You can find out if your loan is in a securitized REMIC trust.
Mandelman writes recently about investor losses on any given individual securitized mortgage. Mandelman specializes on homeowners that think they need a mortgage modification. I nother words, they have a distressed mortgage. Either the mortgage is in arrears, or the homeowner can see the handwriting on the wall.
The National Board of Realtors estimates that 98% of the mortgages written since 1998 are broken. In other words, they have mortgage violations; which makes them illegal. When the homeowner calculates their prospective mortgage modification, and then calculates new mortgage terms based on those mortgage violations, or “broken title,” a mortgage violations suit invariably results in better mortgage terms. We/ve done 500 of these mortgage violations suits since January, 2013. We’ve never lost. We have the bank’s own software. They have nothing to dispute in court. Game over.
Imagine, you couldn’t keep up on your mortgage payments. Maybe they went up, maybe your income went down, or maybe it was both things happening at once, but whatever the cause, the point is that you fell behind… or knew you would have eventually… so you applied for a loan modification.
Now you’re told that the decision to modify your loan or foreclose on your home depends on whether the investor that owns your loan will come out ahead financially by modifying it… or foreclosing and selling it to someone else. This is a non-starter. Mortgage modification is calculated simply on your income.
That’s what the Net Present Value test is supposed to determine, whether the investor who put up the money for your loan will make more money by foreclosing and re-selling, or whether it makes more sense financially to modify your loan so you can continue to make the payments. You can get a pretty accurate NPV by going to Zillow.com. Sure, modifying your loan will mean you’ll pay less than you were supposed to pay, in most cases, but if the amount you’ll pay with a modified loan is more than the investor would get by re-selling your home, wouldn’t it be better for the investor to modify?
Isn’t that what this foreclosure crisis is all about… whether it’s in the best interests of the investor to foreclose or modify the loan? When the investor comes out ahead by modifying, the servicer is supposed to modify. And when the opposite is true, they should foreclose. In practical terms however,
Most Americans have no clue what’s happening to their calculations. Unless you mail your mortgage modification Certified Mail, Return Receipt Requested; there is no accountability on the part of the mortgage servicer. Servicers are foreclosing when it’s in the best interests of the servicer. We absolutely know this to be the common practice. If the homeowner doesn’t take responsibilty to check mortgage calculations, they sure can’t expect the mortgage servicer to rapect their best interests. To believe your mortgage servicer is on your side is to assume the philosophy of Peter Pan.
The NPV test is only a forecast of whether the investor will make more money with mortgage modification than foreclosing. All we can do is create a formula that provides a forecast… an estimate… a best guess, if you will… and that’s what the NPV test is designed to do. NPV stands for Net Present Value, and it’s a calculation that every first year business school student is taught in finance and accounting class. It calculates the present value of a future amount… some people think of it as the time value of money. But, no matter what… it’s forecasting the future, so it could come true… and it might not.
However, once the trust that holds your loan and others has been around for several years, a number of loans have defaulted, been foreclosed on and re-sold, and a number have pre-paid, which is usually done by refinancing. Once the trust has had experience with those sort of events, they don’t need to rely only on an NPV forecast anymore to see how much is lost when a loan is liquidated through foreclosure … we can look at the ACTUAL losses that have accrued to the trust when foreclosing on homes… and we can see exactly how much the investor lost. And then we can compare those losses to the financial outcomes of modified loans.
We need to take a few minutes to make sure we understand what causes investors, or more accurately the trusts that hold the loans, to lose money. Then Mandelman illustrates how one might use knowledge of investor losses to help save homes.
There are many costs that a trust must pay over the years, but the two most significant events that can change what an investor earns result from loan defaults and loan prepayments.
Prepayment risk most often refers to loans being refinanced, although it can also refer to loans that are paid off early with funds provided by the borrower.
Up until this last financial crisis, the biggest threat to investors in mortgage-backed securities was pre-payment risk, because when a loan is refinanced, it is paid off by the new loan and although that does mean that the investors receive their principal back, they stop receiving interest on that principal amount and they’re left to reinvest their capital somewhere else in order to continue earning a return on their money.
Also, with almost no properties appreciating in value since the Robo-signer – Foreclosuregate scandal exposed by CBS News a few years ago, this would be moot.
The days of 2% and 3% mortgages are gone – unless you sue for mortgage violations.
The thing is that when loans refinance it generally means that interest rates have gone down, because that’s when people refinance… when they can take advantage of the lower rates that have become available since their loan was originated. When interest rates go up, almost no one refinances, because to do so would mean having to pay a higher rate than was available when they got their loan.
