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October 13th, 2009 (Modified on October 15th, 2009)

Update1 Is it Time to Modify Modifications?



UPDATE1: We thought so, and said just as much last Friday…we just had no idea it would happen this quickly. A short bulletin from National Mortgage News (NMN) this morning reported that the Treasury Department’s Office of Homeownership Preservation (OHP) announced at the Mortgage Banker’s Association’s annual conference that a new wrinkle to the Federal loan modification program is coming soon. Laurie Maggiano of the OHP said the new loan mod effort will be designed to assist borrowers who don’t fit into the current modification mold.

Looking through the latest numbers, we speculated on Friday that it may be time to alter the current structure of loan modifications; according to statistical reports, loan mod issuance has slowed (see original story below), redefault rates are high, and ‘foreclosures in process’ continue to grow.

The “new modification effort” will offer borrowers the option of participating in either a short sale or a deed in lieu of foreclosure:

Ms. Maggiano said Treasury will set out the parameters under which servicers can earn financial incentives if they offer borrowers the option of participating in a short sale and deed in lieu of foreclosure. “There’s really no magic. We haven’t reinvented the wheel,” Ms. Maggiano told industry executives in San Diego. To cut down on the paperwork, the program will provide a standardized set of forms. It will also cap the amount of money that can be paid to subordinate lien holders who agree to waive their interest in a property.

Second lien holders have added to the length and cost of the foreclosure process. Since they are unlikely to get any money in return, these investors have little reason to enthusiastically participate in the modification process.  Despite the incentives, Maggiano said she knows some second lien holders will “walk away” from these potential deals because of the limited compensation, however, she’s confident that the financial incentives will serve to speed up the process.

“Given the high amount of foreclosures, this new effort offers two additional options to avoid foreclosure,” says HSH VP Keith Gumbinger. He goes onto to explain that, while a foreclosure in an involuntary (not to mention lengthy and costly) way for lenders to recover their losses, the deed in lieu offers lenders a voluntary approach to recovery.

We’ll be sure to keep you updated when the Treasury releases more on this new effort.

Original Post (10/09/09): Merely one day after the Treasury declared that the country has achieved a “milestone” in its loan modification program (500,000 mods have been issued since its inception), the Federal panel in charge of overseeing the program says the issuance of loan mods have actually begun to slow down:

Mortgage servicers actually signed up fewer homeowners in September than they did in August—100,216 last month, down from 133,192 the month before. That was even below the 110,397 signed up in July.

The seemingly disappointing and slightly embarrassing statistics should raise a lot of questions for the administration. Just yesterday we asked: how many of the 500,000 mods would actually survive due to their high levels of re-defaults? Is this program properly designed to deal with the economic factors that are causing these foreclosures and delinquencies? How can this program compete with a near 10% unemployment rate?

There has been some talk that a proposal may be sent to the Treasury so that the loan mod program could be restructured to better suit the issues facing the employment and housing markets. Certain panel members questioned if the program was tied too closely to subprime mortgages (which we all know are no longer the main cause of foreclosures):

Specifically, the panel—with disagreement from its two Republican members—argues that the program is too tightly tailored around the problems of subprime mortgages. By lowering monthly payments to 31% of income, the program does little for the increasing numbers of homeowners who lose their jobs and can no longer make mortgage payments at all. “It increasingly appears that [Treasury's Home Affordable Modification Program (HAMP)] is targeted at the housing crisis as it existed six months ago, rather than as it exists right now,” the report says.

“The questions which come immediately to my mind are, ‘How many borrowers are asking for mods and how many are getting them’,” said HSH VP Keith Gumbinger. “Is a lack of outreach the problem, or are some borrowers just not aware that these offers exist?”

Besides the economic factors that are anchoring the program’s progression, the fact that HAMP is a borrower-initiated venture and the fact that servicers aren’t allowed to solicit borrowers to participate creates a natural obstacle to begin with.

“Perhaps what’s just as important to ask is ‘how many foreclosures aren’t “preventable” due to the fact that the home may be investor-owned, it’s so far underwater that no monetary recovery, even over the long term, is possible, or the borrower possesses limited or zero ability to pay even after a modified mortgage payment,” says Gumbinger.

Just as we said yesterday, the “milestone” was encouraging, but the panel’s report suggests that the White House may have to consider modifying their modification program in order to increase its productivity and success.

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2 Responses to “Update1 Is it Time to Modify Modifications?”

  1. Mike Says: October 12th, 2009 at 8:51 am

    The loan mod program may not be working for homeowners but it also doesn’t appear to work financially for the investor or servicer. The financial impacts from FAS 114 and FAS 5 cause an investor or servicer to realize tens of thousands of dollars in losses. Loan losses may actually be less if they let it go to short sale or foreclosure. Based on the financial impact analysis of those accounting treatments some investors and servicers may not being trying to modify loans, especially early stage delinquent loans. Also, the difference is about 2x the loss on a 1st lien mod versus a 2nd lien mod.
    Looking at the front end of this program shows it is not effective, based on current re-default rates. You should also take a look at the back end and see how big the financial impact is across the industry based on accounting rules.

  2. Tim Manni Says: October 12th, 2009 at 3:29 pm

    Hey Mike,

    Great comment, thanks for stopping by. You’re right on with your comment. I can’t back up your number per say, but you have recognized some of the fundamental problems that exist with this program. While we do know that some homeowners have been helped by this program, it can only do as much as its structure allows.

    It’s perfectly logical to understand why a lender wouldn’t start the mod process if they crunched the numbers and realized it would make more financial sense to foreclose instead.

    In your opinion, what could the White House change about this program?

    Great comment, great insight. Thanks,

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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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