For over a year I have been working closely with a friend — who for the purpose of this note I will call Rufus so you don’t forget it — to see how far we could push Chase on a WaMu Pay Option ARM first mortgage and Chase HELOC second mortgage modification.
I agreed to help out because he has been a friend for a long time and thought negotiating a mod from the front line would make for great research. Further, because through my proprietary, near real-time bank-originator and servicer-specific resi NPA tracking system I could watch Chase’s default & Foreclosure activity daily and if they began to accelerate the volume and velocity of Foreclosures for any reason, I would be able to catch this threat before anybody else giving him an early warning to do what it took to cure the default. On the contrary, if I noticed Chase went into hyper can-kicking mode, which actually happened in June and July when Chase suddenly cancelled over 10k WaMu Pay Option Foreclosures, I could advise him to get more aggressive because obviously the bank was experiencing some sort of internal strife. Lastly, because Rufus owes $1.2 million ($1.1mm first and $100k 2nd) on a house now worth about $700k I figured a great modification was a lay-up because at the end of the day Chase stands to lose too much to let him walk away. Boy, was I wrong at least until recently.
In short, after a long, long relentless back and forth with Chase’s “Burger King kids (and adults)” who couldn’t answer any questions about how a mortgage or mortgage mod worked unless they conformed perfectly to their script — and that left me so frustrated at times during this ordeal I didn’t get any sleep even though it wasn’t even my loan — Chase agreed to a $250k principal balance reduction on the $1.1mm WaMu portfolio Pay Option ARM balance and a one-time cash payment buyout of their $100k portfolio second mortgage for roughly 20 cents on the dollar.
The Long Version
This all began when Rufus lost his job roughly 18 months ago due to an injury. He was on disability but at a fraction of his former pay. He decided to quit paying his mortgage, which due to his personal circumstances and how far underwater he was I fully endorsed. Months and months went by and nothing from Chase other than mail correspondence, ‘late notices’ and random auto-dialer calls notifying him that he must call the bank. Finally, around month six he got his Notice-of-Default, the first stage in the CA Foreclosure process. A couple of months afterward I told him to make first contact with Chase with me on the other line.
And so the journey began.
After a few calls, messages and returned calls we finally got through to somebody who was beyond clueless. At the end of a 30 minute call, Jerome told Rufus that if he just made some sort of payment — even if only a few hundred dollars — it would look good in the eyes of the bank when they made their decision to grant him a mod. It was as if he was a collection agent working off a minimum daily amount he must bring in to keep his job. Immediately, I called BS and we hung up the phone.
A week later Rufus got a call from someone else named Billy and wants to speak with him about a great “deal” on his Chase mortgage. It turns out Billy was from Chase’s second mortgage collections division calling to harrang him about not making his payment for several months. Bottom line – the two divisions do not work together. Knowing the second mortgage had zero leverage due to being fully underwater, he told Billy to call back after he coordinated with the first mortgage division.
About another month goes by — Billy has called and left at least 50 messages trying to collect on the second mortgage by now — and Rufus decided to go down to the local Chase mortgage modification centre opened in our area. I went with him. Bottom line – the women there, Tamiqua, was as clueless as Jerome and Billy. But we did get a mortgage modification application package, which was more information than was given to Rufus over the entire term of his delinquency.
All this point, Rufus had not made a payment in nine months.
And so the saga began.
Rufus completed the modification application and submitted it by mail at the beginning of May. We wait.
Mid-June Rufus got a call from someone wanting to talk about his modification request. Bottom line – this was an administrative person getting the paperwork together for a modification underwriter of sorts. He sent over some additional paperwork including ad-hoc P&L he drafted on his PC for some consulting work he is doing and again, he waits.
Early July a call came from Candy who said she could help with a mod. We called back and she tried to play hard ball saying he doesn’t qualify and he should sell the house. When he told her the house was only worth $700k her tone changed. She said she would get back to him.
Late July Candy calls back with an offer. She said she could wrap all the late payments, penalties, and fees into the loan amount if he would start making his payment again beginning today. Rufus said “just take the house. If I could afford the payments I would have never went into default in the first place”. We hang up. This is what’s known as a loan “workout”, commonly confused with modifications and preferable to the banks. However, most of the time these lead to another default in short order.
