“Recovery!”

That’s the word the general press is bandying about. “Recovery.” Really?

Residential real estate values have dropped 25-50% since 2006 (depending on what state you’re in). Many pundits, and expert economists (an oxymoron?) predict that 2010 and 2011 will be even worse because of the mass of adjustable-rate mortgages that are scheduled to re-set to higher interest rates this and next year.

With so many of those properties under water (worth less than the mortgage amount, a thing the Banks term “negative equity”), and with Banks unwilling (or unable) to make loan modifications for these jumbo or A-Paper loans, what is a borrower to do?

Extend the term of the loan, drop the interest rate, forebear some part of the principal to the end of the loan term, write principal off – all these are potential solutions. One of these has proven to work, or be workable for the Banks.

Wells Fargo has – quietly – been writing principal off of certain loans. Very quietly. And, only on some loans. Wells Fargo’s results? The written off loans have a higher success rate than other modifications. Only 3 percent of modified loans have had principal reductions (that’s not just Wells Fargo, but numbers from an industry source for 3rd Quarter 2009). Of the WFB mods with reductions, “only” 15-20 percent go back into default. That’s a “success!” The normal re-default rate of a modified loan is something on the order of 50-60%.

So, is it worth it for a Bank to attempt to modify a loan?

Maybe not. At least, not if you’re Countrywide. Countrywide got sued for modifying its loans by one of its investors, Greenwich Financial Services. Sued for $8.4 BILLION! Greenwich wants 100 cents on the dollar for each “modified” loan. The “claim?” Countrywide was participating in predatory lending practices when it made the loans in the first place, practices Countrywide didn’t disclose to Greenwich when it sold the loans to Greenwich. Really? Greenwich Financial didn’t do ANY investigation of its own as to the credit worthiness of the borrowers of the underlying loans? Greenwich just “trusted” Countrywide? Really?

And these are the same folks who say it’s “bad” for a borrower to simply “walk away” from a “negative equity” loan?

What does that lawsuit (and others like it) mean for the industry? Well, forget about any “recovery” – at least any time soon.

With shadow inventory equal to the number of homes already listed as REOs, and with a foreclosure rate of nearly 90% on any loan that goes into default (yes, that merely goes into default, as in 30 days late = default), the numbers are staggering. This isn’t “sub-prime” borrowing either. This is “A-paper” lending.

Recovery? Sounds more like Intensive Care.



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