Interest in commercial loan modification business intensifies.

Interest in the commercial mortgage modification consulting business has intensified as the residential loan modification industry in California is squashed in its infancy by SB 94. 

The law prohibits advance fees for loan modifications on residential properties of 4 units or less.  The new statute was enacted to protect the public from a group of attorneys (16 in total are being investigated) who allegedly took advantage of vulnerable homeowners by collecting advance fees without obtaining results for the clients. In a few cases homeowners actually lost their homes when they believed the attorneys in question were processing modifications on their behalf.

In one fell swoop thousands of for-profit housing counselors, intake clerks, receptionists and loan modification processors got pink slips this week.  While there are some companies that will remain in the business, they can no longer collect any fees until specific work and milestones have been completed. 

Essentially an attorney or loan modification company would have to provide unsecured financing for people who have already demonstrated their inability to pay.  Recent data show that over 50% of modified mortgages re-default within six months. This demonstrates the fact that the credit risk is too great for service organizations that rely on income produced by service fees to finance continuing operations. 

Those who have built their livelihood on helping homeowners get modifications in California have to find a new line of work. Homeowners will have a hard time finding  someone that will take their case under the new statutory terms.

Mortgage brokers and attorneys who were doing residential loan modifications are now looking at the commercial mortgage modification business as an alternative.  Advance fees and retainers are not prohibited for commercial property under SB 94.

There are many misconceptions about the commercial mortgage modification business especially in how it relates, in scope to the residential business.  Let's have a look at the numbers. 

There are about 125,000,000 single family homes in the United States.  Extrapolating the data released from RealtyTrac today who said that foreclosure reached one in every 136 homes, gives us a little over 900,000 homeowners in imminent danger of losing their home.  Several hundred thousand more loans will default in the coming quarters as Alt-A and the toxic pick-a-payment loans reset in 2010, peaking in 2011.

The commercial property marketplace is much smaller in terms of the number of property owners.  There are about 5 million commercial properties in the US. With the default rate on commercial loans running just under 3% this represents about 150,000 properties in which the owner is in need of modification consulting.  There are more potential clients that are not in default but this number represents a nominal market place population of under 50,000 individuals since many commercial property owners have more than one property.

With the termination of an entire industry in California, somewhere around 10,000 and  25,000 entrepreneurs and their employees in California are looking for a new business model.  Many are exploring commercial modification as a new line of work.

The misconceptions about the commercial modification business starts with the numbers and continues with the scope of work required to complete a successful modification.  In residential modifications, 70% of the deals were cookie cutter deals that fit nicely within the Obama modifications plans like HAMP and Making Home Affordable and other programs put forth by the FDIC and Federal Reserve.  There are rarely any negotiations.  The loan mod company simply submits a package that has been underwritten according to the guidelines published by the FHA, FNMA and Freddie Mac and approved by the loan mod company before being sent to the loan servicer.  This is why many companies claimed a 90% or more success rate. They were easy to do if you knew how to get it done.

The commercial modification business involves real negotiations, in-depth market research, financial analysis and hours of tedious data collection, discovery, verification and reporting.  Most of this is foreign to the residential mortgage broker turned loan modification consultant.

I am getting several calls and inquires everyday from loan mod companies who are in this position.  On one call I got, the owner of the company who has been processing hundreds of deals per week for residential modifications asked me how much for commercial leads and could he get a volume discount.  I asked what he needed and he replied that he needs 500-1000 leads per week.  I chuckled. 

The nitty gritty on SB 94

I found a very good, factual article on SB 94 courtesy of 360 Realty in Los Angeles.

The new law prohibits any person (including real estate licensees) who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance, for a fee or other compensation, from: claiming, demanding, charging, collecting or receiving any compensation until after the licensee has performed each and every service the licensee contracted to perform or represented that they would perform. In addition, licensees cannot take any wage assignment, any lien secured by real or personal property, or any other kind of security to secure payment of compensation in association with their acts. Moreover, no licensee can take any Power of Attorney from any borrower, for any purpose. This part of the law applies to 1-4 residential units only. Violation of this provision would constitute a misdemeanor, with a fine of up to $10,000, plus up to one year in jail. If the violator is a corporation, the maximum fine increases to $50,000. These remedies are in addition to any others imposed elsewhere in the law. The bill specifically exempts parties who own or are servicing the loan in question before the terms of the loan are modified.

