One Year is all it Takes for Loan Modification to find Trouble
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 government wanted to do something for homeowners, and came up with the program for loan modification. 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. This news follows President Obama’s recent chastising of the banking industry for now doing more for homeowners. 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. 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’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. 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. Paired with a pick up in the number of jobs, it could look promising.