Obama’s Loan Modification programs have been criticized for their lack of results. But what are these results? The March Servicer Performance Report is fresh off the press, so let us have a quick look at what it has to say.
The highlights for HAMP are that more than 230,000 mortgages have been permanently modified. 108,000 loans have been approved by the lender and are simply waiting for the borrower to sign the final papers. That gives us a total 338,000 loans with permanent modifications. The other big newsbyte is that over 1.1 million trial loan modifications are active under the HAMP program. As you all know these trial loan modifications last for three months. If at the end of this period the borrower has provided all the relevant documentation and is up-to-date with his mortgage payments he is given a permanent loan modification. That is, of course, the theory.
According to MHA these loan modifications represent over $3 billion dollars in savings for monthly mortgage payments. The bad news on the report is the number of trial modifications added in the March has dropped to 57,000 from 72,000 in February. The reason for this, according to HAMP’s spin, is that servicers and lenders are requiring upfront documentation before trial modifications start. This has been a bone of contention with critics of the program that see the trial loan modification (without prequalifying the necessary documents) as a way of getting troubled borrowers to pay for three extra months and then deny them the loan modification on the basis of pending paperwork .
The flip side on the reduction of new trial modifications is there has been an increase of 15% in the number of permanent loan modifications approved in March. The story MHA is spinning is that numbers are dropping because of prequalifying filters servicers are introducing. The biggest issue with the Making Home Affordable Program is it doesn’t tackle the real issues of the housing crisis. Interest rate reductions of loans can substantially reduce the cost of a mortgage. A drop of 1% translates into savings $1,500 in most cases. The problem is that high interest mortgages are not the biggest problem any longer. Unemployment is.
MHA understands this and is providing alternatives programs to HAMP that provide specific aid to unemployed homeowners. The latest program for unemployed started this month. It provides loan modifications of mortgage payments to 31% of the unemployed worker’s income for a 3 to 6-month period. The question is will these measures provide real aid to those that need it and not just throw good money at lenders and servicers with little long term benefits for borrowers.
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The latest federal report on loan modifications shows that loan modifications carried out from January to April 2009 had a re-default rate of 51.5%. Re-default is defined by the report as any modified mortgage that has pending payment that is 30 days or more late. The same report highlights that re-default rates of modified loans in the last 12 months is 57.9%. This means that loan modifications are a) not doing what they are meant to; help people keep up with their monthly mortgage payments. And b) are getting worse at it.
Homeowners that have qualified for loan modifications are still struggling to make payments for a variety of reasons. Some have since lost their jobs, or their income has been reduced. Others simply do not see the sense in continuing to pay for a mortgage that is completely underwater. There are a lot people in that last category; around 24% of all homes with a mortgage on them were underwater in the last quarter of the 2009. The median price of a house in the United States has dropped by 28% since July 2006. It does not take a degree in Economics to see that loan modifications are just not working.
The question is why bother spending money on loan modifications that do not help homeowners keep their homes? A growing number of analysts are saying there is simply no rational reason to rewrite all these underwater loans. The number of homes facing a foreclosure is huge. The last quarter of 2009 had 2.39 million borrowers that were 60 days late on their mortgage payments, which is nearly a 50% rise from the previous year.
The pressure is on for the Obama administration to provide real solutions to the oncoming wave of foreclosures. Projections expect over 4.5 million foreclosure filings just this year. Some critics say the government’s current loan modification program is a disservice to the public, because it has extended the problem over years by helping homeowners, but not enough to make a real difference.
Of the 594,000 loan modifications that have started the application process from September to December process only 21,000 have received a permanent modification. In the entire lifetime of the HAMP program only 168,708 have received a loan modification, according to the Treasury’s own analysis.
Not surprisingly, owners whose mortgage monthly payments were reduced the most had the least chances of re-defaulting on their homes. The magic number of loan modifications seems to be 20%. When a loan modification reduces monthly payments by over 20% re-default rates dropped considerably.
