Tragedy…this home could have been saved only if…

This is the final chapter in a painful story of a Short Sale gone bad.

The “Bankruptcy Negotiator II”, Ryan Bickerton with American Home Mortgage Servicing Inc(AHMSI), refused to accept a short sale purchase agreement offer of $264,000. AHMSI’s supporting appraisal completed 3 months prior was there basis. In our current market…3 months is a lifetime. With home prices dropping at a rate of 3-6% per month, our offer would be in-line with the market at close of escrow.

2 months later the property is back on the market advertised as a “Bank Owned Property”, MLS# i08151962, listed price is $245,000. Go figure!

Mr. Bickerton is the systemic problem with our banking industry. Mr. Bickerton is a “pulse” filling a position that requires intellect and experience to make fiscal decisions that affect investor’s fiduciary interests. His superiors should be held responsible for placing him in a role that he is clearly not fit to handle.

American Home Mortgage Servicing Inc is a small warehouse that services loans. They should be held responsible for their “contribution” to the demise of this nation’s current economic state. Place their leadership on trial for their negligence. This may seem harsh; however, they are the problem!

I am on a soapbox with this message; however, if we don’t hold these decision makers responsible, they will plague us for years to come. The government will, no doubt, come to their or their affiliates rescue at some point and our hard earned tax dollars will bail them out.

With all of the hype of “loan modifications” and “government bailouts” you can’t help but feel that there is a solution somewhere that will save you from loosing your home. I’ve been watching the news, reading everything that comes across my emails and can only say that I get a little sick to my stomach at times.

One must really think about long term when faced with an opportunity to modify an existing loan. It’s such an emotional time, the fact that your going to lose your home is beyond anything I could put into words, believe me I know first hand! The stress seems to go away when you are told that if you just “sign here” you don’t have to move and you get to keep “YOUR HOME!” Wow, those are words that you’ve prayed for.

Here’s the hard reality;what do you do in a few years when you find that your so upside down in the home that you can’t refinance to a lower payment, or worse yet need to move and have no chance of selling unless you do a short sale….and who knows if the lender will be willing then?

As I work with our clients and their lenders on loan modifications, one thing has been consistent. Lenders are not in the mindset to help their current clients. They go off of black and white paperwork, if the borrower fits their criteria they offer up some type of a loan modification. I’ve never seen one, no never, that was an advantage to the borrower. They are a bandage at best!

Lenders are not willing to take into consideration the fact the home is 30 to 50% + upside down. They will usually extend the borrower a lower payment and add all of the “accrued” interest to the end of the loan. We have seen a few lenders discuss the possibility of reducing principal balance 5%, but have not had ONE accepted as of today.

The point here is there is no magic wand, no real fix for the mess of our housing industry. Loan modifications may work for some people, if they are not seriously upside down in their home.

Having lived through the loss of a home, and of course trying anything possible to keep what was “mine”. I look back and realize the blessing of not being given the chance to keep it. Now that the emotions have died down the fact is that if we would have kept that house at it’s upside down equity, I’m not sure if we would have seen it appreciate enough in our life time to have equity….it was nearly $200,000 upside down a year ago…and still dropping.

Those four walls that seemed to mean so much to us now sit empty like hundreds of other homes in the city. I’ve realized that it’s human nature to fight for things that are ours, no one wants to be told they don’t have a choice. Here’s the thing, you do have a choice, you can choose to get out of a bad situation that will most likely get worse before it gets better.

The market is still declining, most loan modifications are going to keep you locked into a home that is going to continue to drop in value. Think about your future.…you can most likely find a wonderful home to live in while real estate continues to drop. Then buy again for half of what you owe on the four walls that you leave behind.

Short Sales were not widely accepted a year ago. In today’s market, your lender is ready to get these bad loans out of their inventory. The President has also realized that people are in need of help and signed into action the mortgage relief act, this relieves home owners of the liability of gains. When your thinking about your “choices” try to step away from the emotions. If it makes financial sense to keep the home, just be very careful to check with your lender before you pay someone to do a loan modification for you. You will be able to talk to your lender/s and find out exactly what terms they will offer.

From the heart of someone who’s been through it…

Note that this does not include principal reduction as a solution. This new plan is limited to: “extending the term, reducing the interest rate, and forbearing interest”
This is intended to help “thousands” (a drop in the bucket unless it is several hundred thousand), and seems to encourage homeowners to stop making payments until they are 90 days late.

