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Patrick Pulatie is the CEO of LFI Analytics. He can be reached at 925-522-0371, or 925-238-1221 for further information. www.LFI-Analytics.com, patrick@lfi-analytics.com

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HAMP = Foreclosure

Over the last year, I have been watching the HAMP modification program with great interest. I have wanted to believe that the Federal Government would actually put into place a loan modification program that would help homeowners, though I knew that this was likely false hope. The results are now in, at least in my opinion.

HAMP is a complete fraud! Nothing else can be said otherwise. The Government has once again put into place a program that will not help homeowners. Instead, HAMP modifications will end up postponing homes foreclosures for a period of time for modified loans, but, most will end up losing the home in the end, except for a “very” lucky few who actually make it. I cannot believe that the Government expected anything other than the HAMP program would end up being a failure. To understand what to expect, we must look inside the numbers.

In March, the February results for HAMP were released. Key points of the update were:

* 1.3 million total trial modification offers.
* Almost 1.1 million trial modifications have begun since the program began.
* 72,000 new trial modifications started in February.
* More than 170,000 permanent modifications granted to date.
* 91,800 other permanent modifications offered and awaiting acceptance.
* 0.9% permanent modifications cancelled
* 8.8% total modifications cancelled, 88,663 total

If one looks at these numbers and compare the numbers to Dec and Jan results, it appears that HAMP is becoming a “Great Success”.

However, the numbers are circumspect if one considers that “trial modifications” are modifications that have been started without any verification of income, or confirmation of meeting HAMP guidelines for modification. The lender must over the trial period determine whether the homeowner meets HAMP guidelines, and if not, the homeowner is declined for the modification and the foreclosure process continues.

It is bad enough that trial modifications are started without determining whether the homeowners meet HAMP guidelines, but I want to take you for a look inside a couple of selected numbers. The February review states:

* Front End Debt Ratio – from 45% to 31% – Median Point
* Back End Debt Ratio – from 76.4 to 59.8% – Median Point

The Back-End Debt Ratio is the key to understanding how effective HAMP will be. The “Median” Debt Ratio means that 50% of all modifications are above the Debt Ratio and 50% are below the Debt Ratio. The HAMP statistics state that the Mean Back-End Debt Ratio is 59.8%. What does this really mean?

Debt Ratios are calculated by taking monthly debt and dividing it by the total Gross Income, before taxes. Front-End Debt Ratios are calculated by taking the Housing Payment consisting of Principal, Interest, Taxes and Insurance and dividing by Gross Income. Back-End Debt Ratios use all debt, housing plus consumer debt for calculating the Debt Ratio.

Prior to the housing boom, under traditional Underwriting Guidelines, the acceptable Front-End Debt Ratio would have been 28% and the Back-End Debt Ratio would have been 33%. As standards loosened, it became 31% to 38%. By 2006, Subprime loans allowed 50%-55% Debt Ratios and traditional loans were 45%. We have seen how those debt ratios worked out.

The Government is “bragging” about having the Mean Back-End Ratio at 59.8%, so half of the loans are above 59.8%. But during the Housing Boom, 59.8% would have meant being declined for a loan due to a lack of an ability to repay the loan.

What has changed to make 59.8% acceptable? Nothing!!!

To further understand how these loan modifications will fail, let’s take a look at the numbers in greater detail. The “homeowner” for this scenario has verified income at $10,000 per month.

* Total Gross Borrower Income of $10,000.
* Front End Debt Ratio of 31%, means Housing Payment of $3,100 per month.
* Back End Debt Ratio of 59.8% means total Monthly Payments of $5,980 per mouth.

Wow!!!!! There is $4,020 left over for the homeowner. OOPS!!!!!! Not so fast……

The Income of $10,000 is Gross Income. So let’s change the numbers a bit.

* If a homeowner has a $10,000 per month Gross Income, and he has a great accountant and tax guy, he is in a 33% bracket for Federal and State Taxes, Social Security, Disability and other Deductions.
* After deductions, his income is $6,667 per month, take home pay.
* Subtract out the 59.8% Debt Ratio and he has $687 per month to live on.
* From the $687, he must cover food, fuel, utilities, medical insurance, clothing, phone, cable and other miscellaneous expenses. And, if he has several children, these expenses continue to mount.

As can be seen, there is no way over any extended period of time that this borrower will be able to continue to make the Modified Loan Payment and the other Consumer Debt. Either he will begin to miss payments on Consumer Debt and just make his Housing Payment, or he will simply give up on the mortgage and prepare to lose the home. There are no other solutions available, unless he attempts bankruptcy on the consumer debt and even that may be questionable.

