Loan Modifications Find Trouble in Less than a Year
A Big Push for Little Results
Last year, the federal government pushed lenders very hard to rework deals for thousands of mortgage holders. The sudden fall in home prices pushed the entire market to near complete collapse. 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. Many homeowners qualified for reductions of 20 percent or more. That seemed like good news for borrowers and for the economy, as well. 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. This news follows President Obama’s recent chastising of the banking industry for now doing more for homeowners. The high rate of default after the modifications could give the banks justification for proceeding cautiously.
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. The strategy would have worked better had the economy recovered as quickly as the feds had hoped. Lingering doubt and sluggish productivity have hampered the economic recovery in all sectors.
Another factor that hampered the effectiveness of the program was the way banks structured the modification process. Most banks devised a trial modification process which required 3 on time payments during the trial period. Many borrowers could not comply with this requirement under the current economic conditions. Additionally, many banks actually raised monthly payments during this trial period. After the 3 month trial period, proof of adequate income was usually the only other criteria which needed to be met to make the modification at the lower monthly payment permanent. It is easy to see how borrowers may have lost their jobs during the intervening trial period and were denied a permanent solution. In fact, of the 760,000 modifications offered, only 31,000 have been made permanent. Approximately the same number has voluntarily dropped out of the program, and the remainder is still pending. The number of homeowners delinquent or in foreclosure remains at a record high 14 percent. These numbers do not show much success for a 75 billion dollar program.
Not as bad as it used to be
The reality is that the modification program is not a complete failure. The impact of what it prevented cannot be directly measured. 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. Combined with a slight up-tick in the jobs market, the news could be looked at as promising.