I’m writing this post in real time as I’m on our weekly industry call. Here are some quick updates.
Lenders hoping to see some movement on the “toxic asset” plan to entice private investors to jump in w/ private equity to help move some of the bad debt off their books has produced little results.
What this translates into is that lenders are still sitting on capital and continuing to shore up their balance sheets, until they get more toxic assets off their books.
There is one, albeit small, bright spot. Some lenders are now accepting that the public/private plan (mostly public, i.e. taxpayer) to buy toxic assets will probably not be the savior they intended it to be.
So they are slowly coming around to accept that principal balance reductions will have to be a reality, if they are to start making any measurable difference in stabilizing their non-performing loans. It’s akin to the ice cap melting in that it’s a slow process.
The hope is that as they see no other options, and bailout money dries up, they will have to take their lumps with balance reductions. The alternative is to face many more foreclosures as strapped homeowners realize they are better off giving the keys back than to keep paying on a home which is worth, in some cases, half of what they owe on their mortgage.
We’re advising clients that they always have the ability to go back to the lender later as trends change to request a principal balance reduction. This will have to be an integral piece of the long term solution since it will take many years for the economy, and with it real estate values, to recover to levels a few years ago.
The “cramdown” provision that would allow bankruptcy judges to force lenders to modify loans and accept principal balance reductions for homeowners going through bankruptcy, has stalled in the Senate and I’m guessing banking industry lobbyists are working overtime to keep this from becoming reality.
Lenders have hinted at the possibility of legal action to prevent this provision to taking hold. Just my two cents, but the chickens have come home to roost. Lenders may just have to take their lumps and eat those writedowns or face a lot of keys on their doorstep.
If it was possible, the issue of collecting upfront fees for loan modifications is attracting more scrutiny due to the unscrupulous operators taking those fees and disappearing. Unfortunately in an economic downturn the wolves come out to prey.
From what we’ve seen, attorneys don’t need to use an advance fee agreement but non-attorney based loan mod firms should be using them to stay out of trouble.
If you are working with a mod firm that collects a fee, make sure their agreement has the fee broken down into parts that basically lays out the work performed. After the work is completed a portion of the fee is released to the firm.
This arrangement usually works the best to benefit both the client and the loan mod firm so they are not waiting several months to receive the bulk of their fee since most can’t run a business with receivables running 90-120 days or longer.
As usualy make sure you check out who you are working with and if a firm wants to charge a fee without even looking at your situation, you may want to reconsider working with them.
Until next week…
Tags: advance fee agreements, Loan Modification, toxic asset