(This analysis does not even cover what happens when the interest rate increases 1% per year after 5 years of being fixed. This will likely mean doom as well, unless income has dramatically increased for the homeowner.)

In summary, as I have shown in black and white and in the numbers, HAMP modifications are fatally flawed. For every person approved for a modification under HAMP, if they are above the MEAN Debt Ratio in the February analysis, the modification will fail. Even for people with just 50% Debt Ratios, the modifications will still end up in failure for most of them.

Therefore, HAMP is a fraud!!! The Government knows this, and now you know this. The truth is that the government wants you to fail. Otherwise, the government would develop a modification program that truly worked.

What are the options for a homeowner if HAMP is a fraud? The only real option that exists is to hire a competent attorney to fight for you. Even then, there are no guarantees.

But, the Government and President Obama do not want you to do that. President Obama has publically stated that the lenders will work with you to do a good loan modification. He has also stated you should not hire a person to work on your behalf because lenders will do a modification for free. Yet, there are now stories in all 50 states where lenders are charging fees for loan modifications.

Senator Charles Grassley does not want you to do a loan modification. He had placed into the HAMP Guidelines a section that loans origination in fraud should not be allowed to be modified. What does he consider “fraud”? Loans that were stated income. So that is why income verification is required. What Senator Grassley conveniently “forgets” is that the lenders created the stated income loans. The lenders had homeowners sign 4506-T’s, Requests for Tax Returns that could be obtained from the IRS to determine if the income stated was accurate. But did the lenders check? No way! If the 4506-T came back with different income, then the lender would have had to decline the loan. Therefore, the lender at the very least was complicit in the fraud, and by offering the program, “aided and abetted” in the fraud. (This does not even cover the fact that many loans were lender originated where the lender determined the income for the borrower and not a broker. But I guess that does not meet Senator Grassley’s definition of fraud either.)

Former California Governor and current Attorney General Jerry “Moonbeam” Brown does not want you to do loan modifications. He has stated that lenders will do modifications for free. And he stated that you should not go to loan modification companies or attorneys for help. He has even gone so far as to state that forensic audits are not effective and they non prescription viagra should not be gotten. Yet, often the true “forensic audit” or “Predatory Lending Exam”, will be the only hope for the homeowner. Attorney General Brown does not want you to have your day in court to contest what the lenders are doing. (I wonder how much money the lenders have contributed to his campaign.)

The California Senate Banking Committee does not want you to do loan modifications. This was the committee that sent SB-94 to the governor for signing that outlawed the taking of advance fees for work by both loan modification companies and attorneys who do loan modifications. They would like to try to prevent upfront attorney fees for attorneys who file lawsuits for the borrowers, but that would clearly be unconstitutional since it would deprive a homeowner his “Due Process” rights, since he would not be able to find an attorney to take his case on a contingency basis.

Governor Arnold does not want you to do loan modifications. He signed SB-94 and has also stated that lenders will do loan modifications for borrowers.

So, we are faced with both State and Federal Governments who have no desire to help the homeowner in distress. Instead, they promote phony programs designed to do nothing but create the impression of a desire to help homeowners. All these programs are nothing more than smoke and mirrors.

Instead, the Government actively supports the lenders, providing TARP bailout funds, and helping people like George Soros buy failing banks in “sweetheart deals” that allow Soros to make even more money at the expense of the people of the US. Meanwhile, the people in the US suffer from falling home values, foreclosure, job loss from a poorly performing economy and other absurd programs that only help the special interests of government and their allies.

Where we go from here, I do not honestly know. What I do know is that the one country in the world that has been a “shining beacon” for the rest of the world is under duress and in serious financial trouble. If the truth be told, and it will not be told, the US is bankrupt, and due to the refusal of the Government to admit this, things will only get worse.

Yet, the government refuses to help out anyone except their “buddies”, banks and Wall Street. The is because the campaign donations necessary to remain in power comes from these entities. So, the homeowner will continue to suffer, and the lenders will continue to feed at the government trough.

What will happen to the Housing Market in the next few years, I can only guess, but it will not be pretty. Home values will drop again, likely 20% or more. Housing sales will continue to weaken, due to falling demand, falling values, lack of qualified buyers, higher interest rates, and greater unemployment.

Maybe, by 2020, we may see some return to “normalcy”, whatever that term will mean then. But, I fear that the future will be radically different than what we have known previously, or even now.

(Patrick Pulatie is the CEO for Loan Fraud Investigations, at www.loanfraudinvestigations.com, a Predatory Lending Audit firm.  He can be reached at Patrick@loanfraudinvestigations.com or at 925-522-0371.)