Helpful questions and answers:

Q: What is a streamlined modification?
A: A streamlined modification is a modification that requires less documentation and less processing. In this case, the streamlined modification seeks to create a monthly mortgage payment that is sustainable for troubled borrowers by targeting a benchmark ratio of housing payment to monthly gross household income.

Q: What is the benchmark ratio?
A: This is the first time the industry has agreed on an industry standard. The benchmark ratio for calculating the affordable payment is 38 percent of monthly gross household income. Once the affordable payment is determined, there are several steps the servicer can take to create that payment – extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower’s means, the borrower’s situation will be reviewed on a case-by-case basis using a cash flow budget.

Q: Why is it necessary?
A: With the rise in serious delinquencies and increasing number of loans in foreclosure, this program will help borrowers who have missed three or more payments, but want to keep their homes. Because the eligibility requirements and process are streamlined and consistent, the program will allow servicers to reach more borrowers more quickly.

Q: Who is eligible?
A: The highest risk borrower, who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed bankruptcy. The loan is a Freddie Mac, Fannie Mae or portfolio loan with participating investors. To qualify for the streamlined modification, the borrower must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.

Q: Why must the borrower be 90 days delinquent? Why not earlier in the delinquency cycle?
A: This is a streamlined solution targeted to reach the most at risk borrower. For borrowers who do not qualify, other solutions are available. This in no way substitutes for the meaningful efforts by all servicers and investors that are currently in place. The 212,000 workouts reported by HOPE NOIW in September are testimony to that fact. We will continue to see those efforts produce meaningful results.

Q: How many people will this help?
A: While difficult to assess, it is clear delinquencies are predicted to continue well into 2009. Foreclosure estimates are significant. Having a streamlined approach will assist many borrowers who default and more quickly. We estimate this will ultimately help thousands of borrowers.

Q: How do borrowers apply?
A: To be considered for the program, a seriously delinquent borrower should contact his or her servicer and provide the requested information – monthly gross household income, association dues and fees, and a hardship statement.

Q: How do borrowers complete the modification process?
A: Upon receiving the Modification Agreement from the servicer, the borrower signs it and returns it with the 1st payment at the modified terms along with income verification. Once the borrower makes three payments at the modified terms and the account is current as of day 90 of the modified plan, the modification is complete.

Q: When will servicers start offering this program?
A: We expect that by December 15th, servicers will be positioned to work with eligible borrowers.

Sadly…. I am going to tell you about a family that was recently lied to and taken for a lot of money in hopes of keeping the home they were living in by doing a loan modification. The ending on this true story left the family loosing the home to foreclosure, filing for Bankruptcy and if that was not enough, served by the sheriffs department with an unlawful detainer to start eviction from their home.

About 3 months ago Kris and I sat down with Mr. and Mrs. Smith to discuss options regarding their home. You see, the payments had adjusted to nearly double what they were 2 years prior and like most people in the same situation they found themselves unable to refinance due to the home being upside down in equity. In their case, it was a little over $400,000 upside down!

We talked about many things, the couple, that had 2 teenage children wanted desperately to keep the home. After talking with their lender we discovered that the loan modification was not in reach financially for them. The lender would not decrease the principal balance, which was a real factor since the home was truly upside down over $400,000. Kris and I know this to be true because we had just closed escrow on the home across the street just a month earlier.

Mr. and Mrs. Smith decided that they would like to sell the home as a Short Sale and save their credit to buy a new home in a few years when the market was more reasonable.

One afternoon we got a call from Mr. Smith asking us if it was too late to stop the sale of his home, as it was already in escrow and the Short Sale was approved by the lender. Mr. Smith had been approached by a friend that had a friend that told him that he would be able to get him a loan modification, one that was “desirable” and would even be able to help him lower his principal balance.

Needless to say, we cautioned Mr. Smith about the legitimacy of this. Kris and I reminded him of the multiple conversations we had with his lender and the terms that they offered. It’s difficult to think without emotion when your loosing your home, we know this because we’ve experienced it. The last thing you want to hear from anyone is “You have to move” Your ears are always open to anyone…and I mean anyone, that says they can help you “keep your home”.

Well, we gladly helped Mr. and Mrs. Smith cancel their sale with the lender and let them know we would be here to help in anyway we could.

The call came about 2 weeks ago, it was a real estate agent from a well known company asking questions about the home owned by Mr. And Mrs. Smith….The home was sold at Trustee Sale.

