Are Loan Modification Programs Working?

Many financial experts say they aren't quoting old data to support their statements. The latest data may force them to change their tune though.

-- DETROIT, MI - The Obama administration continues to push loan modifications as the best way to address the nation's growing housing crisis. Many so called financial "experts' though, disagree with this focus.

It's interesting to note that the administration recently announced (.pdf) that due to disappointing numbers for its Home Affordable Refinance Plan (HARP), the program was being expanded to allow refinances to 125% of a homeowner's property value, up from 105%. To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets.

The disappointing numbers for HARP are a sign that many homeowners don't qualify for it because they're either too far upside in their homes or they're behind on their mortgage payments. This makes loan modifications their only option - hence the administration's focus on loan mods.

So, what about all the naysayers against loan modifications?

Well, they all quote studies that seem to "support" their claims that modifications aren't working due to the high number of homeowners that default on their loan modifications.

One of these studies was done by the Federal Reserve Bank of Boston (.pdf), published July 6, 2009. The study had some valid points:

• Lenders are reluctant to modify mortgages. Only 3% of seriously delinquent loans have had modifications.
• Percentage-wise, lenders are modifying FNMA/FHLMC and mortgages held on their books the same.
• 30% of delinquent loans become current with no intervention by the lender.
• Most modifications result in an increased loan balance as back payments are rolled into the loan amount.
• More and more modifications are being done and resulting in lower homeowner payments.
• 26% of modified loans in the 4^th quarter of 2008 resulted in lower payments.
• Payment decreases before the 3^rd quarter of 2008 ranged from 10-14%.
• Payment decreases in the 4^th quarter 2008 averaged 22%.
• 30-45% of modified mortgages redefaulted within 6 months of a modification.

These are all interesting statistics. The financial "experts' all seem to focus on the fact that 30-45% of modified mortgages redefault, while ignoring one important fact - only 26% of the loans modified resulted in a lower payment.

Why would a lender expect a homeowner that's already defaulted on their current payment to be able to afford that same payment or a higher one? Anyone citing this report's redefault rate without taking that point into consideration should stop calling themselves an "expert".

A more recent report (through 1^st quarter of 2009) from the Comptroller of the Currency Administrator of National Banks, shows something a bit different:

• A significant increase in the number of modifications made by servicers. Up 55% from last quarter. Payment plans decreased in favor of loan modifications.

• Servicers implemented a higher percentage of mods that reduced monthly payments than in previous quarters.

• 3. Modifications with lower payments continued to show fewer delinquencies each month following modification than those that left payments unchanged or increased payments.

• Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans

• The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter.

• Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter.

One very important statement from the report:

The number of modifications recorded in this report does not reflect actions taken under the Administration's "Making Home Affordable" program, which was announced in March and began to be implemented after this reporting period.

As Obama's plan is the most aggressive loan modification attempt to date, focusing on reducing homeowner payments to 31% of monthly income, the numbers should start turning even more positive.

Even without those numbers, statistics from the 1^st quarter of 2009 show improvements in loan modification performance after previous quarters showed a trend to the negative:

What can we conclude from all this?

While it's important to note that we're far from out of the woods on the housing crisis and we don't have enough recent data to really draw any long-term conclusions on the benefits of loan modifications - we do seem to be heading in the right direction.

For all the free-market advocates out there railing against bailing out upside homeowners - your arguments went out the window when the government bailed out the banks. If we can bailout upside down banks, how can we not bailout upside down homeowners?

For those who believe we have to lower mortgage balances to effectively modify mortgages, I disagree that we have to do so. It would be nice as I'm upside down in my own home, but I think it's more important to lower house payments.

People buy cars all the time where as soon as you drive it off the dealer's lot, you're upside down in it. I don't hear anyone asking for a bailout on their car loan. Why do they continue to pay on their upside down car? Because they need transportation and they can afford the payment.

Why are people losing their homes? Because they can't afford the payments. Statistically, most people are emotionally tied to their homes. Most won't do the logical thing and walk-away from their upside down home anymore than they would walk-away from their upside down car. Give them an affordable payment and even if they're upside down, they won't walk. Bring the payment down to their local rental rates and they won't be able to live anywhere cheaper. Yes, there will be a small percentage that move in with relatives or move to a lower income area, but most will stay.