One of the big issues that feed on this scenario is that many homeowners are underwater on their homes and are not interested in keeping their homes. They prefer to simply let them go back to the mortgage owner. Treasury has responded to this issue by creating HAFA, a mortgage aid for designed to get people to short sale their home. HAFA helps to fast track the short sale process by paying servicers, junior lien holders and borrowers to complete a short sale.
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Loan Modification programs like HAMP were set up with the goal of providing financial stability to the housing industry. A crippled Real Estate market affects everyone, even people who are not struggling with their mortgages. Neighborhoods get run down, house prices drop, and house service provides like builders, plumbers, electricians and pool cleaners also feel the pinch.
The numbers show that loan modifications and the programs that promote them are not providing the solution hoped for. Could house flippers provide the stability that lenders, servicers and the government have failed to deliver?
First, what is a house flipper? It is an investor that buys a home with the sole purpose of quickly reselling it. This practice is often restricted on homes that have received some kind of government subsidy. House flipping is an industry in its own right. Investors are always looking out for bargains they can quickly resell. During the housing boom everybody was doing it. Even rookies that had never bought a house before were making a profit from buying a house making some small (or large) improvements and selling it again. Now, deep in the financial and housing crisis it is certainly not a game for amateurs. However, professional are doing just great, in fact they are making more of a profit than ever before.
House flipping is one of the few housing sectors that are still booming. On a national level the number of flipped homes increased by 19%, and there is still time for this figure to grow even more before the end of the year.
House flipping has often been considered a scourge of the housing industry, made up of ruthless investors out to make a profit from troubled borrowers. Now, many hail them as financial heroes that are injecting much needed cash into homes and neighborhoods hard hit by the crisis. This practice is also helping to clear out properties from moribund housing markets that are suffering from the raise in foreclosures.
House flipping also generates business for carpenters, builders and other home service providers that are contracted to clean up old homes in need of maintenance. It has also created new jobs like that of a “runner” or a “driver”, who are used to check out homes that are going to be auctioned off and inform potential buyers if they are occupied, what condition they are in, what the neighborhood is like, and other relevant information.
Such are the benefits of house flipping to the housing market that the Federal Housing Authority is considering a one year waiver on anti-flipping regulations. This will allow buyers to purchase foreclosed homes form owners that have owned the property house for less than 90 days. This will help first time buyers get their hands on renovated properties at lower prices.
Could this be a case of digging our way out of a financial crisis by helping people make money instead of just passing on handouts? Granted house flipping will not help troubled borrowers keep their homes, but it might help the housing market recover faster and reduce the negative effects of the current housing crisis.
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Loan Modifications finally got a boost of media coverage last week when Bank of America unveiled their new loan modification scheme. This scheme promises to forgive up to $3 billion to eligible homeowners with underwater mortgages. Underwater mortgages are loans that have a principal balance larger than the current value of their home.
It seems that overnight Bank of America has gone from villain to hero. From one of the most inefficient loan modification servicers to an innovative leader in the field. Does Bank of America deserve this positive media? Is it all as good as it sounds? This article will expand on our previous post and provide some more details on how the plan will work.
1) The scheme plans to help around 45,000 underwater borrowers with up to $3 billion in principal balance reduction. Principal balance reductions are the big daddy of loan modifications. The Holy Grail of modifications for borrowers. Up to now most servicers have limited their help to reducing interest rates and extending the term of the loan. However, this is not the whole truth, Wells Fargo reduced up to $2 billion in principal balance reductions for their customers. This was done with much less fanfare than BofA latest program.
2) To qualify you must have a LTV ratio (loan to value ratio) of 120% or more. What does this mean? Take this example, if you own a house that is currently worth $100,000, but you still owe $120,000 on it, you have a 120% LTV ratio and qualify for BofA latest modification program. There is no limit to your LTV ratio, although BofA has limited principal reductions up to 30%. Having said that 30% of your loan is a sweet chunk of your mortgage.