Kris called Mr. Smith to make sure all was ok, Mr. Smith told Kris that the “loan modification company” was still working on a loan modification…? Yep, Mr. Smith had paid for services up front to save his home, and unknown to him the home was sold while he trusted this loan modification company to do what they told him they could do….! Mr. Smith called us back later that day and told us the the loan modification company had him file an emergency bankruptcy and not to worry. Again….when your loosing your home…desperation is a very familiar feeling, and Mr. Smith did what most would do, he forked out about $2500 to do the emergency BK Filing.

Less than a week after Mr. Smith filed for Bankruptcy the County Sheriff posted an eviction notice on the home. The home was sold at auction, the BK did not save his home, the loan modification company told him that the lender was unable to offer him anything other than what had been offered several months back……

Please be aware that not all loan modification companies are really helping you, the employees might just be the same group that sold you that screwed up loan a few years ago!

Here is some great information that I located that will explain the very detailed rules and restrictions that support the Hope for Homeowners initiative that kicked off at the first of October. If you are trying to keep your home and reduce your payments. This program is very restrictive and will most likely not be able to help everyone. Remember that even if you don’t fit the mold for Hope for Homeowners, there are still opportunities with loan modifications that may be offered by your lender. We can help you figure out what your options are.

H4H program allows troubled homeownerss to keep their home, while enabling lenders to receive a Federal Housing Administration (FHA) guarantee on the loans. Under the terms of the voluntary program, lenders agree to refinance the existing mortgage at 90 percent of the current appraised value and assume the loss on the remaining balance; the new loan is an FHA guaranteed 30-year, fixed rate, fully amortized, fully documented loan; and the homeowner must forgo a portion of the home’s future appreciation to FHA when it is sold.

NOTE: Homeowners, contact your existing lender and/or a new lender to discuss how you may qualify for the H4H program.

The HOPE for Homeowners (H4H) program was created by Congress to help those at risk of default and foreclosure refinance into more affordable, sustainable loans. H4H is an additional mortgage option designed to keep borrowers in their homes.

The program is effective from October 1, 2008 to September 30, 2011.

As many as 400,000 homeowners could avoid foreclosure through this program over the next three years. If you are having trouble making your mortgage payments, HOPE for Homeowners may be able to help you, by refinancing your loan into a new 30-year fixed-rate loan with lower payments.

How the Program Works

There are four ways that a distressed homeowner could pursue participation in the HOPE for Homeowners program:

1. Homeowners may contact their existing lender and/or a new lender to discuss how to qualify and their eligibility for this program.

2. Servicers working with troubled homeowners may determine that the best solution for avoiding foreclosure is to refinance the homeowner into a HOPE for Homeowners loan.

3. Originating lenders who are looking for ways to refinance potential customers out from under their high-cost loans and/or who are willing to work with servicers to assist distressed homeowners.

4. Counselors who are working with troubled homeowners and their lenders to reach a mutually agreeable solution for avoiding foreclosure.

It is envisioned that the primary way homeowners will initially participate in this program is through the servicing lender on their existing mortgage. Servicers that do not have an underwriting component to their mortgage operations will partner with an FHA-approved lender that does.

Step 1: Cost-Benefit Analysis

Lender considerations:

Given their fiduciary responsibilities and financial obligations, lenders will assess their portfolio and perform a cost-benefit analysis to determine the feasibility of offering this program to struggling homeowners.

1. Affordability versus value: lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 90 percent of current appraised value. The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values.
2. Borrower eligibility: Lenders that determine the H4H program is a feasible and effective option for mitigating losses will assess the homeowner’s eligibility for the program:

o the existing mortgage was originated on or before January 1, 2008;
o Existing mortgage payment(s) as of March 1, 2008 exceeds 31 percent of the borrowers gross monthly income;
o The homeowner did not intentionally default, does not have an ownership interest in other residential real estate and has not been convicted of fraud in the last 10 years under Federal and state law; and
o The homeowner did not provide materially false information (e.g., lied about income) to obtain the mortgage that is being refinanced into the H4H mortgage.

Consumer considerations:

The lender will disclose to the homeowner the benefits of the program:

* Home retention,
* New affordable mortgage based on current appraised value,
* 10 percent equity

The lender will also disclose to the homeowner the costs of the program:

* 3 percent upfront mortgage insurance premium and a 1.5 percent annual premium,
* Equity and appreciation sharing with the Federal government, and
* Prohibition against new junior liens against the property unless they are directly related to property maintenance.

