Loan Modifications * Recession Proof * Recovery Timing

Subprime Lenders, Transformed

With shady subprime-lending practices behind us, former subprime lenders have been forced to put their devious skills to work elsewhere. The complexities of loan modifications have attracted many ex-lending predators and provided them a vehicle to employ their corruption.

Now no one is saying that each and every person involved in loan modification is corrupt. In that same vein, no one is saying that each and every person who ever approved a subprime loan is guilty of being a swindler. A select few did truly believe they were helping their customers to fulfill the dream of home ownership. But, many of the lenders did thrive through corrupt practices in the subprime arena and have now adapted their skills and applied them to loan modifications. With many of the exotic mortgages they once approved sliding into foreclosure, the former subprime lenders are essentially scamming the same audience. Only now they are promising to modify the quirky loans.

Many businesses that formerly operated as mortgage brokers are now offering loan modifications to customers that are desperate to retain ownership of their homes. Dozens of such loan-modification companies have been accused by authorities of fraudulent business practices. The success rate for significant loan modification is low. Loan modifiers attract their customers by advertising that they can negotiate with lenders to lower payments on delinquent mortgages, which would in turn allow borrowers to stay in their homes. Of course, loan-modification businesses require upfront costs, sometimes exceeding $3,000. Customers, strapped for cash and desperate to hold onto their homes, are filing formal complaints against companies that take their money and make no progress with lowering their loan payments.

According to a recent New York Times article, “Since October, the California Department of Real Estate has ordered 210 businesses and individuals to stop offering loan modification or foreclosure prevention services, because they lacked a real estate license, as required by the state.”[i] In order to sidestep the rules in California, many loan-modification businesses have brought on a lawyer. This allows them to market their company as a law firm and, in turn, collect the upfront fees that keep them salivating. The lawyer will often act as a silent partner and have nothing to do with the process of modifying loans.

With the fees being paid upfront, the loan modifiers have no motivation to see that the paper work actually goes through to the lender for processing. Many loan-modification businesses have sprouted up hoping to make a quick buck, but few are genuinely concerned with helping clients lower their mortgage payments. So what measures are being taken to prevent loan-modification fraud? In California, the Federal Trade Commission has a lawsuit against a major loan-modification business and has prompted credit card companies to freeze the business’ accounts. In Florida, the country’s only privately-funded loan-modification investigative firm, MFI-Mod Squad, LLC, is committed to exposing illegally-operated loan-modification companies and the people behind them. To report loan-modification fraud or to learn more about the issue, visit

Do These Pants Make Me Look Recession Proof?

Historically, a select number of industries have been considered so necessary that they have been labeled “recession-proof.” However, over the past 18 months the magnitude of this downturn has exposed nearly every industry, except for possibly the booming field of producing “foreclosure” and “for-sale” signs.

From gambling halls to hospitals, many facets of our economy have been referred to as recession-proof. They have been placed on special pedestals where recessionary floods cannot reach them to wipe them out. But, this current flood has raged long enough to erode those pedestals and expose the specialized industries to the same damage as the rest of the economy.

The health industry may be still growing, but it is at the pace of continental divide. According to some of the most recent research, a survey by the American Hospital Association, hospital employment grew by just 0.1 percent in January and February and was stagnant in March. Furthermore, nearly 50 percent of hospitals have cut staff in order to save money, and almost 60 percent reported a substantial decrease in their operating margins from last year.[ii]

The health industry is damaged and has handfuls of concerns, but not nearly as many as casinos, which have long been referred to as recession proof. With dented investment portfolios and non-existent job security, most people are not willing to let it all ride on red. According to an article posted by

Atlantic City casinos reported that revenues fell almost 20 percent this March from a year before, the largest year-on-year decline in the resort’s 31-year history. And on the Las Vegas strip, February revenues from table games plunged more than 35 percent from a year earlier.[iii]

Conventional wisdom has always suggested that the rich have a free pass to escape the pains of a recession. However, the rich have cut back on spending and the luxury market is dwindling. According to a June report from global business consulting firm Bain and Company, the luxury market is forecast to drop an unprecedented 10 percent and not fully recover until 2012.

This downturn has revealed a number of myths concerning even our strongest and most essential industries. Through layoffs, poor investment performance and frugal consumer spending, this recession has truly affected all sectors, even those once thought to be recession proof.

Recovery Doesn’t Go “Boom!”

Those opposed to the American Recovery and Reinvestment Act have persistently criticized the Obama administration’s heavy spending. Because the unemployment rate has continued to rise, critics are quick to argue that the entire stimulus package was a mistake. This week, Peter Orszag, President Obama’s top budget czar, traveled to New York to, once again, plead for patience.

Speaking to the council on foreign relations, Orszag reiterated that the Recovery Act is on the right track:

The economic situation we inherited was so severe that we needed to assure producers and consumers that aggregate demand would be boosted not just for a few months, but for a sustained period. That is why we envisioned a Recovery Act that would ramp up rapidly in 2009, have its peak impact in 2010, and lay the groundwork for further growth thereafter.[iv]

Patience is not something a lot of us have when we are in pain. However, the problems required to cause a recession of this duration took years to develop and it is going to take years to resolve them. We all forget that we are not going to wake up in the morning to find everything is back the way it was pre-recession. It is going to take time and effort to recover. The other side of this is not going to look like 2006. Some of the characteristics will be similar, but things are going to be different. We are all going to have to reset our mindset in order to move in a new, positive direction. We have tremendous opportunities to build a stronger, more efficient economy. None of us will ever forget these troubled times, but we can all learn from them and do our part to be better prepared for them in the future. This will not be the last time we experience a down economy, but with some preparation this will be the last time we experience one this painful.

President Obama rode his promise of change all the way into the presidency and that is exactly what we are going to experience over the next few quarters.

[i] See

[ii] See

[iii] Ibid

[iv] See

About TomPowell

Senior Managing Partner of Resolute Capital Partners. As chief strategist I combine my education and proven expertise in raising private capital, innovative deal structure, risk mitigation, portfolio management, and distressed debt recovery to lead the Resolute Capital team in building a cross-pollination program of Foreign Direct Investment between Asia and the United States. In 1999, I founded and led the growth of ELP Capital, Inc, a mortgage banking investment company. In addition I served as the Senior Managing Director for ELP Capital’s affiliated investment company - ELP Capital Advisors, a Registered Investment Advisor for the ELP Capital Family of Funds, Institutional Investors, and wealthy individuals. I began my career with Wells Fargo Bank when I was recruited in 1988 for a management position in business banking for the Silicon Valley market. I was instrumental in the architecture, development, and initial application of Wells Fargo's Officer Sales Training programs, led two separate branch offices to top 5 overall rankings, and in 1990 was named as one of the youngest Vice Presidents in the Company’s 140-year history. I am a widely sought after speaker, international guest lecturer, and am an Instructor in the Office of Executive Education at Harvard University. In addition, I publish a weekly economic newsletter and podcast The Powell Perspective. I am involved in numerous community and industry groups. Specialties:An innovative investment manager with particular expertise in credit risk analysis, distressed debt recovery, and deal structure. I understand the practical application of money management in response to risk on both Wall Street and Main Street.
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