Less Than
Loan Modifications Run into 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. Lenders were meant to modify mortgages to have lower payments, principles, and/or interest rates if possible in the program. A lot of homeowners qualified for a 20% reduction or more. It looked like good news for borrowers and the economy, too. That said, the Office of Thrift Supervision stated that 40 percent of the income of borrowers receiving a 20 percent reduction in monthly payments, were delinquent again in a year or less. The news follows President Obama’s recent lash of the tongue at the expense of the banking industry, for not doing enough. The high rate of default after the modifications could give the banks justification for proceeding cautiously.
Contributing Problems
One of the main contributing factors to the continued struggle for homeowners is the unemployment rate. When a borrowers 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.
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. 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. 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. More recent findings show encouraging trends. Regulators that analyzed April to June of 2009, showed 20 percent of borrowers who had loans modified, missed 2 of every 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.
Less Than Jake – “Gainesville Rock City” Fat Wreck Chords
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