Step 2: Negotiations Between Borrowers and Lien Holders

If the lender refinancing the loan does not hold the senior mortgage lien, it will need to secure an agreement from the existing lien holder to waive all prepayment penalties and default fees on the existing loan and accept the loan proceeds from the H4H loan as payment in full. The loan amount (including the 3 percent UFMIP) for the new H4H loan cannot exceed 90 percent of the current appraised value of the property.

The lender will engage existing subordinate mortgage lien holders to extinguish all subordinate liens on the subject property. To entice subordinate lien holders to participate in the negotiation process and release their liens, FHA has the authority to share its future appreciation entitlement with them.

Step 3: Originating an H4H Mortgage

The lender will qualify the homeowner for the new H4H mortgage using the guidelines established under the terms of the program’s unique statutory requirements, ensuring the homeowner has the capacity to make the new payment on the H4H mortgage in a timely manner.

During underwriting of the loan, the lender will calculate the future appreciation interest amount for each subordinate lien holder in accordance with instructions provided by FHA.

At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD’s appreciation share.

Following funding of the loan the lender will record – in addition to the typical security instrument and note for the first mortgage – a shared equity note and mortgage (SEM) and a shared appreciation note and mortgage (SAM). These mortgages will be serviced by FHA.

The lender will also submit the new mortgage for insurance to FHA, certifying that it has been originated, underwritten and closed in accordance with the H4H program guidelines.

Step 4: Fulfilling H4H Mortgage Obligations

Upon sale of the property, the homeowner will use their sale proceeds to pay off the H4H mortgage as well as the shared equity and shared appreciation mortgages.

FHA will provide instructions to the settlement agents regarding subordinate lien holders who are entitled to a portion of any appreciation. The lien holder that previously held the highest priority will receive payment up to the full dollar amount of its interest, not to exceed the amount of available appreciation, and so on, until all prior lien holders are satisfied or the amount of available appreciation is exhausted. All remaining appreciation is remitted to FHA.

In instances where the homeowner failed to make the first payment on their new H4H mortgage, the H4H statute prevents FHA from paying claim benefits to anyone holding the mortgage.

If you follow our blogs, one of my recent posts ” In the business to foreclose…ask Ryan” told of a loan servicing company that declined to order a bpo on a property due to the fact they had done their own appraisal months prior to the offer we had provided them. Please, go back and read the communications between Ryan, employed at American Home Mortgage (servicing company for Option One Mortgage).

I’ve been talking to anyone that will listen about this, I’m just trying to understand how an investor would benefit from taking the home back? Well, needless to say, I’ve been watching the property to find out what the sale price will be once it comes back on the market.

When I looked it up today…I had to look several times at the information, honest, were my eyes really that bad that I can’t make out the print???

The home was sold at auction. Now, let’s go back 30 days...We presented an offer that was all cash offering $264,000. This according to upper management was too low, they would not go back and order a current bpo and they decided to foreclose on the home.

Ready for this, Auctioned for $150,000. Ok, someone, anyone, please tell me what is going on here????

These servicing companies have no vested interest in these loans, Option One was taking a loss, but they now will be writing off $100,000 plus more than if their servicing company, American Home Mortgage (servicing company for Option One Mortgage) would have had half a brain!

Here are the emails that lead to the Auction Price of $150,000!

Hello Ryan,
I am sending a new offer on the property. Escrow is completing the HUD with all of the required changes resulting from our last conversation/offer. I did not send in an updated HUD on that offer due to the buyer backing out. The issue with this property has been the second lien holder, BofA as I explained to Mr. Kellty. They were not willing to release for $1000, which is your policy. We have remedied that. When I called in today, to find out if you had received this new offer I was told it was too low and I would need to counter, With a sale date set for tomorrow I don’t have time to get back to the buyers agent. This home has been discharged in a Chapter 7, we have interest in the property. When I spoke to Mr. Kelly he told me he would work with us to help the ****** family avoid foreclosure. Could I request that you order an interior BPO on this home? The offer that we are providing to you today is in line with recent sales as you will see. The property must be able to appraise for the lender to fund, according to all information, this offer is at the high end.

