There has been a subprime-esque bubble growing in the world of loan modifications. I know of several shops that have moved almost entirely from originating loans to facilitating loan modifications for profit. Many lead providers have also started offering loan mod leads as part of their product quiver. The margins are not as good as a loan, but typically they are easier to do so you can do more loan mods per month than loans. The problem that I see, however, is that this bubble, too, is about to burst.
Loan mods were intended to be a compromise between banks and consumers to keep a loan from defaulting in a market that continues to decrease in value; it is a means of loss mitigation for banks. But there appear to be some cracks emerging in the dam. There was a very interesting article in the NY Times on Dec. 8th. If you didn’t catch it, you can read it here. In short, most homeowners whose loans were modified during the first part of this year are falling behind on their payments once again. The article states:
“Data from banks show that more than half of loans modified during the first three months of the year were delinquent by 30 days just six months after the terms of the loans were changed, John C. Dugan, the comptroller of the currency, said at a conference in Washington. After eight months, 58 percent were delinquent again.”
Think about that. 58% of the modified loans were delinquent again after 8 months. So for the shops that have seen dollar signs in the recent months and shifted operations to a more loan mod-centric approach, know that you are not likely to be able to continue for too much longer, in my opinion. It can’t continue as it currently is.
Obviously something significant is going to have to change because the system as it is, is not working. I don’t begin to know what will happen. Based on what we have seen of late with all other things financial, the government is likely to step in. I would expect some sweeping changes in how a loan can me modified and who can do it. But what is 100% evident is that the system of loss mitigation as it exists right now is still not working. So if you ere looking for loan mods to be your panacea for 2009, my recommendation is to re-evaluate your options.
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I am not completely convinced that a 58% delinquent rate is a sign that loan modification will come and go. I would guess that 97% of those people, without the loan modification, would have had their homes foreclosed on. Looking at it that way loan mods helped 37% of the people in distress.
Bottom line is banks will continue to modify loans to keep real estate off their books and the amount of ARM that will be recasting in 2009 and 2010 will continue to grow the loan mod bubble.
The loan mod industry has a good 24-36 months prior to any decrease in business, unless there is some sort of government intervention that redirects these hurting borrowers.
Only time will tell, but I would capitalize on the opportunity, but stay diversified.
I would bet that those loan mods were the banks boiler plate deals or what we like to call “bandaid deals.” Bandaid deals only work when values and employment are stable or rising.
How many people lost their jobs during the time period?
Traditionally it has been in the investors best interest to do bandaid deals so profits would once again follow the original pro-forma after the temporary modification expires.
In this climate it is a simple question of: “are you willing to lower your future yield to protect your yield to date?” – Otherwise it will be erased and then some.
If cost of funds are sub 3% lowering a rate from 8 to 6 or lower in order to keep the homeowner in the home should be a win-win.
Permanent modifications or modifications that are offer a realistic approach to ones unique situation are the ones that will work for the long haul.
Great topic LC…
Let me ask perhaps the obvious questions:
1) Why would a Mortgage Banker buy a lead for this type of consumer as the data is freely at their finger tips?
2) What benefit does a consumer get from working with a Broker, as I am going to take the “wild guess” that this is the audience that is buying these leads?
Interested in your thoughts.
LeadTwit,
I think in many cases, no matter what the vertical is, people buy leads for the convenience. They find it easier to buy an inquiry then generate them on their own. Many also lack the experience and know how. However, if they have the resources, they probably do have their own marketing running, but need supplemental traffic.
Same goes for the person looking for this type of service. They could probably do this on their own, however lack the experience, know how and motivation to complete the process on their own. This is similar to the thriving debt and credit repair space. These are both services that can be done by the consumer too.
It is all about convenience and we all know people will pay for convenience.
I agree that people purchase leads for convenience. It saves time so you need to ask how much is your time worth. If the time it saves you is worth more than the money spent then its just good business. I tend to have a buy rather than a build mindset but thats only because my time is valuable to me.
We are also watching the Loan Mod industry closely. Not sure where it is headed but I would imagine some of the loans that are failing for second time might be due to continue deterioration of economy. One spouse loses a job and then they get a loan mod but never expected the other spouse to also lose their job.
Some great feedback to this post. I regret I haven’t had the chance until now to follow up on them.
LC, you said, “I am not completely convinced that a 58% delinquent rate is a sign that loan modification will come and go. I would guess that 97% of those people, without the loan modification, would have had their homes foreclosed on. Looking at it that way loan mods helped 37% of the people in distress.”
I think that this is probably an accurate assumption, but I would not agree with your logic. There is little doubt that almost all of the consumers would have likely foreclosed, that is why they qualified for a loan modification to begin with. But since the loan modification is designed to prevent a future default on the loan, yet 58% of them still defaulted, I can’t see a 37% success rate could be considered as anything except a resounding failure. It is for this reason I assume that dramatic changes and likely government intervention will take place.
My concern is this. The mortgage industry has been commoditized quite a bit by the standardizing of lending guidelines. So, the lenders that were major contributors to the situation we are in because they put consumers in loans in which they had no business being in, and did so because they could pull 5-7 points, are now moving to loan mods. The money isn’t as good, but it is far less competitive than originating loans in a commoditized environment so the profits come in the volume. But the vast majority of these folks are the opposite of Bill, whom you can tell from of his post (and whom I know), is one of the good guys that genuinely is interested in helping borrowers in need. But he is in the minority, I think, which is my concern. That’s why I titled the piece “The New Subprime.” Loan Mods run the chance of being the industry’s next get rich quick scheme at the behest of the consumer.
I guess the level of the success or failure can be argued, however the point was based on those numbers I do not think you can say that loan modifications are going to come and go. Then again you ca argue the specifics of “come and go” too. I think loan mods will have a fairly short cycle, maybe 3-5 years at best, so maybe you can define that as coming and going,
It would be my assumption that people having finance or credit issues cannot resolve their problems with a simple settlement rather have serious lifestyle issues that need to be changed. I would be curious how many consumers settle their debts with creditors and get right back into debt months later. I am sure this happens at a very high rate.
It would seem that number would be high, but nonetheless it will be interesting to see if it sustains at that level. If it does, what can the government do to help? I am not sure there is much more they can do.
Both points are right on.
I hate to even be labeled in a vertical that is attracting scumbags…but I hope we can truly help save America through homeownership and financial coaching.
We could go on and on about the people that I have run across thus far in this space and the ones I see trying to get in.
WOW! to say the least!
Recording calls is a must with this product.
Sales people must be managed and Integrity must be a top value throughout the organization.