November 13, 2008 – 7:13 pm

Fannie Mae, Freddie Mac and the big banks have instituted an aggressive new loan modification program that has nothing to do with loan modifications. The new scam is designed to keep payments flowing to banks at the expense of mortgagors being sunk with negative amortizations and teaser rates. Hear ye:

The great new and improved big plan to save the housing sector involves giving 40-year terms, adding balances to the end of the loan and offering teaser rates. IT WAS THESE EXACT PRACTICES THAT GOT US HERE IN THE FIRST PLACE! They were called ‘interest only’ and ‘Pay Option ARMs’.

This ‘new’ program is nothing new at all. It is simply an aggregation of a bunch of stuff brought forth previously that just makes everyone renters. The government’s new plan of reducing rates, extending terms and allowing negative amortization is being done primarily to keep borrowers from walking and renting by competing with rentals.

This plan does not solve the problem – that home owners are hopelessly underwater and over-leveraged to their home. They can’t sell or refi. In turn, they are making a wise financial decision and walking away. Negative equity cuts across all loan types and borrower demographics.

Sooner or later, house prices will to collapse. All the king’s horses and all the king’s men cannot stop it. In fact, all the world’s kings couldn’t stop it either. These new programs are swimming upstream in a river of subprime sludge. Witness:

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ’save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

To date, four banks have joined the new program. Most recently, Citigroup penned its signature to the list:

Citi becomes the fourth major bank to garner press for a pronouncement of mass modifications, and an associated freeze in foreclosures. The FDIC kicked off the loan modification party in August by announcing a plan to refinance troubled homeowners into “affordable” mortgages at IndyMac Federal Bank; Bank of America Corp. (BAC: 17.10 +0.59%), saddled with legal pressure tied to its Countrywide unit, later announced its own $8.4 billion loan modification program/settlement in early October, which is also expected to target 400,000 borrowers. Just last week, JP Morgan Chase & Co. (JPM: 37.19 +7.58%) launched an aggressive loan modification plan estimated to impact roughly $70 billion in mortgages

Similar programs motivated by legislation have shown tepid success slowing down foreclosure rates in California, but they cannot solve the foreclosure crisis.

Foreclosure sales in California dropped a sharp 39.1 percent between September and October, according to a report released by ForeclosureRadar late Wednesday. The drop, however, has largely been ascribed to recent legislation in the state that is effectively stalling most foreclosures amid new borrower notice requirements.

“It would be a mistake to conclude declines in foreclosure activity indicate an end to the foreclosure crisis,” said ForeclosureRadar CEO Sean O’Toole, echoing comments made by many industry observers in recent weeks amid falling foreclosure statistics within the state. But O’Toole also suggested that lenders themselves may be slowing the foreclosure roll within the state, as they look to modify more loans.

And if you believe the lenders are truly concerned about stemming the foreclosure crisis, then you’re just along for the ride they want to take you on.

“While lenders now appear to be embracing the concept of foreclosure moratoriums and loan modifications, neither typically address the core issue of negative equity,” O’Toole said. “Most loan modifications focus on lowering payments to affordable levels by using unsustainably low interest rates, not unlike the ‘teaser rates’ that many have blamed for the current crisis.”

In the end, it comes full circle. Greed led to teaser rates and option ARMs, which led to a credit crisis, to desperation, back to teaser rates and to option ARMs.


  1. 3 Responses to “Stalling Foreclosures with Fake Modifications”

  2. This is what I think is really happening. I base this upon my own personal experience as well as being a former Realtor and pre-law student. Ultimately, NO ONE is going to get a real loan modification because it is all a scam. We happen to have Chase Home Mortgage also, and I have read story upon story from one homeowner after another about the way these banks are abusing people. The stories are the same and I can identify with everything that others have said. The banksters’ ultimate goal is to take your house. THEY WILL FORECLOSE. Make NO mistake about that. You WILL lose your home. Bottom line.
    Because when the banks got all that bailout money, that gave the Feds the right to stick their nose in the banksters business. Banksters are common thieves (the ONLY difference is they dress nicer and don’t sneak into your home in the middle of the night).
    The banks want the Feds out of their business so they say they are going to pay back the bailout money to get the Feds off their backs. HOWEVER, rather than actually paying back the billions in bailout money (our taxpayer dollars mind you) they are forcing everyone who is upside down and behind into foreclosure. Banks almost always buy the/your houses back at the foreclosure sales. Then they write the difference off (as losses) on their taxes. Thus, they are technically “paying back” the bailout money but not out a single dime and, they get to keep the houses too and resell them and make even more money over the life of the new loan. They get to have their cake, keep it, and eat it too. This is who the American homeowner is dealing with.
    HOW are they getting away with doing this and why are they telling people to PURPOSELY NOT make XX payments prior to filing for a modification? The answer lies in the mortgage paperwork itself. Almost all mortgages have a clause in them called a “Power of Sale” provision. Read it! It plainly states that in the event of your default (ie., you get behind), the lender has the right to foreclose and NO OBLIGATION to enter into ANY modification program or accept anything other than what was originally agreed to. The banks are literally setting people up like dominoes. Just look around. Right now 4 out of 10 homes are either vacant or in foreclosure-that’s nearly HALF! The Banks have ZERO intention of letting you keep your home. It is a complete scam with the full blessing of our elected officials who work so hard for us (cough). Once you are behind, there appears to be no accountability as to what happens to any/all payments you make to them from what I am seeing and hearing. There are major discrepancies in escrows. My educated guess is that the banks are pocketing whatever you do send them so you might as well burn the money.
    Bottom line? Don’t get behind. In this economy though, I know for most people that is or has been impossible. If you have been or you are in arrears/trial loan modification, etc., REALIZE NOW that they ARE GOING to take your house-it is only a matter of time, a question of WHEN, NOT “IF”. If you are behind, stay in your home as long as you can, drag the process out as long as possible, realize you will most likely have to file bankruptcy because they will also try and come after you for the difference in what you owed and what the home actually sold for. Watch your respective County recorder’s office for the foreclosure sale date. They are REQUIRED to record that PRIOR to the sale. On the day BEFORE the sale, file your bankruptcy. It isn’t the end of the world. Rather, it is a new beginning. While you remain in your home DO NOT SEND THE BANK ONE CENT! Save ALL of your money and sell off anything you don’t need so that you can find another home when they stick a note on your door telling you that your home has been sold from underneath you. This is the inevitable. It is awful and scary and atrocious-but this is the reality of what is going on. I have yet to hear of a single loan modification that worked out in the homeowners favor. Google the banks and foreclosures and complaints and you will see the same scenarios being played out over and again and all have the SAME end result-FORECLOSURE! It is doubtful that the government or the AG’s will help. ALL the complaining is falling on deaf ears. Banks are powerful because they have money (our stolen money) and money is power. Class actions are good but they are only as good as the judge who handles the case and Judges can be and are bought and sold all day long for the right price. Bottom line, SAVE YOUR MONEY! Gve these criminal enterprises (banks) a taste of their own medicine. Play along – but send them no money and drag out the process of foreclosure as long as possible. Two can play at their game. But realize that ultimately you WILL lose your home so you best prepare yourself whilst you have the time. Don’t pay these bastards ANYTHING no matter what empty promises they offer. They are lying and yes, still stealing and they will stop at nothing to steal your home right out from under you.

    By Jan H on Apr 4, 2011

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