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Borrowers complain when banks won’t accept a cramdown

Posted: 05 Oct 2011 03:30 AM PDT

Borrowers today feel entitled to a loan modification, and they complain when they don't get the loan modification they believe they deserve.

Irvine Home Address ... 11 COLDHARBOR Irvine, CA 92620
Resale Home Price ......  $540,000


But be aware,
I always get what I deserve
Keep your focus,
keep your nerve
Ready, set, go

Pick up the pace and step on it
Rip up the place if you want it
Work, work
You know you gotta work, work

The Saturdays -- Work

During the housing bubble, loan owners only had to fill out a few forms to get copious amounts of cash. Now getting free handouts from the banks requires a plethora of paperwork, and sometimes the bank says no.

Getting a mortgage workout shouldn't be this exhausting

A Downey couple who had fallen behind on mortgage payments to Wells Fargo subsequently tried to make good on the money owed. But getting their lender to work with them — that's another story.

By David Lazarus -- October 4, 2011

Before we get started, I want to ask a simple question. Why should getting a loan modification be easy? Most often, this is a unilateral contract revision being forced on the lender who is under duress. The culture of borrower entitlement has forgotten this fact. If prices were not down so much, lenders would just foreclose and get their money back. The main reason a lender considers a loan modification is because they are in a weakened bargaining position due to the fact they cannot recover their capital in a foreclosure.

Some market watchers have complained strategic default is a threat to contracts, but loan modifications are far more threatening. Strategic default merely triggers a contractual contingency already spelled out in the agreement. Nothing is being changed. Loan modifications are actual changes to the contract being forced upon lenders by borrowers empowered by government programs and the state of the market. Loan modifications are a threat to contracts.

Remember, loan modifications are not entitlements, and lenders don't want it to become one. What shocks me about articles like this one is the sense of entitlement and how oblivious everyone is to it.

Jackie Durra and her husband, Pedro Balladares, have been riding out the economic downturn as best they can.

For a while they were both out of work, making it a challenge to pay the bills and feed their two kids. She eventually found a job, and then he did as well.

But over the course of what turned out to be a very difficult year, the couple fell behind on mortgage payments for their house in Downey. There were months when they simply had to choose between keeping the lights on and meeting their obligations to their lender, Wells Fargo.

"It was hard," Durra, 49, told me. "We had no money coming in."

That would be very hard. Having both wage earners lose their jobs really puts a family in a tough spot. It's a good thing they weren't renters...

As loan owners, this couple deserves special dispensation, right?

Make no mistake: She and her husband are at fault here. They missed four mortgage payments between October 2010 and April of this year. They shouldn't have been surprised when Wells stopped taking their payments in June and served them with a notice of default in August.

But Durra and Balladares are also typical of many other homeowners who, because of circumstances beyond their control, found themselves barely able to keep their heads above water. They aren't deadbeats. They aren't trying to cheat the bank out of its money.

Actually they are deadbeats as they were not making their payments. What he is really arguing is that it's okay to be a deadbeat if you have good intentions.

Given a chance, they're eager to make good. They want to keep their home. But getting their bank to work with them — that's another story.

If they're eager to make good, they can agree to the terms offered by the bank. Most lenders will modify the loan to add the missed payments, penalties, fees, and other charges to the balance of the loan. However, the borrower still must have the capacity to make the payment. If the loss of income which prompted the loan modification becomes permanent, then the borrower can no longer afford the property. Banks are not obligated to reduce principal and payments just because the borrower doesn't make as much as they used to. If banks did have such a requirement, I would buy the biggest home possible right before retirement.

"It's a national crisis," said Jamie Court, president of Consumer Watchdog, a Santa Monica-based advocacy group. "Banks seem more interested in foreclosing on people than on keeping them in their homes."

That's a stupid and emotional statement. Banks are interested in two things: return on their money, and return of their money. Banks are not interested in whether or not people stay in the home the bank bought for them with the bank's money, nor should they be. Banks exist to make money. They are not a charity.

Adding insult to injury, many of these banks (including Wells) received billions of dollars in taxpayer-funded bailouts to keep them afloat when times were tough.

