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. Lenders were meant to modify mortgages to have lower payments, principles, and/or interest rates if possible in the program. 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. The news follows President Obama’s recent lash of the tongue at the expense of the banking industry, for not doing enough. The high rate of default after the modifications could give the banks justification for proceeding cautiously.
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 period, proof of adequate income was usually the only other criteria which needed to be met to make the modification at the lower monthly payment permanent. 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 existed at all, no one knows how many people 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. Although this sounds dire, the number was 35 percent just 3 months earlier. Paired with a pick up in the number of jobs, it could look promising.
