very small portion of the monthly payment. If your measly little loan is worth somewhere between $65-200/month to a servicer, exactly how motivated do you expect them to be to give you a loan modification and help you to avoid foreclosure?

Add to that the fact that they’ve got tens to hundreds of thousands of loans to service, and it’s clear why a servicer might prefer to see you go, rather than help you to keep your home. And, your loan is eating up resources, so they’re probably losing money on your file. Add to that the fact that they have to advance to the investor the payments you haven’t made, they’ll probably recoup those costs more quickly by foreclosing than completing a loan modification.

So, I’m having difficulty seeing why this lack of skin in the game theory isn’t being applied to servicers. Recently, Calculated Risk had a story on Banks Sell Some REOs in Bulk below Market Prices. It seems that some servicers have let a few homes go for significantly less than “fair market value,” whatever that means in today’s climate. Apparently, some investors have been buying these REO homes and then flipping them without having to improve the properties.

For many years, the problem with the handling of REO’s is that the lenders were asking retail prices for homes that were in awful condition. Miraculously, they were often getting these prices. Instead of selling the properties to competent professionals who would buy them at reasonable cost and make the necessary improvements, they were foisting them on retail buyers. Many of these homeowners-to-be were financially unsophisticated, with weak credit scores and more mechanical skill than capital. They’d buy these homes with the easy financing that was available at the time, and later find themselves woefully short of cash to make the needed repairs. This eventually led to a glut of repairs in really awful shape, which were increasingly difficult to unload.

Now, the pendulum has swung in the opposite direction in some cases. Faced with bloated inventories, these homes are being packaged and sold in bulk. Occasionally, a home is re-sold for significantly less than its retail value. Well folks, when you buy in bulk, you’d best have a few gems in there, or it’s not worth making the purchase.

For those completely aghast at this prospect, I suggest you pick up a copy of Thomas Sowell’s “Basic Economics” and read the section on the value of middlemen. While it’s popular to bash middlemen who take a cut of potential profits, holding out for the last dollar on every single piece of inventory is inefficient and would likely cost more in the end to collect than letting a few good ones go with the bad ones. And believe me, there are a LOT of bad ones in every bunch. 

The actions of some servicers that I’ve seen border on a violation of fiduciary duty. And some have clearly crossed the line. The crux of the matter, in my opinion, is the low margin in this business, leaving servicers with very little interest in any one given loan.

The excuse that some lenders offer is that, “We’re swamped.” or “We service X million loans.” This sounds to me like, “We’re big, so we suck.” Of course, out of the other side of their mouths, they’re promoting their size as an asset to potential borrowers who are in search of a home loan.

On the other hand, I recently dealt with a “Mom and Pop” shop that seemed hell-bent on foreclosure, looking for any excuse possible to take away the home, rather than offer a loan modification to a borrower who would have been a slam dunk at any major servicer.

Of course, this particular investor had very little “skin in the game” themselves, having just acquired the note for what was likely pennies on the dollar. Funny what a game changer “skin” is in the area of loan modifications for those who want to avoid foreclosure.

Filed under Avoid Foreclosure, Loan Modification, REO, loan servicers, loan servicing, skin in the game | No Comments »

Hard Money Loan Applications Surge in First Half of February 2008

Posted on February 19th, 2008

As the mortgage market continues to tighten the availability of residential mortgage money, many former qualified investment home borrowers are turning to hard money lenders to facilitate their needs.  In the first half of February of 2008, we’ve witnessed a massive resurgence of borrowers requesting this type of financing.

A hard money loan is typically defined as a loan that mortgage banks won’t do.  They range from borrowers with low FICO scores all the way up to complex commercial deals invoking blanket or bridge financing.  The lenders offering these funds are typically lesser known pools of funds put together by former mortgage brokers now turned hard money lenders. 

With the recent tightening of institutional financing and the folding up of 200+ lending institutions, these types of hard money pools are gaining popularity with former mortgage brokers faster the any new FHA reform you may hear about. 

These new hard money lenders bring on wealthy investors and pay them a sizeable return of approximately 10-12% for the use of their money.  They then loan the money out and keep the origination fees that they collect from the borrower.  Additionally, they typically charge their pool of investors a 1% fee for servicing all of the borrower’s monthly payments and collections.

In the past, and to some degree still today, hard money loans carry a stigma of ill repute.  This comes from the high fees (points) and exorbitant interest rates that nearly all of these lenders charge.  Interest rates of twelve percent are a normal starting point for these costly loans.  Origination fees are also high, typically ranging from 3-8 points (3-8 percent of the total loan amount borrowed.)

Interestingly enough, for some borrowers, this type of loan is a wonderful thing.  Residential investment mortgage loans have nearly dried up while the number of pennies-on-the-dollar foreclosure homes has gone through the roof.  In many cases, residential home investors are now forced to utilize hard money financing to purchase homes.  Traditional lenders used to allow investors to finance as many homes as they could reasonably afford.  With lenders feeling the pinch from sub-prime losses, they have nearly all restricted the max number of financed properties to four.  With the advent of the hard money lender comes relaxed guidelines and a more common sense approach to lending.

Hard money lenders typically loan at a maximum of 65% of the purchase price of a home or its appraised value on a refinance.  For a hard money lender, this gives a tremendous cushion and a firm reassurance that a borrower will pay their monthly hard money mortgage payment.  After all, if they don’t pay, the hard money lender will foreclose and own the home at a roughly 35% discount. 

There are few other qualifications to a hard money loan besides having “skin in the game” (having the 35% to put down on a purchase or at least 35% remaining equity in a home when refinancing.)  A few newcomers require the borrower to have a FICO score of 620+ but most old timers in the business still loan to anyone with a 65% LTV or lower.

If you are looking for a hard money loan on an investment property, a residential refinance or a commercial transaction your first stop should be to visit our friends at Las Vegas Hard Money.  They provide hard money loans strictly based on LTV (Loan-to-Value Ratio.)  They are the only technologically savvy source of hard money with a website that instantly gives you a lending decision.  Their website automatically pulls down the property valuation and divides it by the mortgages requested, thus providing a fully-automated immediate hard money decision.

Luxury Mortgage Group assists in the placement of funds for this pool as well as consults investors with diverse yield requirements from all over the US and abroad.  If you are interested in investing in hard money mortgage backed securities, continue on to our corporate website where you can read about investing in hard money.

If you have additional questions regarding hard money investing or obtaining a hard money loan contact:

Call Jason Fox / President
at (702) 444-0400 x1
Continue on to our 2 minute mortgage pre-approval form.
Or complete our full online mortgage application.

Filed under Hard Money, Las Vegas Hard Money, hard money investing, hard money lenders, skin in the game | No Comments »