So, when interest rates go down, and people refinance, the investors are forced to reinvest their capital, but now they have to do so at lower rates than they were earning before rates dropped. And that’s what is known as the “prepayment risk” associated with mortgage-backed securities.
Of course, when interest rates rise, while there are fewer prepayments, there are often more loans that go into default as those with adjustable rate loans, find that they can’t keep up with the higher payments that result from their loans adjusting.
And as we’ve all seen these last few years, even if interest rates don’t go up, should home values fall and the economy go into a recession, causing unemployment to rise, median incomes to fall and/or should the availability of credit tighten… any or all of those things can lead to increasing numbers of defaulting loans.
When a loan defaults, the investor stops receiving the monthly payments of principal and interest, and after a certain number of months, moves to take back the property so it can be re-sold and the proceeds returned to the investor… minus the costs of foreclosing and whatever losses have occurred (Read: servicing costs).
Mortgage Loss Severity
The term used to describe the losses that investors take when foreclosing and reselling a home is “loss severity.” It answers the question: How severe was the loss that resulted from foreclosing and then reselling the home.
In past years, with home prices steadily rising, sometimes by the time a loan was foreclosed on and resold, the price of that home had increased, so the investor actually received more from the sale than he or she had invested. (Read: before 1998 for most of the country) When that happened, perhaps the excess received covered the costs associated with the foreclosure and sale, so the investor was actually made whole. But since the financial crisis and meltdown of the mortgage and housing markets, home values have fallen so that certainly hasn’t happened often, if at all.
When home prices are declining or staying flat, investors want to foreclose as quickly as possible so they can resell the home before prices fall any further. But that hasn’t been happening these last five years either. In fact, today it’s not uncommon to find homeowners still living in their homes even though they haven’t made their payments in three… four… or even five or more years. (The press calls this “Strategic Default.”)
In New York as one example, it takes an average of more than 1,000 days to foreclose on a home, and that doesn’t include how long the home may have to sit on the market before it sells… in California, on the other hand, it takes something approaching 600 days to foreclose, before you can sell the home at a trustee sale or list it for sale as an REO. Most states on both coasts, this is fairly accurate.
From the time a borrower stops making his or her payments, to the time the home is repossesed and sold, the investor is losing money. Not only is the investor losing the interest payments he or she would receive if the payments were being made, but in addition, the investor is also paying the property taxes and may also have to pay association dues for HOAs to prevent the homeowner’s association from forcing the sale of the home.
Then there’s the question of damage to the home that the investor must pay to bring the home back up to marketability before selling it. Homes suffer materially when unnoccupied.
Additionally, the longer a home sits empty, the more maintenance it requires, and in some parts of the country, where winters are harsh or summers are sweltering, homes that sit empty too long can deteriorate significantly and cost the investor a lot of money to repair.
There are other costs associated with foreclosure as well, such as legal bills and servicing fees, among others, but when you total everything up and deduct the total amount from the sales proceeds after the home is sold to a new owner… the amount at the bottom-line is called “loss severity,” and it can be expressed as either a dollar amount or as a percentage of the loan amount.
One can calculate that tcurrently loss severity has to be running significantly higher than usual… maybe even higher than at any time in our nation’s history, but that doesn’t answer the question of specific losses in dollars and cents.
To do that we have to be able to look inside the trust that holds the loans and see what it has reported in terms of loss severity since its inception. And that’s precisely what you can now do… with an RMBS Trust Liquidation Analysis Report, which you can now order through Mandelman Matters.
Looking at the Actual Loss Severities Reported by RMBS Trusts Today, the statistics are eye-popping. Please follow the link below to see some charts published by Mandelman.
In one chart; when thie trust forecloses on a home and resells it, the trust realizes a loss of almost 70% of the loan value. But let’s keep going because we want to get more specific than that… we want to know how much would have been were our loan to be liquidated by this trust through foreclosure.
So, the next chart shows liquidations by loan amount.
This trust lost more than 100% of the loan balances when it foreclosed on homes under $100,000.
It sure seems like if those loans for $100,000 and under had been modified, the investors would have had to come out ahead of losing everything and then some, as they did by foreclosing, wouldn’t you think? Of course the investors should have modified those loans… anything is better than losing everything. So, who do you suppose didn’t take the reaponsibility of showing this to the investor. Sure wouldn’t be the homeowner. That leaves – you guessed it; the mortgage servicer.
Is the trust losing more or less as time passes? In this illustration, for the 4th quarter of 2011, loss severity for this trust was roughly 75%, and for the 3rd quarter of 2013, loss severity jumped up to a little over 97%.
How about the amounts due in terms of unpaid principal, the amounts of accrued interest, and a category for miscellaneous expenses associated with foreclosing and selling the homes?