Hi Ryan,
I am Kim’s partner. We received your email this morning and we understand a business decision.
You mentioned that you had an appraisal done. When was the appraisal completed? The declines in this market are staggering. We are seeing declines of over 6% per month in Rancho Cucamonga.
I would be remiss in not fighting for our clients best interest. We have reviewed the recent listings both “Active” and “Closed” in this gated community. There are no recent sales and 7 active listings in this very small gated community. The average days on market is 46.8 and of the 7, 7 are distressed properties i.e. Bank owned, short sales, or pending Trustee’s.
In today’s climate of declining sales, another home on the market is a “coal on the fire.”
Rancho Cucamonga, while a lovely city, is suffering from a tremendous volume of distress properties. There are currently 761 Homes on the market. 378 are marked as “Distress” sales in MLS. That is over 50% of the homes in Rancho Cucamonga. And that is assuming that the Agent remembered to check the “Distress” category of the listing. My thoughts is that there are many more.
According to Commonwealth Title, The International Title agency, there were 408 Notices of Default and Trustee Sales filed for Rancho Cucamonga from 08/08/2008 – 09/08/2008. That is staggering and this is your competition for resale when you enter the market with another Foreclosure.
These figures, while staggering are simply a sign of the times and according to a Department of Economic Studies at UCLA recent study, they reported that Southern California has a minimum of 2 more years of decline.
Again, we appreciate your companies decision, however, with these staggering declines, your client is more than likely to suffer a great loss over the next 6 months as this property is not sold at Foreclosure and is placed back on the market in 2 months at a lower price than currently listed.
Thank you again for your consideration.
Best,
Kris Darney
714-615-7605

Ryan discussed an appraisal with me that was done at the onset of the filing of the Chapter 7. This would be at minimum a 4 month gap to time of request for the BPO. A few years ago this would not have been so significant. …but this is the Inland Empire….October 2008. Prices are declining monthly!
I’m not sure how a servicing company is paid. It would seem by this transaction that it’s not based on retention. This is one of the most disgusting business practices I’ve ever experienced! The servicing company has most likely spent more money on foreclosure costs than this home will eventually sell for by the time it’s back on market in about 3 months.

I found some great information on a blog post today from the OC Register. The story was focused on the Orange County area, but clearly shows the degree and areas that were hard hit with unsavory loans in the Inland Empire.

The loans that shook the financial world started small.

In 2004, the first year that the Fed’s Home Mortgage Disclosure Act database tracked high-priced subprime loans, subprime was a bit player in the California home market.

But a Register analysis of HMDA data shows that subprime quickly grabbed market share in lower middle-class neighborhoods up and down the state in 2005 and 2006. In 2007, as subprime giants like Orange-based Ameriquest and Irvine-based New Century downsized or shut down, subprime again became a bit player.

These maps show the spread and retreat of subprime loans in Orange County and neighboring counties from 2004 through 2007. Another set of maps below describe a similar pattern statewide.

These maps represent what we’re calling the subprime penetration rate, the percentage of total home loan volume in each census tract that was high-priced. Yellow on the map indicates that subprime accounted for 15 percent or less of total loan volume; green is for 15 percent to 25 percent; light blue for 25 percent to 35 percent; dark blue for more than 35 percent.

A caution: The industry defines subprime using credit scores; the Fed defines high-priced loans as those that cost at least 3 percentage points higher than a Treasury bill of comparable maturity. The two terms don’t match, but the Fed’s high-priced category appears to capture most subprime and some alt-A loans.

In 2004 there are just a few pockets where subprime lenders grabbed more than 15 percent of the market: most notably in central Los Angeles between the I-110 and I-710 freeways, and in the Inland Empire, especially along the I-10 corridor.

In 2005 and 2006, however, the picture changed dramatically. Suddenly the subprime guys and gals were making more than 35 percent of home loan volume in a huge swath of LA and the Inland Empire. They also started doing big business in Orange County, where many of them were headquartered. Look at the I-5 corridor and especially at Anaheim, Garden Grove and Santa Ana.

By 2007, business was cooling down almost everywhere outside central L.A. and portions of San Bernardino County.

For many Southern Californians, the desert and the San Joaquin Valley are windshield territory — places best crossed at high speed on the way to someplace else. But there’s a remarkable economic story to be told here: These regions are adding new residents by the tens and hundreds of thousands, drawn by cheap housing and new jobs.

Subprime lenders played a big role in financing the valley’s and the desert’s growth. The proof is in the maps.