There Are 15 Responses So Far. »

  1. Please look up the word “circumspect.” Numbers are not circumspect.

  2. Linda,

    Associate Professor Biology Clay Green, of Texas State University, used in a paper the term “However, these numbers are circumspect and recent decreasing trends……”. I think that he has more credibility in the use of such a phrase. (Also, circumspect can mean “cagily, suggest caution, and other similar terms.)

    That said, why not address the point of the article. HAMP is a fraud and most people will fail. Half of the mods have a 59.8% Debt Ratio, and even at a legitimate 50% ratio, homeowners lost their homes in droves.

    This is the important part of what I wrote, not one word that you think was used improperly.

  3. Half of them SHOULD lose their homes. I’ve been managing default in the industry for 20 years and the only thing that changes is who the borrower is going after for forcing them to lie and strip the equity in their home.

    Now even unemployed borrowers are eligible for HAMP!

  4. Carey,

    Typical comment that I could expect from a Default Specialist. What about this:

    1. Why didn’t lenders execute the 4506-T to verify income before closing the loan? Because they would have had to decline the loan.

    2. Why did lenders offer Stated Income to W-2 employees? Because they knew that the borrowers could not qualify elsewise?

    3. Why did lenders offer brokers YSP in large amounts to brokers, enticing them to push such loans to borrowers, knowing full well that the borrowers could not repay the loan? Because when the lender sold the loan, they received 2-4 points for the loan themselves.

    4. Why did lenders not abide by the REPS & WARRANTIES Sections of the PSA? Because if they did, then they would have had to decline most loans.

    5. Why did the lenders securitize the loans? Because it kept the lenders from getting stuck with the bad loans.

    The bottom line is that, yes, 90% of the people in CA got loans that they should never have been approved for. Veteran underwriters knew who would be able to repay, and who could not. But their supervisors ORDERED them time and again to approve such loans or risk losing their jobs.

    You may not like this, but the lenders knew EVERY STEP what they were doing, and they did not care. It was all about the money and nothing else.

    If the lenders had stuck with underwriting guidelines back in the 1980’s, realistically reviewing the loan to determine the ability of the borrower to repay the loan, then the Housing Crisis would never have come to pass.

    BTW, the Office of the Comptroller of the Currency regularly sent out Guidance Letters since the Mid 90’s, warning of Predatory Lending and advising banks NOT to conduct business that would constitute Predatory Lending. But, each time, the Guidance Letters were ignored, because they did not have the effect of Statutory Law, nor were they enforced by the FTC,Section 5 Act, though the government could have done so easily.

    The bottom line is that the lenders, in collusion with Wall Street and the Fed, allowed this to happen. They dragged the common man into their scheme, with visions of the American Dream of owning a home. Brokers and Realtors assisted in this fraud, and the Media, by promoting home ownership and the increasing values, abetted this.

    Yes, there were many borrowers who knew what they were doing and engaged in “lies and equity stripping”, but most did not have a clue. They relied upon the “advice” of brokers and realtors who violated their Fiduciary Duty” to the borrower, and then, they were “let down” by lenders who violated their own Fiduciary Duty to their investors. (Lenders have no Fiduciary Duty to their borrowers, just investors”.)

    Today, the lenders are still doing what they did before. They are making loans to people with up to 50% or greater Debt Ratios. They are lending on appraisals that are not truly representative of what is happening in the local markets.

    Even worse, they are offering loan modifications to homeowners that have no hopes of meeting the conditions of the loan modification repayment plan. These modifications are doomed to fail, but the lender or servicer does not care.

    What the lenders are doing is nothing more than Predatory Loan Modifications, and those mods are going to be the next phase in the War Against the Lenders.

    For information on Predatory Loan Modifications, and what is up there, anyone can contact me.


  5. FYI…for anyone reading this the “Back End Debt Ratio” covers your credit cards and auto loans. If you want to save your house you need to make some choices. HAMP was designed to save your home…not save your credit. You can take the bus and live off of cash…it’s not that difficult. If you’ve ever wondered why Credit Cards charge 21.99% it’s because of the risk of having a unsecured loan. Don’t get it twisted…the borrower in the articles example above has $3,567 to live on not $687. That’s more then enough to live on.

  6. Sean,

    As a practical matter, perhaps. But you miss the obvious. Lawsuits and deficiency judgements against the borrower that will place liens on the property, so that in the future, the borrower is stuck with paying them off. Or IRS issues. A bk may help, but we know the issues with bk’s

    Also, what happens if all these borrowers quit making payments? Another bailout on these companies. (As well, many of these type debts were securitized as well.

    And,….continued home values falling……

    It is not that simple to just say “quit making the consumer debt payments”.)

    The reality is that lenders and the government want this program to fail and for the homeowners to lose their homes. Why?

