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 feds wanted to do something for the individual homeowner and developed the loan modification program. 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. That seemed like good news for borrowers and for the economy, as well. 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. Slow productivity and lost confidence have slowed recovery across the board.
Another factor that hampered the effectiveness of the program was the way banks structured the modification process. A lot of banks created a trial modification process that required 3 timely payments during the trial period. Borrowers just couldn’t keep up with the requirements in this economic weather. Additionally, many banks actually raised monthly payments during this trial period. After the 3 month trial, proof of adequate income was the only other criteria that had to be met to permanently modify the mortgage to a lower payment. 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. Approximately the same number has voluntarily dropped out of the program, and the remainder is still pending. The number of homeowners delinquent or in foreclosure remains at a record high 14 percent. These numbers do not show much success for a 75 billion dollar program.
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 been created, a lot of people probably would have lost their homes. More recent findings show encouraging trends. Regulators that analyzed April to June of 2009, showed 20 percent of borrowers who had loans modified, missed 2 of every 3 payments. Though it sounds bad, it was 35 percent 3 months before. Paired with a pick up in the number of jobs, it could look promising.