Mid-August, Rufus received a Notice-of-Trustee Sale with a court date and time for his Foreclosure sale. I told Rufus not to worry as there was no way in hell Chase would Foreclose and lose $650k between the first and second mortgage. At this stage he almost relented and made a payment but after a couple of days of internal debate figured he was better off using the money for a rental, which are actually less expensive than a modification when factoring in taxes, insurance and maintenance.
About a week later Candy called back with a “new and improved” modification program she claims Chase has rolled out, which will lower his monthly payment substantially. She is totally unaware that the house has been scheduled for sale. She thinks he may be able to get a rate of about 2% for the first five years but she has to have a complete modification application and all supporting income and asset documentation.
Rufus said he just turned in a full mod package with all supporting documentation a few months back. She said she doesn’t have it and a new package will be required.
Towards the end of August, Rufus returned his documentation. Mid-September a call came notifying him in that his modification was in underwriting and he was told to be “patient”.
Mortgage-gate breaks around the beginning of October.
All this time, Rufus had not made a payment in 14 months.
The End?Mid-November Candy called Rufus to tell him he has been approved for a 2% interest only loan modification with a principal balance reduction but the final approval has to come from a manager and that will take a couple of more weeks. When he pressed her on the amount of principal reduction, she said that the underwriter approved $250k, which was about what I figured was needed to keep his debt-to-income ratios at 50%. When Rufus asked about his second mortgage, Candy said that is not her department and it will have to be dealt with separately. However, she did say they will not approve the first mortgage mod unless the second is completely current, paid off, or modified.
Modifications on seconds are all over the map. I have seen them vary from a fixed payment of $100 a month on a $75k balance to 1% interest only. Banks commonly requiring that borrower’s “fix” the second before they will grant a mod on the first mortgage is why second mortgage loans have had a much better delinquency and default track record than many, including myself, had forecasted. This track record allows many banks to mark these loans, which are essentially unsecured credit cards on which the borrower’s can’t charge on any longer — the most risky debt of all (think Advanta) — at par and set aside meager loss reserves against future performance.
On the first mortgage, a 2% interest only on a $850k loan (after his $250k principal reduction) is only $1416 per month plus taxes and insurance…far cheaper than he can rent the same house for.
Suddenly, on Tuesday — after not hearing from him in a few months — Billy, who is now a seasoned second mortgage collection veteran, called back with a “great deal” on his second. He said he can offer a buyout of the $100k second mortgage balance for $40k and give payment terms. Rufus offered $5k cash today. Jimmy said he knows he can’t get that approved and won’t even take the offer to his boss, but has recently seen 10 to 20 cents on the dollar get approved for borrowers in this mature of a state of default and feels strongly about his chances. He said he would be back to Rufus within a week.
As I have shown through volumes of research over the past year, with respect to the millions of legacy high-risk, severely underwater Subprime, Alt-A, Pay Option, Prime and Jumbo Prime loans still churning in the system awaiting their final day at the Foreclosure courthouse steps, a fundamental “credit” improvement is not really occurring. Under the guise of mortgage modification, banks have just taken exotic lending and leverage to a level never dreamed of during the bubble years because they have no leverage over the borrowers or choice in the matter. Basically, the market has demanded that Subprime lending be brought back and the banks have complied to a degree that would make Angelo Mozillo blush.
In Rufus’ particular case – owing significantly more than the home is worth, a second mortgage in place, and the whole loan still owned by the bank – he was in the perfect situation to demand as much as he could get or walk. There was no reason not to walk unless Chase fully relented, which in the end they did. Now, with Rufus’ $325k in savings ($250k on the 1st and $75k in the 2nd) he can buy a lot of credit repair, get several high balance secured credit cards, or even put substantial down payment on a car and have his credit cleaned up in a year.
However, going forward — because his 2% interest only loan rate turns into a fully amortized and then begins to increase rapidly after year five — he remains a very risky long-term borrower especially considering his field of work and his age, thus the crux of “held to maturity” and “mark to model”. And when that day comes, if Rufus is still struggling and house prices are even lower, I am sure we will be talking to Jerome, Billy, Tamiqua and Candy again about a loan mod for his loan mod.
But until that time comes, Chase has successfully turn a certain default, Foreclosure and loss of approximately $650k into a “performing” loan for a cost of only $325k.
And the can rolls on.
The author is a housing industry analyst.
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