3) This program aims to help those that were worse hit by the financial crisis. It focuses on troubled homeowners that have subprime loans (loans with very high interest rates), payment option mortgages, these are mortgages where the borrower can decide how much to pay every month, which can be even less than the month’s interest fee, and teaser 2 to 1 ARM mortgages that sold cheap interest rates for the first two years, but then switched to adjustable rate mortgages.
4) The difference with this program is that BofA is claiming to look at principal reductions as the primary method of reducing monthly payments for eligible borrowers. This is a drastic change from the current situation, where principal reduction is the last option banks and servicers will look into to avoid a foreclosure.
5) This program will reduce principal balance on a staggered 5 year scheme. The bank will take away the principal balance, place it in a 5 years forbearance account ,and calculate monthly payments on the new, modified loan balance. This reduces monthly payments considerably and helps borrowers keep up with their payments. If borrowers keep up with their payments their forbearance account will be reduced after every year. After five years the entire principal balance reduction is permanently forgiven.
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America’s largest mortgage provider has stopped dragging its corporate feet, and seems set to take a huge leap in what may be one of the boldest steps in the mortgage industry. The details are still a little fuzzy but it seems that BofA is about to start a loan modification scheme that will actually reduce mortgage balances of underwater homeowners.
Traditionally lenders and servicers have resisted this type of loan modification, focusing on interest rate reductions and longer loans to reduce monthly payments. However, this scheme would actually reduce mortgage balances before reducing interest rates.
This initiative is meant to start in May, but has already pushed the entire industry into a fresh debate over what measures to take with underwater mortgages. These mortgages are the most vulnerable because they cannot be sold or refinanced if the borrower experiences a financial setback and can no longer afford the monthly payments. Bank of America’s own projections estimate the total amount of “forgiven” debt in this program will reach $3 billion.
The scheme is designed to target high risk borrowers that have missed a minimum of two mortgage payments. They must also be at least 20% underwater. That means they must owe on their homes 20% more than the current value of the property. It is also limited to borrowers with subprime and other risky loans like “option” adjustable rate mortgages. Option adjustable rate mortgages allow the borrower to decide how much to pay each month. Many borrowers choose to pay less than the monthly interest. The unpaid interest is tagged onto the back of the loan.
This program could be a first step in the right direction to help the over 11 million households that are estimated to be underwater. Until now few banks had used principal reductions in a significant way in loan modifications. One of the few exceptions was Wells Fargo that reduced principal balances by $2.6 billion last year. The fact that BofA, the biggest lender in the country, and one of the worst loan modification performers until now, seems willing to make innovative steps sets the scene for a brand new loan modification initiative.
BofA have designed the plan to encourage homeowners to be regular on their monthly payments even though their house is underwater. In order to do that it will consider reducing the mortgage balance by up to 30%. This “forgiven balance” is set aside in another account that is gradually disappears, if the borrower keeps up with their monthly payments. If they don’t they face having the “forgiven” balance reattached to their mortgage in a final balloon payment.
HAMP, the Obama administration signature loan modification program does include principal balance reductions in their recommended loan payment reduction methods, but does not required that lenders do it, and very few did. HAMP incentivizes regular payments by giving up to $5,000 to borrowers that keep up with their payments. However, up to now this has only resulted in a total of 200,000 permanent loan modifications; a far cry from the 4 to 5 million it set out to help.
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HAMP, the Obama administration foremost measure against the wave of foreclosures triggered by the financial meltdown is not working as planned. What do you do when something does not work as planned? You clarify how it was never designed to work like that anyway, and patiently explain what it really was meant to do.
When HAMP, the Making Homes Affordable Plan started, the Treasury Department claimed it would help as many as four million troubled homeowners. However the revised projections of the program now are that it will only help 1.5 to 2 million borrowers.
Is this a failure for the government? Of course, it depends how you look at it. Treasury’s spin on it is that the 4 million homeowners the program set out to help did not refer to the number of borrowers that would receive a modification but to those that would be offered one, whether they finally got it or not.