Watch the spreading blue zone — the tracts where subprime accounted for at least 35 percent of total home loan volume. In 2004, it’s isolated to a few patches in the desert and the southwestern corner of Tulare County in the San Joaquin Valley.

By 2005 the entire valley from Bakersfield north to Stockton is blue. The bluest areas are along State Highway 99, which connects the valley’s urban centers. And subprime is now spreading north to Sacramento and to the farm counties above it.

In 2006 the urban parts of the San Joaquin Valley are solid subprime turf. Today cities in this zone including Merced and Stockton have some of the highest foreclosure rates in the nation. Note too how subprime spread to virtually the entire high desert, from Lancaster and Palmdale in northern L.A. County to Victorville in San Bernardino County.

That was subprime’s peak year. In 2007 the map shows far fewer blue areas, though subprime continues to be common in most of the San Joaquin Valley. The largest blue areas, by the way, are lightly populated tracts — the vicinity of Death Valley National Park in Inyo County on the state line, and the Santa Barbara County back-country.

Today I was talking to a fellow that called me to find out about how a Short Sale works.  I realized after talking with him for nearly an hour that there are a lot of people (real estate agents) that give out conflicting and incorrect information.  I don’t believe that it’s intentional in any way, but scary for the person that needs to be informed correctly regarding this very important subject.

Some of the topics that were of interest and concern to him….

The loan modification he was offered was not going to help him enough per month on his payment and he was going to have to keep all of the principal balance.  The payments he was currently making were taking nearly 3/4 of his pay per month.  So, he had basically depleted his savings and was now having to look for a new place to rent for a while, but found he was lacking the money it was going to take for deposit and first month’s rent to move…not to mention moving costs.

I assured him that as long as we had the home listed for sale, and it was able to be shown to clients, his lender  would not be ask him to leave the home even if he was not making his payments.  As I explained, it’s like an ordinary sale in most ways.  The main factor in a Short Sale is that the “bank” is really now the seller and as real estate agents now negotiate with the bank instead of him.

For some people, doing as little damage to their credit is very important.  So I would say to those of you that fit this category…if your able, stay current on all of your financial obligations.  If your like most of us that are facing mortgage payments that are increasing at the speed of light and it’s just not possible to make those payments, don’t.  But get your home listed for Short Sale as soon as possible and stay current on as many of your financial obligations as you can.

One last little tip, if you live in a home that has an HOA (Home Owners Association) do what ever you can to not let those get behind.  HOA’s hold quite a bit of power, and will slap a lien on the property in a heart beat!  And that lien will have to be paid before the sale of the home.

Hope this information is useful, as always, please email us if you have any questions!

It appears that their is something coming to California Homeowners that have Counrywide loans. We will find out more today concerning the specifics. We will keep you posted.

Countrywide mortgage pact may be worth $3.5 billion to California loan holders
Bank of America Corp. agrees to nation’s largest mortgage-workout program to settle charges of lending abuse.
An estimated 125,000 Californians who are struggling with risky mortgages from Countrywide Financial Corp. may get their loans modified and payments reduced under a program to be announced today.

In a pact that could save mortgage holders billions of dollars, Countrywide owner Bank of America Corp. has agreed to the nation’s largest loan-modification program to settle charges of lending abuse brought by California and other states.
The program could reduce payments to Countrywide borrowers and provide other benefits to total as much as $8.7 billion nationwide. It would examine nearly 400,000 loans across the nation — about 125,000 of them in California — to see how they could be reworked and made more affordable. That could include switching customers to fixed-rate loans or reducing the interest or principal.
Bank of America said Countrywide mortgage-servicing employees would be trained to carry out the program by Dec. 1 and would then begin reaching out to eligible customers. The plan includes a foreclosure freeze for borrowers who are likely to qualify until Countrywide has determined their eligibility, the bank said.

But officials acknowledged that some borrowers were beyond help and said these customers would need the cooperation of investors who owned the loans. Such assistance was not always forthcoming in the past.

The settlement includes a program for California borrowers who are behind on their Countrywide mortgage payments or are having their homes foreclosed by the lender.

The total value of the benefits could reach $3.5 billion to California homeowners who took out risky, adjustable-rate loans from Countrywide, California Atty. Gen. Jerry Brown said.

The program, to be announced today by Brown, applies to mortgages made before this year. It had been endorsed by at least nine states as of Sunday, including California, Florida and Texas, where Countrywide wrote the most loans.