    Because more failures mean more sales and tax dollars. More sales means more buying at home improvement stores, more consumer transactions, etc.

    It means more money being spent to create a growing economy. That does not happen if homeowners are granted loan modifications. The home is saved, but there is no money to stimulate the economy.

    The government knows this. Heck, that is why they allowed the bubble to occur in the first place. It allowed an economy to grow that has no real industrial base anymore.

    The US has an economy that since the 1970’s has been turning to more and more service industries. Industry, which creates real wealth is disappearing. As a result, bubble economies must be created to stimulate the economy, or it slides into rescission.

    This is what happened with the Dot Com Bubble. It created an “artificial industry” that had no true basis for wealth creation. When it collapsed in 2000, something was needed to replace it. Hence, the Housing Bubble. Again, artificial wealth creation.

    Now that the Housing Bubble has collapsed, what is to take its place? A Government Bubble, based upon adding government jobs, phony stimulus, and socialized Health Care.

  7. The whole system is shot.

    Alleged Goldman Sachs fraud
    April 19, 2010

    Amanda Lang and Kevin O’Leary talk with Janet Tavakoli, president of Tavakoli Structured Finance, on the SEC’s civil case against Goldman Sachs


  8. […] nightmare’Václav Klaus: „An Griechenlands Krise ist der Euro schuld“ – FAZ.NETHAMP = Foreclosure : The Implode-o-Meter BlogNationally, 60% Favor Letting Local Police Stop and Verify Immigration Status – Rasmussen […]

  9. These lenders (Wells Fargo in particular) are taking advantage of the HAMP program by deceiving customers. They literally lie throughout the entire process so that they can make money off of your foreclosure. The mass media needs to get on this! This is fraud and it is happening to thousands of people nationwide! They put you on a “three month trial” they tell you to if you continue making the modified payments and submitting your paperwork you will be approved for the mod and done. Throughout several months to even years they string you along telling you to just keep making your payments and we will get you on the mod. They did this to us for 10 months, constantly losing our paperwork. They tell you their will be no fee’s while you are on the program. What they fail to tell you or simply lie to you about as in our case is that after the 3 month trial period they put you back onto your original payment – while you are making modified payments that they tell you to make they are tacking fee’s and penalty after penalty. You find out (in our case $40,000 later) when you get the sudden foreclosure notice on your door that your loan has been penalized the whole time you were supposed to be on a modification. They then tell you you have been kicked off your modification and you have a few weeks to vacate your home, when it goes to auction. They auction your home at a fraction of the price owed and then are reimbursed for the remaining amount by the government. They then come after you for the back fee’s and penalties after everything you have gone through. They are taking advantage and making money off foreclosure’s, the more money they get out of the loan, the more money they make from the government. The gov. is encouraging and supporting this. This is pure, outright fraud by the people that are supposed to be protecting us! These lenders are pure criminal. Journalism excellence is the efforts that go towards helping the people, this is your job, to be the watch dog. This needs to stop!

  10. […] HAMP = Foreclosure : The Implode-o-Meter Blog […]

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  12. […] Feb 2010, I authored an article for ML-Implode titled “HAMP=Foreclosure” that was well received. The article dealt with the effectiveness of […]

  13. If anyone questions the validity of Patrick’s blog, watch the documentary “Inside Job”. He is 100% correct with everything stated. I have been living it, the very essence of all things wrong, for the past three years. The fraud, scams, deceit, and forgery I am experiencing is something I though only happened in movies.

    I know it was quite some time ago but really Linda? Attempting to point out a grammatical error? That is all you had to say? Why?

    And Carey. How could you say such a disgusting thing? Nobody SHOULD go through this. I would never wish this turmoil on my worst enemy; or even you.

  14. Oops, I noticed a typo. It should be “thought” not though. Linda please don’t hang me for it.

  15. Further proof that HAMP is a fraud:

    The seldom read FDIC HAMP guidelines state on page 3 that the program

    “Mandate that the cost of the modification must be less
    than the estimated foreclosure loss”


    This means that homeowners with substantial equity are categorically denied a modification, because, as one honest Chase employee explained to me, they will incur no loss if they kick me to the curb and tap into my equity to cover all related expenses. The cash flow from a foreclosure on a homeowner with equity, is great for servicing bank and the investor in the corresponding mortgage backed security…. so HAMP dictates that those homeowners be denied a modification.

    So those with equity, who intuitively are the least likely to re-default, are categorically denied a modification. HAMP was never intended to help homeowners. It was intended to help investors in mortgage backed securities, and was simply disguised as a program to help homeowners.

    By comparison the HOLC of the 1930, as described in the December 2010 COP report, directly gave troubled homeowners new mortgages, and those with more equity were least likely to re-default

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