Loan Modifications Run into Trouble in Under a Year

Posted by allanmadams on February 25th, 2010 at 03:20am

A Big Push for Little Results

Last year, the federal government pushed lenders very hard to rework deals for thousands of mortgage holders. The drop in home prices almost collapsed the market. The feds wanted to do something for the individual homeowner and developed the loan modification program. Under this program, lenders were supposed to re-work mortgages to lower payments, principle, and/or interest rates whenever possible. A lot of homeowners qualified for a 20% reduction or more. It looked like good news for borrowers and the economy, too. However, according to the Office of Thrift Supervision, 40 percent of the borrowers who received a 20 percent reduction in monthly payments were delinquent again in less than a year. The news follows President Obama’s recent lash of the tongue at the expense of the banking industry, for not doing enough. The higher rate of default, post-modification, could justify caution among banks.

Contributing Problems

One of the main contributing factors to the continued struggle for homeowners is the unemployment rate. When a borrower’s income is cut to near zero because unemployment is now the only income, a 20 percent lower house payment hardly solves all the problems. This idea might have worked better if recovery had progressed at the rate the feds were hoping for. Lingering doubt and sluggish productivity have hampered the economic recovery in all sectors.

Also, the way banks structured the modification process hampered the programs’ efficacy. A lot of banks created a trial modification process that required 3 timely payments during the trial period. Borrowers just couldn’t keep up with the requirements in this economic weather. Additionally, many banks actually raised monthly payments during this trial period. After the 3 month trial, proof of adequate income was the only other criteria that had to be met to permanently modify the mortgage to a lower payment. It’s not a stretch to see how borrowers, that lost their jobs in the trial period, were denied a solution. Actually, of the 760,000 modifications offered, 31,000 are all that have become permanent. Around the same number have voluntarily dropped themselves from the program, and the remainder is yet to be determined. The number of homeowners delinquent or in foreclosure remains at a record high 14 percent. The numbers don’t demonstrate that the 75 billion dollar program has been successful.

Not as bad as it used to be

The reality is that the modification program is not a complete failure. What was prevented can’t be easily quantified. Had the program not existed at all, no one knows how many people would have lost their homes. In fact, a break out of some of the latest data shows an encouraging trend. The April-June, 2009 analysis by regulators showed 20 percent of borrowers whose loans had been permanently modified had missed 2 out of 3 payments. Although this sounds dire, the number was 35 percent just 3 months earlier. Paired with a pick up in the number of jobs, it could look promising.

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Tags: 75 billion dollar program, loan modifications, mortgage holders, the federal government, the unemployment rate

Under mortgage refinancing Tags: 75 billion dollar program, loan modifications, mortgage holders, the federal government, the unemployment rate