Its central thrust — changing the terms of subprime and other risky loans — was to be applied across the country, even in states that might not accept the overall settlement, California and Bank of America officials said.

“It’s not perfect,” Brown said Sunday, “but we have some money for people who already have been kicked out of their homes, and we have money for people who may get foreclosed on later. And there are some very significant payment reductions for people. This will allow them to stay in their homes.”

According to Brown’s office, the settlement could save borrowers up to $8.7 billion nationwide, nearly all of it through interest rate and principal reductions. There was no word on how much people whose homes had already been foreclosed would receive.

The $8.7-billion estimate assumes that all eligible borrowers participate and that investors in mortgage securities cooperate with the loan workouts.

Those are big ifs, said Robert Gnaizda, general counsel of San Francisco’s Greenlining Institute, a fair-lending advocate. “There’s no way of saying how much borrowers are going to save on this. The talk of $8 billion is pure speculation,” Gnaizda said after reviewing a description of the plan. “All that being said, I believe this is a very important first step.”

The agreement almost certainly would rank as the largest predatory-lending settlement in history, dwarfing the nationwide $484-million settlement with Household Finance Corp. in 2002 and a $325-million settlement with Ameriquest Mortgage Co. in 2006.

Those settlements involved payments to borrowers, however, not loan modifications.

Bank of America officials said the settlement costs would not exceed those anticipated when it acquired Countrywide in July for $2.5 billion in stock.

Although numerous lawsuits and federal investigations continue against Countrywide, ex-Chairman Angelo Mozilo and other former executives, the settlement helps Bank of America shed liability for the aggressive lending that helped trigger the current global financial crisis and left hundreds of thousands of Americans stuck in loans larger than the value of their homes.

Under BofA ownership, Countrywide has stopped making the types of adjustable-rate loans that caused the most problems, officials said.

Countrywide’s prior lending practices put families into loans they couldn’t understand and ultimately couldn’t afford, according to Brown, who said the settlement sought to compensate the borrowers.

According to the agreement, borrowers assisted by the loan workouts would not be precluded from joining private class-action lawsuits against Countrywide or pursuing their own claims.
Barbara Desoer, president of Bank of America’s mortgage and insurance operations, said: “We are confident that together with the attorneys general we have developed a comprehensive program that provides more solutions than ever before to assist troubled borrowers and put them back on the path to sustained home ownership.”

The states of California, Illinois and Florida took the lead in the settlement, said Benjamin Diehl, a California Department of Justice attorney specializing in lending abuse. The three states had sued Countrywide and its subprime unit, Full Spectrum Lending, in June, alleging they maximized short-term profit by deceptively marketing risky loans with low starter rates to borrowers who didn’t understand that their payments would one day “explode.”
The program will first identify customers who have fallen behind on their mortgages by more than 60 days or are likely to do so because of loan features such as rate or payment increases, Diehl said. These customers will be contacted by Countrywide starting Dec. 1.

Various options will be considered for eligible customers, with employees handling the workouts instructed to first consider refinancing into a fixed-rate Federal Housing Administration loan, Diehl said.

The options on subprime mortgages also include keeping the initial rate for five or 10 years, having the borrowers pay interest only and reducing the interest rate to as low as 3.5%, Diehl said.

For pay-option loans, many of which now amount to more than the borrower’s house is worth, the options include writing the principal down to 95% of the home’s current appraised value and lowering the interest rate to 3.5%, he added.

In addition to California, Florida and Texas, the states that signed the settlement are Connecticut, Washington, Arizona, Ohio, Illinois and Iowa.

Brown said he believed most of the investors who owned the loans would accept the modifications rather than foreclosure at this point.

“It’s not exactly what they wanted, but it’s better than default,” he said. “In this environment of people talking about us heading for a depression, I think having a predetermined fixed amount coming in will be attractive to them.”

Countrywide mortgage aid

The total value of the benefits in California could reach $3.5 billion. The plan calls for:

* Loan modifications, mostly through reduced interest payments, and in certain cases reductions of loan balances

* Suspension of foreclosure on delinquent loans while loan modifications are being reviewed

* Waived late fees

* Payments to delinquent borrowers or people whose homes have been foreclosed

* Waived prepayment penalties for borrowers whose loans are modified, paid off or refinanced

* Additional payments to borrowers who can’t afford their monthly payments after loan modifications and who lose their homes to foreclosure in the future

Source: California attorney general’s office