Further, the new bill requires any person, including licensees, to provide the following written disclosure in at least 14 point bold type regarding loan modification fees prior to entering into any fee agreement with a borrower:
It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.

If loan modification or other loan forbearance services are negotiated or offered in Spanish, Chinese, Tagalog, Vietnamese, or Korean, a translated copy of the statement above must be given to the borrower in that foreign language. A real estate licensee who violates this new law would be subject to discipline by the Department of Real Estate, and violation of this provision would also constitute a misdemeanor, with a maximum fine of $10,000, and up to one year in jail. If the violator is a corporation, the fine increases to $50,000. These remedies are in addition to any other imposed elsewhere in the law. The bill specifically exempts parties who own the loan or are servicing it before the terms of that loan are modified.

The definition of the term, "Advance Fee" has been significantly changed. Now, an Advance Fee includes any fee, regardless of the form, that is claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed. Advance Fees now include: a fee for a listing, an advertisement or an offer to sell or lease property (other than in a newspaper of general circulation), issued primarily to promote the sale or lease of a business opportunity or real estate, or for a referral to real estate brokers or salesmen, or for soliciting borrowers or lenders for, or to negotiate loans on, business opportunities or real estate. Thus, licensees must be much more careful about how they charge for services they render. The law now requires real estate licensees to submit all Advance Fee materials to the Real Estate Commissioner before they are used (including contract forms, letters, cards used to solicit prospective sellers, and radio and TV ads), if they are intended to be used to solicit prospective owners and sellers to enter into an Advance Fee Agreement. All materials must be submitted to the Real Estate Commissioner for approval at least 10 calendar days before the materials are used. If the Commissioner finds that the materials are deceptive, the licensee may be Ordered not to use them. The fine for violations of the Advance Fee law has been increased from $1,000 to $2,500, plus violators may spend up to six months in jail. In addition, a violation could result in discimplinary procedures with the Department of Real Estate.

Existing law defines a "Foreclosure Consultant" as any person who (after the recording of a Notice of Default) solicits, represents or offers to perform for compensation or who performs any service for compensation which the person in any manner represents will in any manner do any of the following: (1) Stop or postpone a foreclosure sale; (2) Obtain any forbearance from any beneficiary or mortgagee; (3) Assist the owner to exercise their right to reinstate the existing loan; (4) Obtain any extension of the period within which the owner may reinstate his or her obligation; (5) Obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a deed of trust or mortgage on a residence in foreclosure or contained that deed of trust or mortgage; (6) Assist the owner to obtain a loan or advance of funds; (7) Avoid or improve the owner's credit resulting from the recording of a notice of default or the conduct of a foreclosure sale; (8) Save the owner's residence from foreclosure; (9) Assist the owner in obtaining from the beneficiary, mortgagee, trustee under a power of sale, or counsel for the beneficiary, mortgagee, or trustee, the remaining proceeds from the foreclosure sale of the owner's residence. This bill excludes real estate licensees and California Finance Lenders (CFL) licensees from the definition of a Foreclosure Consultant, when they are acting under the authority of that license. Under the new law, CFL licensees are now prohibited from making materially false or misleading statements or representations to borrowers about the terms or conditions of that borrower's loan when making or brokering a loan. Senate Bill 94 remains effective until January 1, 2013, and it will expire at that time unless further action is taken by the California Legislature.

SB 94 Signed into Law

SB 94 has been signed by Governor Schwarzenegger. In a statement regarding the veto of the more restrictive AB 764 he said..

"Although I support the prohibition of individuals charging advance fees for mortgage loan modifications, I do not agree with the provision of this bill that will only allow fees to be collected if a modification is successful. This could adversely affect legitimate businesses that provide loan modification services. As such, I am signing SB 94 that accomplishes this prohibition against advance fees without unnecessarily harming legitimate companies."

The law applies to mortgages on primary residences and does not restrict the ability of  attorneys and consultants to collect advance fees for modification of commercial mortgages.