We’re left with looking at how much was lost on one $320,475.57 loan. And there are three different loss severity percentages we might want to consider…
Trust Loss Severity – The average percentage loss on foreclosures for the trust overall.
The loss severity for the principal balance band, meaning by the price band of the loan.
Loss severity for the most recent quarter, which is the third quarter of 2013 in this example.
So, in the chart below, you’ll find each one of those measurements of loss severity shown… the overall trust loss severity is 67.89%, for the principal balance band it’s 59.67%… and the latest quarter, as we saw above, it’s 97.96%… almost 100% losses from foreclosing as of the third quarter of this year. Things seem to be getting worse as time goes by, which should come as no surprise.
Finally, we might want to know how much the trust is expecting to get out of a loan liquidated today, and so we’d want to apply all three loss severity percentages to the specific loan’s balance and the result would be a low, medium and high amount that the trust can expect to realize.
So, should this trust modify that $320k loan, or should it foreclose and sell the property? Well, to be fair… that depends on one thing I haven’t mentioned yet… the probability of the borrower re-defaulting in the future after the loan has been modified, because obviously the cost of defaults and foreclosing is high… so most certainly the trust doesn’t want to have to go through it twice on one loan or its loss severity could climb towards 200% in some cases, right?
But, should that trust agree to short sale that home for something around $165k? Well, that depends on the market value of the property too. Obviously, if the home were to appraise for $250,000, it wouldn’t make sense to take $165k and forget about the market price, but if the home has been in inventory for some time, perhaps there are times when accepting $165k might look pretty good.
And regardless, doesn’t it make negotiating a short sale or modification more closely tied to the actual financial performance of the specific trust that owns the loan? Instead of working in the dark and being asked to guess a number between one and 10… and you saying “7” and them responding by saying, “Wrong, try again?”
If I were heading into mortgage mediation, or trying to get my own mortgage modification, I’d definitely want to know what the trust that owns my loan is expecting to lose by foreclosing as opposed to modifying my loan, especially if the trust is expecting to lose 70 percent or more.
I think the entire country is under the impression that servicers foreclose because it’s in the best financial interests of the investors, and perhaps sometimes they do… but data from this trust and numerous others, proves that’s not always the case. And no homeowner has ever been able to prove that before now.
Now homeowners and Realtors can know the loss severity being experienced by the specific trust that holds a specific loan and, whether in mediation or when trying to get a loan modified will prove to be an advantage in many instances.
The RMBS Trust Liquidation Analysis Report is not available for loans owned by Fannie Mae or Freddie Mac… yet… but it is available for loans securitized by Wall Street… and that’s still a whole lot of delinquent loans.
So, if your loan was securitized by Wall Street and is held in a REMIC trust, you can get this report right now, by simply sending an email to Martin Andelman at… Mandelman@mac.com
… and PLEASE type the SUBJECT in ALL CAPS…
I’M INTERESTED IN THE LIQUIDATION ANALYSIS REPORT
Then in the message, please provide your contact information and when would be a good time for Martin to call so we can discuss the report further and I can answer any questions you might have.
And you may be assured that the information you receive in the Liquidation Analysis Report is rock-solid correct… it’s reported by Master Servicers to trustees as of the last day of the prior month and it’s delivered by the structured finance industry standard in trust intelligence and surveillance. It’s the same data used to value trust assets by investors all over the world and expert witness testimony is available should you need to bring the data in the courtroom.
(If you need expert attorney assistance, call or email me. I don’t recommend attorneys, but I have two resource websites I’ll send you.
I don’t know how homeowners having this information will impact their mediation or loan modification processes… no one does because homeowners have never had access to this kind of information before now.
But ya gotta think it will help, and perhaps it will lead to turning this crisis on its ear as homeowners are finally able to prove that foreclosures are not always happening because they are in the best financial interests of investors.
The statistics show, however, that your most strategic course of action is suing for mortgage violations. Call or email me and I’ll send you my worksheet that I’ve had for five years. It’s proven.
And when you order your report, you also get me… and Mandelman Matters… because I’ll write about whatever happens as a result of you using this information to get your loan modified.
Order your Liquidation Analysis Report today by sending an email to Mandelman at Mandelman@mac.com. And please don’t worry… although it can’t be free because it does cost money to get the data… it’s also not expensive.
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tags: mortgage pre-payment risk, mortgage-backed securities, mortgage loan loss severity, actual mortgage loss severity, strategic default, trust loss severity, mortgage modification, securitized REMIC trust, mortgage violations, broken chain of title, quiet title, try title, clear title, mortgage forensic audit, mortgage securitization audit