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October 8th, 2009

500,000 Loan Mods: How Many Will Survive?



Touted as a “milestone” by the Treasury, President Obama’s loan modification program has reportedly helped 500,000 borrowers avoid foreclosure. According to the New York Times, the White House set out to reach the 500,000 mark by the end of this month, and is quite encouraged that the goal was met a few weeks ahead of schedule.

While the number is certainly encouraging, we have to wonder how many of these modified loans will wind up growing delinquent or failing. Our friend Alan Zibel at the Associated Press wrote last month that:

More than 50 percent of homeowners with loans modified in the first half of last year had missed at least two months of payments a year later, the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision said Wednesday.

About one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again within a year. That compares with more than 60 percent for borrowers whose loan payments were left unchanged or increased.

Since a loan can only be modified once under the Federal modification program, we ask, “What’s the government’s back-up plan for these pending delinquencies and/or failures?”

Given that most of the recent loan failures have been generated by poor economic conditions rather than from a risky loan product, makes the potential for future successful loan mods all the more slim. As long as economic conditions like high unemployment, falling home prices, and tight credit dictate the cause of failures and delinquencies, these mod numbers may be nothing to brag about.

To their credit, the administration does acknowledge that today’s “milestone” is merely the first step, and that “large numbers of families across the country are still at risk of losing homes they could otherwise afford to stay in.”

While there are many Americans who feel cheated by the loan mod process, there are clearly a host of success stories out there that will claim that their home was saved thanks to a loan mod. While we applaud the mission of the program and are encouraged by today’s announcement, we’re equally worried about its long term success.

The Federal loan mod program is set to expire on December 31, 2010.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

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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