It seems the so called "experts" live in their own little worlds and seem to have their own agendas. Few actually report unbiased facts, instead preferring to only focus on what supports their positions while ignoring all other facts. Heaven forbid they actually take the time to digest and think through the statistics.

The media is just looking for sensational headlines to sell more advertising. Very little actual research seems to happen these days. What's more, they all seem to regurgitate the same stories, propagating incorrect stories, fooling the public into believing them because of the repetition.

So be forewarned not to buy into what you read in the headlines or what so called experts tell you. Click on the links I've provided and read the material for yourselves to come to your own conclusions.

Comments

[Kinabalu:]

"Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans

This is an amazing statistic. I would be very interested in an article that explains just how they did it. The last chart in this article suggests it's only because they primarily modified loans that were not in trouble.

Jul 14 12:56 PM

[waf76:]

"To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets."

I believe the loan also has to be a loan bought by FNMA or a HUD loan rendering a lot more people ineligible.

Jul 14 01:52 PM

[D_Virginia:]

> Yes, there will be a small percentage that move in with relatives
> or move to a lower income area, but most will stay.

I think that percentage is larger than you think. Not everyone moves or not strictly based on financial implications.

People get married, people get divorced, people change jobs (relocating for a job is more common when unemployment is high), families grow, etc.

Let's be realistic, a lot of these houses won't break even for DECADES. Suddenly that 7-10 year credit hit looks pretty darn good.

This is why principal reduction /is/ important -- a lot of people foreclose because otherwise they're just stuck.

Jul 14 01:55 PM

[TinyTim:]

"People buy cars all the time where as soon as you drive it off the dealer's lot, you're upside down in it. I don't hear anyone asking for a bailout on their car loan. Why do they continue to pay on their upside down car? Because they need transportation and they can afford the payment."

AND they don't have someone offering them a similar car for 40% less OR a lease at 2/3 of their current payment.

That's what's going on with homes versus foreclosures versus rentals.

Jul 14 03:19 PM

[Gtarras:]

"One very important statement from the report:

The number of modifications recorded in this report does not reflect actions taken under the Administration's "Making Home Affordable" program, which was announced in March and began to be implemented after this reporting period."

This is the most important point. There have been few mod studies, but it is so difficult for me to figure out where exactly the data was coming from. In one study that I saw, the list of companies used in the study contained 15-20 lenders/servicers. I knew 3-4 out of the list in addition to the usual suspects like BofA, WaMu, and all of them were subprime only (Ocwen, Willshire etc). My point is that I am not that sure the studies are very objective. Maybe I am wrong.

One last point, the Obama mods have been in place for couple of months only, is it really enough time?

Jul 14 03:23 PM

[Gtarras:]

i just re-read the last few paragraphs. Fantastic points!!! thank you. i'm in total agreement.

To paraphrase Mark Twain: if you dont read the "experts" you are uninformed, if you read them - you are misinformed.

Jul 14 03:27 PM

[Troyhector:]

Efforts to modify home loans have been slow and easily outpaced by the number of new delinquencies.

"In the first quarter, loan companies modified 185,156 mortgages, up 55 percent from the previous quarter. But the number of foreclosures in process increased to 844,389, up 22 percent."

The loan modification efforts to prevent the increase of foreclosure rates have not got a huge welcome. The reason is because the lender needs to revise the ‘borrowing terms’ of the troubled borrower who is struggling to repay the loan on time. It also involves reducing the interest rate which is generally not received well by the lender who would lose some margin in the sale. In addition, the revised plan involves cutting the principal amount by reconsidering the financial state of the borrower and hence, it tackles the benefit of the borrower than guarding the interest of the lender.

Check out : www.housingnewslive.co...

Jul 14 04:23 PM

[bcncv:]

Very good article. It's good to be reminded that the important statistic is HOW loans are modified, not how many.

Jul 14 04:51 PM

[rivermann75:]

If people want to stay in their home but can't make the payments, why not just rent the home to them with an option to re-buy the home after the economy stabilizes. They wouldn't be able to rent elsewhere any cheaper. The mortgage company could have a property management company handle the rental provision.

