Partnering with Addvent Funding, a Provider of Motgage Principal Reductions, Can Be More Advantageous then Working with a Loan Modification Company

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With increased housing foreclosures and strategic defaults, loan modifications alone are not the answer to solving the financial crisis, they are a short term fix for a long term problem... principal reductions, offered by a few emerging companies, are the solution. Addvent Funding wants to educate the public on the current state of our financial market and the figures that go with what is wrong.

The latest housing statistics indicate loan modification may not be enough; a principal reduction may be the only answer to address expected increase in foreclosures. Addvent Funding publishes current housing market statistics, hoping to educate current homeowners on what steps they can take to reclaim lost equity.

The most recent statistics released about loan modification and negative equity indicate lenders may need to quickly re-think their refusal to offer mortgage principal reductions if they want to avoid monumental and systemic foreclosure rates.

According to the OCC and OTS Mortgage Metrics Report for Q4 2009, here are the sobering facts about the relative ineffectiveness of loan modification thus far:

  • The report covers nearly 34 million loans totaling almost $6 trillion in principal balances and provides information on their performance through the end of the fourth quarter of 2009 (December 31, 2009).
  • Overall mortgage performance declined for the seventh consecutive quarter, with the percentage of current and performing mortgages falling to 86.4 percent at the end of the fourth quarter of 2009.
  • This decline is attributable to the 21.1 percent increase in mortgages 90 or more days past due to 4.7 percent of all mortgages in the portfolio at the end of 2009. The increase in seriously delinquent mortgages was most pronounced among prime borrowers, where the number of seriously delinquent mortgages increased by 16.5 percent during the fourth quarter.
  • overall re-default rates remained high with more than half of all modifications falling 60 or more days past due by 9 months after modification, and more than half of all modifications were 90 or more days past due by 12 months after modification. Nearly 40 percent of modifications that had reduced monthly principal and interest payments by more than 20 percent were 60 or more days past due 12 months after modification.

While loan modification is the hot topic among members of the federal government and the general media, statistics show the most significant factor contributing to the depressed housing market is the overwhelming presence of “negative equity”. Negative equity is a term that describes the situation when a homeowner owes more in debt on their home than the current market value of the property. The difference between what is owed and the value of the home is referred to as negative equity.

Negative equity affects one in four homeowners with a mortgage in our country according to data compiled by First American Core Logic and published on February 23rd 2010. Here are some more statistics from the First American Core Logic report that speak to the depth and severity of negative equity:

  • First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009.
  • An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.
  • The net increase in the number of negative equity borrowers in Q4 2009 was 620,000
  • The rise in negative equity is closely tied to increases in pre-foreclosure activity and is a major factor in changing homeowners’ default behavior. Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors.
  • The aggregate dollar value of negative equity was $801 billion, up $55 billion from $746 billion in Q3 2009. The average negative equity for an underwater borrower in Q4 was $70,700, up from $69,700 in Q3 2009. The segment of borrowers that are 25 percent or more in negative equity account for over $660 billion in aggregate negative equity.

And this quote from Mark Fleming, chief economist with FA Core Logic, sums up what to expect for the near future:

"Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners. Since we expect home prices to slightly increase during 2010, negative equity will remain the dominant issue in the housing and mortgage markets for some time to come.”

So what is the answer to dealing with the escalating crisis of negative equity and the relative ineffectiveness of loan modification? It would seem the only plausible conclusion is for lenders to consider principal reduction in an effort to bring mortgage loans more in line with property values.

There are a number of companies beginning to leverage this information in a manner that allows them to negotiate principal reductions and reduce mortgage amounts for qualified homeowners. While many of the details of this process are proprietary in nature, the concept is similar to a private investor approaching a lender with a large inventory of REO’s (Real Estate Owned properties) and negotiating the purchase of a portfolio of these loans at less than face value of the debt owned on them, a practice that is commonplace in today’s volatile real estate market.

Addvent Funding is a Tampa, FL based company that engages in this type of “portfolio short-refinance” strategy. As a company based in Florida, Addvent Funding is strategically located at “ground-zero” of the negative equity crisis, as Florida is among the top five states in virtually every statistical category regarding the impact of negative equity. Addvent Funding and its affiliates identify homeowners that may qualify for a mortgage principal reduction, then go through the necessary processing steps to prepare qualified clients to have their mortgages included in a portfolio for negotiation with a lender.

The result of this negotiation is typically a principal reduction of the borrower’s mortgage principal balance down to the current market value of the home. In turn, the lender receives a much needed infusion of capital and is able to off-load a severely under-performing asset, and the increased capital in turn helps the lender to resume normal lending practices.

Sources:

  • Office of the Comptroller of the Currency
  • Office of Thrift Supervision

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Zack Larson
Addvent Funding
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