A Big Push for Little Results
Last year, the federal government pushed lenders very hard to rework deals for thousands of mortgage holders. The sudden fall in home prices pushed the entire market to near complete collapse. 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. It looked like good news for borrowers and the economy, too. 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. The news follows President Obama’s recent lash of the tongue at the expense of the banking industry, for not doing enough. 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. The strategy would have worked better had the economy recovered as quickly as the feds had hoped. Lingering doubt and sluggish productivity have hampered the economic recovery in all sectors.
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. Also, a lot of banks raised monthly payments in the 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. In fact, of the 760,000 modifications offered, only 31,000 have been made permanent. Around the same number have voluntarily dropped themselves from the program, and the remainder is yet to be determined. The number of delinquent or foreclosed on homeowners stayed at the record high 14 percent. The numbers don’t demonstrate that the 75 billion dollar program has been successful.
Not as bad as it used to be
The reality is that the modification program is not a complete failure. The impact of what it prevented cannot be directly measured. Had the program not been created, a lot of people probably would have lost their homes. More recent findings show encouraging trends. The April-June, 2009 analysis by regulators showed 20 percent of borrowers whose loans had been permanently modified had missed 2 out of 3 payments. Though it sounds bad, it was 35 percent 3 months before. Combined with a slight up-tick in the jobs market, the news could be looked at as promising.
