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December 8th, 2008

What’s Wrong With Loan Mods?



Fresh statistics today revealed more bad news for foreclosure assistance. According to the Comptroller of the Currency (OCC), more than 50% of loans modified in the first quarter of 2008 defaulted within six months.

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” said John Dugan, Director of the Comptroller in remarks at the Office of Thrift Supervision’s National Housing Forum today. “The data is similar for mortgages modified in the second quarter: the re-default rate after three months was 39 percent, and after six months, 51 percent.”

The Comptroller spoke in front of a panel which included the Office of Thrift Supervision Director John Reich, Federal Reserve Board Vice Chairman Donald Kohn, FDIC Chairman Sheila Bair, and Federal Housing Finance Agency Director James Lockhart. Presently, the Federal Reserve, the FHFA, and the FDIC are all currently involved with separate loan-mod programs. Early dismal reports and forecasts forced HUD to remove their numerical projections for the loan-mod portion of the Hope for Homeowners Act, and swiftly improve the program.

The questions remain: why are so many modified loans failing? “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?” asked Dugan.

Also, why is the government investing so heavily in a solution that has so far proven ineffective? To be fair, the statistics aren’t yet complete for the third quarter, and fourth quarter results will not be ready until 2009. Perhaps with the implementation of the FHFA’s “industry standard” of what’s affordable, re-default rates could improve.

Exit Question: Is the government wasting time developing a solution for people who are destined to fail from the beginning? Share your thoughts in the comments.

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10 Responses to “What’s Wrong With Loan Mods?”

  1. Craig Says: December 8th, 2008 at 6:13 pm

    I think the reason many loan mods aren’t working is that home prices continue to fall, and many loan holders realize that they are still underwater, and likely to be so for a decade or more, even if prices immediately start rising 3-4%/year! Why continue to pay for something that is worth less than is owed — hundreds of thousands of dollars less in some cases — and is likely to be down for a decade or more! Much cheaper to default and consider buying the home next door for $100K or more less!! —

  2. Bill Hoak Says: December 8th, 2008 at 9:24 pm

    I can tell you why my so-called Loan modification won’t work, they are not offering any significant rate reduction to the loan. My rate at the beginning of the loan was 7%, now it is 10.4%, which equates to nearly a 40% increase in my monthly payment. If this is typical of the “modification”, then there really is no deal.

  3. Steve Says: December 9th, 2008 at 9:32 am

    I suspect this is probably a combination of factors. In some cases, perhaps the underwriting of the modified loan is just as bad (read “unrealistically hopeful”) as the underwriting of the original loan.

    In some cases, the modified terms may not be enough to enable the borrower to stay current. In some cases, perhaps the borrower is thinking “hey, my mortgage holder had to bail me out once, they can do it again if they have to.”

    And no doubt in some cases, the borrower never was and maybe never will be able to handle mortgage payments at any where near the level they are, no matter how often the lender modifies the loan.

  4. Rebecca Wilder Says: December 9th, 2008 at 2:42 pm

    Hi Tim,

    I agree with Craig. If home values are falling precipitously, interest reductions are unlikely to prevent foreclosures….unless the interest rate was set at 0%. There’s an idea!

    You know, I am happy that you all are keeping up with this because I am getting confused between all of the government programs out there. The Fed, the FDIC, the Treasury, HUD – they all seem to have some new and improved program to tackle the housing crisis.

    Thanks, Rebecca

  5. Tim Manni Says: December 9th, 2008 at 3:15 pm

    Thanks everyone for your interest and comments regarding this story. Rebecca you’re right, there are more than a handful of loan-mod programs out there, and each seem to have a slightly different target audience — whether it’s an actual bank’s program designed for their customers (i.e. JP Morgan), or GSE loan-mod programs, or the FDIC’s non-GSE loan-mod program — each have the same goal in mind, but why isn’t it being accomplished?

    Craig you made a really good point — falling home prices continue to reverse the benefits of the modification. But for me it’s so hard to swallow the fact that people make the decision to continue to default because they owe more than what their home is worth. I still owe way more (60%) on my car than what the vehicle is worth if I was to sell it. But as Craig said, we may be talking about hundreds of thousands, not a couple as in my case.

    Bill, I can only sympathize, however long it took them, and however long you had to fight to get your loan modified, they did nothing to give you a fixed rate which is the first step to getting you a stable payment option.

    In conclusion (this turned into another blog post), Steve hit the nail on the head — what good is modifying someone’s loan who could have never afforded any practical terms in the first place. Also, Steve touched on this new and ugly human condition that’s plaguing the housing market, “my mortgage holder had to bail me out once, they can do it again if they have to.”

    Thanks again everyone,

    Tim (HSH)

  6. Russell Abravanel Says: April 16th, 2009 at 5:31 am

    Principal reductions are an option if the hardship is severe.

    They now have principal suspension plans where the banks will set aside a portion of your principal and base your modified interest rate on the remanding balance for a period of time.

    Then they have the “Step” program which will have your rate increase .5% each year until your rate reaches 5 or so percent then it is fixed for the remainder of the loan balance.

    There are many options and many solutions to make these loans work for troubled homeowners.
    You do not need to walk or lose your home!

    Good luck everyone!

  7. Russell Says: June 18th, 2009 at 9:45 pm

    Loan Modification comprises of changing the terms of a current or delinquent loan arrangement between a lender and a borrower that results in a payment level that is more affordable in light of the borrower’s current financial position.

    The process of loan modification can be accomplished by contacting your lender straightaway, employing the services by a non-profit counseling service, or employing a Real Estate Attorney. The different methods have variable approaches altogether planned to reach the equivalent resolution – a modified payment that’s more affordable to the homeowner.

    The desirable final result in the loan modification process should reflect a payment level that’s more affordable to the borrower and that is also acceptable to the lender as an option to the high cost of foreclosing on a family and their home.

  8. Russell Abravanel Says: June 18th, 2009 at 9:47 pm

    You Are Not Alone

    Foreclosures in the U.S. were up 81% in 2008. Over 2.3 million Americans faced a foreclosure last year. In December of 2008 alone over 300,000 properties received either a Notice of Default or a foreclosure notice. The foreclosure crisis is not only a problem for homeowners, mortgage lenders are reeling from the effects as well as Wall Street.

    Lenders have discovered that working out a mutually beneficial resolution with a homeowner may lead in a more beneficial final result than adopting a inflexible collection approach. Unfortunately more people mistakenly assume that they cannot qualify for a loan modification plan or are not acquainted with how to go forward.

  9. Russell Abravanel Says: August 12th, 2009 at 1:40 am

    Lenders are still playing games and not helping homeowners. They keep talking about the Obama Plan?
    What is that exactly?

  10. Tim Manni Says: August 12th, 2009 at 11:12 am

    Hey Russell,

    Good hearing from you. A quick explanation of the latest housing-rescue initiatives could turn into a 1,000 word essay. To get the concrete details of the Obama plan (qualification, FAQs, servicer info) be sure to check out http://www.MakingHomeAffordable.gov.

    Thanks for commenting,

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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