Jul 14 05:22 PM

[Accuriz:]

Gtarras

Your last sentence states it the best.

We are reading data that means what? The real question is 6 months from now to see how many people are current on the loans. We are so addicted to immediate results, we forget that it does really take time for this to work.

If you want cheap wine make it yourself or if you want a good bottle it needs to age.

Jul 14 05:53 PM

[mkttrdr:]

Time is not on your side when a foreclosure is pending.
Mods -hmm-only save less than 5% in our market. That means an owner has good credit, a solid home w/equity in a good area and a secure job(in health care) and current or less than 90 days late. Odds are not good folks.

The big problem is on the backs of those paying the mortgage. Give them the a 3% reward for paying on time. But,They are losing equity everyday, yet taxed more-for less. How: Lenders refuse to take title on many pending foreclosed homes leaving it to the defaulted owners who bailed. So, now the cities and states; which are near bankrupt must foreclose/raze the junkers. Increased taxes are the citites answer, but there are fewer homes/owners to be taxed and the equity piggy bank continues down! More homes go on the market etc....
Lenders are just letting wall st and DC see better numbers-the losses are coming folks-just not this year.

Therefore, home values will continue to fall, causing more hardship foreclosures next year, and thus any loan mods will fail due to continued loss of home values, more future layoffs etc....

Is there anyone out there reading the tea leaves or in the streets dealing w/ foreclosures like myself? Am I a loan(sic) here?
At least I can tell you the truth-like it or not.

Jul 15 10:39 AM

[Accuriz:]

If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future. Here is an example of how it could work.

Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest). The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700 so the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government. But the government says, okay you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

What the government has done is provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.

This program is not perfect, it can assist a lot of people who want to own homes and most importantly it is channeled directly to the property owner, not a large corporation that has motives other than keeping the property owner solvent. A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.

There need to be conditions, such as confirming gross income via income tax statements, confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%)

The total assistance would be capped at $50,000 and could run for 24 to 36 months. So in a given year up to $25,000 could be provided. The government would be releasing the funds over 12 months, this the federal outlay would be limited. The total cost of 10 million loans receive assistance would be $250 Billion per year or $500 billion in total. This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.

The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost to desperate situations.

Yes it is possible and yes it can work.

The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.

As stated early, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try. We only fail if we do not try.

Jul 15 01:11 PM

[kebu77:]

Loan mods should be distinguished from forebearance. It's not a loan mod if the monthly payment is not lower with the difference forgiven. Efficient underwriting is the key to effective loan mods that serve the interests of lenders/investers and borrowers. Going back two years, you will find few stories that address this point.

The missing ingredient that would drive effective loan mods is the lack of recourse to bankruptcy for home buyers who live in their own homes.

Bottom-up loan mods obtained case-by-case, mainly via pre- and post-bankruptcy filing negotiated settlements, are better than top-down government-driven schemes that exclude folks who would be included with good underwriting and include folks that good underwriting would exclude.

Jul 15 01:25 PM

[homeloandef...:]

Interesting!

The loan modification process can be frustrating and confusing for many distressed homeowners. But you have to know what exactly is loan modification. A loan modification is a permanent change in one or more terms of a borrower's home loan.

Jul 24 06:00 AM

[MPetrone:]

The current home loan modification guidelines are indeed helping homeowners. Despite the struggling economy, and lack of a housing market, foreclosures are remaining, or sdeclining in some areas. This is all because of Obamas Making Home Affordable plan.

While there is much work that needs to be done, homeowners are getting the help they need, and home loan modification is a big part of that help.

Nov 01 11:53 PM

[MPetrone:]

The current home loan modification guidelines are indeed helping homeowners. Despite the struggling economy, and lack of a housing market, foreclosures are remaining, or sdeclining in some areas. This is all because of Obamas Making Home Affordable plan. (More info on this plan at: www.RefinancingCondo.com)

While there is much work that needs to be done, homeowners are getting the help they need, and home loan modification is a big part of that help.

Nov 01 11:53 PM