Loan Modification Presentation

What are loan modifications?What are loan modifications?

How do they work?How do they work?

Why would banks be willing to do Why would banks be willing to do them?them?

What is a loan modification?What is a loan modification?

Modification of any term in an existing Modification of any term in an existing notenote– Interest rateInterest rate– Term lengthTerm length– Principal reduction*Principal reduction*

* 1.3% of loan modifications done between * 1.3% of loan modifications done between January 08 through May 08 resulted in a January 08 through May 08 resulted in a principal reduction. NY Times 07/23/2008principal reduction. NY Times 07/23/2008

Wall Street Journal Wall Street Journal December 22, 2008December 22, 2008

Of the loans that were modified in the 1Of the loans that were modified in the 1stst quarter quarter of 2008.of 2008.

37% were 30 days late after 3 months. 37% were 30 days late after 3 months. +50% were 30 days late after 6 months. +50% were 30 days late after 6 months.

WHY? WHY? No equity position.No equity position. Home values continued to slide.Home values continued to slide.

So how do they work?So how do they work?

Example Mortgage Term Prior to Example Mortgage Term Prior to ModificationModification Current mortgage $250,000.Current mortgage $250,000. 30 year fixed rate mortgage.30 year fixed rate mortgage. 6.5% interest rate6.5% interest rate Payment is $1,580.17Payment is $1,580.17 Plus taxes and insurance.Plus taxes and insurance.

Example Post Modification TermsExample Post Modification Terms Current mortgage $250,000.Current mortgage $250,000. 40 year fixed rate mortgage40 year fixed rate mortgage 4.5%interest rate4.5%interest rate Payment is $1,123.91Payment is $1,123.91 Plus taxes and insurance.Plus taxes and insurance.

Savings of $456.79 per monthSavings of $456.79 per month

Why are banks be willing to do this?Why are banks be willing to do this?

Banks want to avoid foreclosure – bad publicityBanks want to avoid foreclosure – bad publicity

On average the foreclosure to sale process takes On average the foreclosure to sale process takes 18 months 18 months

Foreclosures are expensiveForeclosures are expensive

Bank foreclosure sales receive on average 82% of Bank foreclosure sales receive on average 82% of current market valuecurrent market value

Banks view their mortgage Banks view their mortgage securities as a pipeline.securities as a pipeline.

Impact of Poor Performing NotesImpact of Poor Performing Notes

0

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100

Balances

Reserves

Performing Notes for banks•$1 in reserves supports $100 in loans

Non-Performing Notes for banks•$24 in reserves supports same $100 in loans

Poor Performing notes create huge reserve issues for lenders and prove toxic to balance sheets – Banks must immediately fund the additional reserve requirement or lose their risk losing their federal banking charter

Loan ModificationLoan Modification

This does work. Currently the DRE has This does work. Currently the DRE has listed 12 companies that they have listed 12 companies that they have “approved” to take up front fee’s.“approved” to take up front fee’s.

There are many many more of them out There are many many more of them out there.there.

In the past we work with a couple of them. In the past we work with a couple of them. They charge between $2,500 and $5,000.They charge between $2,500 and $5,000.

There is a better wayThere is a better way

Note purchase – Third party purchases Note purchase – Third party purchases your existing note from the bank.your existing note from the bank.

Prior to purchase the third party complete Prior to purchase the third party complete a forensic audit on your note. a forensic audit on your note. Complete Review of Truth in Lending Complete Review of Truth in Lending

DisclosuresDisclosures Audit for HUD compliance Audit for HUD compliance Document case against lender to create Document case against lender to create

strong negotiating positionstrong negotiating position

So how do they do that?So how do they do that?

Investor then approaches the bankInvestor then approaches the bank Buying power when combined with audit Buying power when combined with audit

documentation results in discounted purchase documentation results in discounted purchase price from existing bankprice from existing bank

Portion of discounted price provided to Portion of discounted price provided to homeowner in the form of immediate equityhomeowner in the form of immediate equity

Example Results for Borrower?Example Results for Borrower?

The house is underwater The house is underwater here $100,000.00here $100,000.00

The bank realizes a The bank realizes a $300,000.00 loss. And $300,000.00 loss. And receives replenishing receives replenishing capitol via government capitol via government TARP program.TARP program.

Note $500,000.00Note $500,000.00

House $400,000.00House $400,000.00ValueValue

Note Note Purchase $200,000.00Purchase $200,000.00@ .50% of@ .50% ofCurrent ValueCurrent Value

Investor Financed Investor Financed New Loan New Loan

The home owner relieved The home owner relieved of $200,000 in debt. of $200,000 in debt.

The investor creates a new The investor creates a new note at 75% of note at 75% of currentcurrent market value.market value.

$400,000 (Current Value)$400,000 (Current Value)

@ 75% LTV =@ 75% LTV =

$300,000 (new loan $300,000 (new loan amount)amount)

New loan has $100,000 New loan has $100,000 in homeowner equityin homeowner equity

Homeowner's positive Homeowner's positive position encourages position encourages continuing paymentcontinuing payment

Next StepNext Step

Complete Loan Application – Complete Loan Application –

Credit does matter Credit does matter

Complete Contract – written guaranteeComplete Contract – written guarantee

Complete Statement of InformationComplete Statement of Information

Foreclosure process is halted until pool reaches $40 millionForeclosure process is halted until pool reaches $40 million

Principle Reduction Guaranteed or Fee is returnedPrinciple Reduction Guaranteed or Fee is returned