"If we gave the banks a second chance," Court said, "the least they can do is help people out who are trying to do the right thing."

That argument has an emotional appeal, but it is completely specious. If banks bail out every borrower, they will need an even larger government bailout.

Durra bought her three-bedroom house in 2001 for $280,000. After a second mortgage was taken out several years later, the total outstanding loan balance was about $375,000.

These people took out $95,000 in free money. They added about 30% to their mortgage and got to spend the money, but we are supposed to feel sorry for them. Perhaps their mortgage payment wouldn't be quite so onerous if they had been responsible with their borrowing.

The real-estate website Zillow estimates the current value of the property at $348,300.

With the decline in values, they would still have equity if they hadn't refinanced and took out $95,000.

Durra and Balladares received a loan modification from Wells in 2009 that lowered their monthly payments. But by summer 2010, the couple were facing new difficulties.

She had lost her job handling billing for a doctor's office, and his business exporting car parts to Nicaragua fell victim to harsh global economic conditions.

With other bills mounting, they were unable to make their October mortgage payment of $1,470. Then Durra landed a job that month handling billing for USC's Department of Pathology. She immediately contacted Wells Fargo and explained their situation.

The bank, Durra said, seemed placated, especially when the November and December payments came in on time.

This is to be expected. After a financial hardship, lenders will modify a loan to cure it.

But the family was still facing hardship.

"My husband wasn't working and we just didn't have enough income," Durra said. "We were living paycheck to paycheck."

In January of this year, they applied for another loan modification to work out more flexible terms. Durra said Wells turned them down because they weren't making enough money.

What exactly is "more flexible terms?" Isn't that code for "they wanted a ridiculously low payment?" Wells Fargo turned them down because with the "flexible terms" the borrowers were offering, the loan would never get repaid. What was Wells Fargo supposed to do, give them a free house?

She and Balladares missed their January and February mortgage payments. They were able to send in a check for March. They missed April. They sent in a check for May.

So what? They couldn't make their payments because they couldn't afford the house. Are we supposed to cheer them on for struggle to pay for a house they cannot afford? Is Wells supposed to reduce their payments to a super low level so they can stay?

I have a better idea. Foreclose on them so a family who can afford the house can buy it.

Then, in June, Balladares finally landed a gig as an X-ray technician for a medical clinic. The couple applied once again for a loan modification. This time, Durra said, Wells turned them down because they were making too much money.

If they make enough money to afford the property, they they don't need a loan modification.

They sent in a check for their June mortgage payment. Wells sent it back and foreclosed on the property.

Durra said she tried to approach Wells to work something out, but each time was rebuffed — even though she and her husband were now setting aside thousands of dollars to cover their missed payments.

Does this story seem reasonable to you? Would a bank really not accept payment from a borrower in arrears? Has any bank ever refused to accept money from someone who owed it to them? Something doesn't smell right here.

At the beginning of September, they tried to find out how much they owed, including late fees and legal charges. Wells said it would get back to the couple in about a week.

It never did. So Durra and Balladares came to me.

I went straight to Wells with a simple question: Would the bank really rather add to the glut of foreclosed homes than work with a committed homeowner who's eager to pay her bills?

It depends on how much money the eager borrower can put toward the mortgage. If it's only a fraction of the payment needed to retire the loan, the bank is better off foreclosing.

I'm glad to report that Wells wasted no time in reaching out to Durra and trying to find some way to fix this mess.

"We're working with them to keep them in their home," said Jennifer Langan, a Wells spokeswoman.

She said it's likely that a repayment plan will be established, and once that happens, the foreclosure proceedings will end.

"At the end of the day, no bank wants a foreclosed property," Langan said. "It is not good for homeowners, neighborhoods or communities."

And with the depressed prices today, foreclosures are bad for the banks as well. Banks don't want to foreclose. They would rather have borrowers make payments. However, if borrowers can't or won't make their payments, banks will foreclose in order to get their money back. They won't stay in business long giving away free houses to people who don't pay them back.

Which is why it's surprising that so few banks seem to step up, especially in times like these, to assist homeowners who are trying to act in good faith.