Analysts, even some from within TARP (Troubled Assets Relief Program) are skeptical of if simply offering the possibility of a loan modification is a meaningful or even useful goal. It would be like a shelter home setting the goal of preparing 1,000 meals but not necessarily feeding 1000 hungry people.
The HAMP program was launched by Obama’s administration with the goal of lowering the mortgage payments of troubled homeowners by paying lenders to carry out loan modifications on the mortgages of troubled borrowers.
The bill was going to be footed by tapping 50 billion dollars from TARP and 25 billion dollars from Fannie and Freddie, the government controlled mortgage financing juggernauts. However, so far only 200,000 borrowers have a permanent modification and only 31 million dollars have been used from the billion earmarked for the program.
The Treasury has been quick to point out that permanent loan modifications should not be the only measuring stick of success. There are, Treasure claims, other avenues that are being pursued to help troubled homeowners avoid foreclosure. For instance, Treasury is now looking into the use of short sales, where the owner sells the home for less than the balance of the mortgage, as alternatives to foreclosures.
A fairer measurement of success, again according to Treasury, would be to see how many eligible homeowners are helped to avoid foreclosure and “relocate to a more suitable home” without having to undergo the embarrassment and pain of a foreclosure.
I believe most homeowners do not care so much about the embarrassment of foreclosing as the pain of losing their home and having to move. Whether you swallow the spin coming from the Treasury Department or not, there is no doubt the wave of foreclosures that is hitting our economy has no quick fixes. The expectations the HAMP program started with were obviously too optimistic, and a reality check was well overdo. The real question is not if HAMP is reaching its goals or not, but what measures CAN or SHOULD (not always the same thing) be taken now to help the plight of troubled homeowners.
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There are few advantages to a financial meltdown, but they do exist. One of them is the significant drop in mortgage interest rates that generally comes hand in hand. You could save thousands of dollars by refinancing your mortgage now interest rates are at an historical low. The question is: can you? This article will look into the three factors that will determine if you are eligible for a mortgage refinance.
First of all, it is worth spending a paragraph on explaining the difference between a loan modification and a mortgage refinance.
Loan modifications are an emergency measure designed for people who cannot pay their mortgage. It reduces the interest rate, extends the length of a mortgage, and in some cases reduces the principal balance of the loan. This measure will have a negative effect on your credit score because you failing to pay the mortgage you signed for. Mortgage refinance is generally not an emergency measure but a strategic move from your current mortgage to another mortgage with lower interest rates. There is no negative credit score impact, because the first mortgage is paid in full before signing a new one. Loan modifications are for homeowners in trouble, while mortgage refinancing is for borrowers that can afford their payments, or pretend to do so, and want a better deal.
So what factors determine if you should refinance now? You should investigate three areas of your personal circumstances: 1) Your credit score, 2) Your home equity, and 3) If you actually save enough money for it to be worth the effort.
Let us look at these factors individually, and see how they relate to the larger picture of mortgage refinancing.
Credit Rating.
When you look for a mortgage refinance you are in effect looking for a lender that offers you a better deal on your mortgage. For a lender to invest in you, you must go through the same procedure as when you got your first loan. The lender will need to make sure you are a reliable borrower and worth the risk. The best way to assess if you will qualify is how good your credit score is. If you do not have a good credit rating, refinancing is simply not an option.
Home Equity.
You need to have some equity on your home for a lender to even consider refinancing your home. The equity on your home, that is the difference between its current value and your mortgage’s balance, is the collateral security you provide your new lender. If it is not large enough, you will not get many lenders willing to take the trouble.
Is it worth it?
There is no point in refinancing a mortgage for the sake of refinancing. You must make sure it actually saves you money. Mortgage refinancing initially cost you money; you only reap the benefits after years of a reduced interest rate. If you are not planning to stay long in your home there might be no sense in refinancing. However if the circumstances are right you could actually save thousands of dollars on your mortgage, and be one of the few that benefited from the financial meltdown.
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