Consumer Watchdog's Court said many banks have one-size-fits-all policies that make it difficult to address individual problems. It can also be more labor-intensive (read: expensive) to work with homeowners on a case-by-case basis.

Langan said Wells would have probably done something for Durra and Balladares even if I hadn't taken an interest, and maybe that's true.

Yes, that is true. If the borrower can now afford the full payment and doesn't require a reduced payment through a loan modification, the bank will certainly work with them to keep that loan alive. The bank would be stupid not to.

But I hear a lot of hard-luck stories from people who say all they get from the bank is a door slammed in their face.

Most of those stories are probably bullshit.

Not everyone deserves a second chance. But banks should know from personal bailout experience that there are many who do.

And helping them out can be good business over the long run.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to

Many people probably don't realize that banks have always done loan modifications for troubled borrowers. It was never a formal or regulated process as it is today, but informally, on a case-by-case basis, lenders have always done this. They are in the business of making loans and collecting payments. If they can find a way to get a borrower to resume making payments, it's all good to them.

The problems with today's loan modification environment are the government tampering with these contracts and the borrower's trying to take advantage. Once the government got involved, borrowers came to believe they were entitled to a break on their mortgage.

Prudent borrowers have already obtained a benefit as they have been able to refinance at today's 4% interest rates. The couple from today's article went to the home ATM for $95,000. Should imprudent borrowers like them be given a break? If it comes from a taxpayer subsidy, I don't think so, but if it's only between the bank and the borrower, then I really don't care. It's none of my business.

Wells Fargo let this couple squat for two years

Far from being in a hurry to foreclose, Wells Fargo let the former owners of today's featured property squat for two years before foreclosing on them.

Foreclosure Record
Recording Date: 06/30/2011 
Document Type: Notice of Sale   

Foreclosure Record
Recording Date: 12/21/2009 
Document Type: Notice of Sale   

Foreclosure Record
Recording Date: 09/14/2009 
Document Type: Notice of Default

This property was a 100% financing deal from the peak. The made payments for about two and half years before giving up. They got to squat for two more.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Irvine House Address ...  11 COLDHARBOR Irvine, CA 92620
Resale House Price ......  $540,000

Beds:  3
Baths:  2
Sq. Ft.:  1703
Property Type: Residential, Single Family
Style: Two Level, Traditional
Year Built:  1985
Community:  Northwood
County:  Orange
MLS#:  S675297
Source:  SoCalMLS
Status:  Active
On Redfin:  1 day
Granite and marble countertops. Stainless steel appliances. Travertine flooring w/ insets and travertine showers w/ accents. Glazed cabinetry. Newer moldings, fixtures and hardware. Granite fireplace and mantel. 2-tone paint. Nice location, complete with 2-car garage, large patio and backyard. Association pool and much, much more. Centralized location near freeways, schools, shopping and park. 
Proprietary IHB commentary and analysis 

Resale Home Price ......  $540,000
House Purchase Price … $182,000
House Purchase Date .... 5/1/2001

Net Gain (Loss) .......... $325,600
Percent Change .......... 178.9%
Annual Appreciation … 10.5%

Cost of Home Ownership
$540,000 .......... Asking Price
$108,000 .......... 20% Down Conventional
4.00% ............... Mortgage Interest Rate
$432,000 .......... 30-Year Mortgage
$105,017 .......... Income Requirement 

$2,062 .......... Monthly Mortgage Payment 
$468 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$112 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$70 .......... Homeowners Association Fees
$2,713 .......... Monthly Cash Outlays

-$334 .......... Tax Savings (% of Interest and Property Tax)
-$622 .......... Equity Hidden in Payment (Amortization)
$150 .......... Lost Income to Down Payment (net of taxes)
$88 .......... Maintenance and Replacement Reserves
$1,994 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$5,400 .......... Furnishing and Move In @1%
$5,400 .......... Closing Costs @1%
$4,320 ............ Interest Points @1% of Loan
$108,000 .......... Down Payment
$123,120 .......... Total Cash Costs
$30,500 ............ Emergency Cash Reserves
$153,620 .......... Total Savings Needed

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