Default Rate Archives – Refinance – Mortgage Refinancing Rates And Information

More than Half of Completed Loan Modifications Re-Default; Why?

April 5th, 2010 No comments

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 Modifications, Loss Mitigation Incentives and Other Greedy Games

January 28th, 2010 No comments

Have you ever heard about having your cake and eating it? That’s what many mortgage providers are trying to do with loan modifications. How so? As it is well known the Government offers lenders incentives for processing loss mitigation actions. Loss mitigation action is code for loan modifications. What has been the result of the Government’s loan modification incentive program?

Banks, lenders and servicer have of course gladly accepted these “incentives” for processing loan modifications. But what has been the result for borrowers?

Mortgage Letter 2009-35 sent to all Government approved mortgagees on September 23^rd 2009 provides a surprisingly honest picture. This letter is quite interesting as an exercise in stating the obvious and calling mortgagee providers thieves to their greedy faces.

The second paragraph of Mortgage Letter 2009-35 is priceless:

The recent economic slow-down has increased demand for loss mitigation actions, including but not limited to, loan modifications. Recent industry studies of these loan modifications revealed that borrowers who experienced an increased mortgage payment on a modified loan had a significantly higher re-default rate than borrowers whose loan modification provided a lower payment.

If you thought loan modification research studies were a waste of time, think again. The Government has come up with a breakthrough. Borrowers in financial trouble are more likely to re-default on their mortgages when their monthly mortgages are increased! Shocking.

I’m sure David H. Stevens, Assistant Secretary for Housing, the author of the letter, knew he was stating the obvious because the in the very next paragraph he hits the mortgage industry with a brutal honesty that is refreshing to say the least:

FHA reviewed its recent insured loan modifications and found that, generally, they resulted in higher payments to the borrower. The higher payment was the result of not lowering the interest rate to the current market rate and/or not extending the term to the maximum of thirty years authorized under 24 CFR 203.616. Generally, the loan modifications simply capitalized the past due amounts and allowable charges and did not extend the term of the loan.

May I personally congratulate Mr Stevens, or whoever writes his letters, on the construction of that paragraph. There is nothing we didn’t know there but it is nice when a Government official simply goes out on a limb and says it.

So this is the picture: Banks provide loan modifications to troubled home owners which generally don’t reduce their monthly payments and simply add on the late charges and interest to the mortgage without even extending the loan term and get an incentive from the Government for their troubles.

The above mentioned letter set out that these practices were to stop in a 30 day period from the date of the letter, that was the end of November 2009, and that any loan modifications where the interest rate was not reduced would not apply for a loan modification incentive. I guess it is a start.

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Loan Modifications Cannot Stop the Rise in Foreclosures

December 29th, 2009 No comments

The Obama administration and all the agencies at its disposal are working around the clock to save troubled loans but it is simply not good or fast enough.

In the third quarter there was a 6.2% rise of all seriously delinquent (i.e. 60 days or more past due) and 3.2% increase of all loans in the process of foreclosure.

What is even scarier is that even prime mortgages, those loans with the best interest rates and conditions also rose heavily.

However banks and loan servicers do seem to have stepped on the gas a little and supported the government’s efforts through the HAMP program, or Home Affordable Modification Program. Out of every 6 troubled homeowner one received a permanent or trial loan modification. Unfortunately the homeowners that get a trial but don’t get a permanent modification make up most of that figure. The bad news is that even those who do get a permanent loan modification (31,000 out of 750,000 in the last count) half tend to re-default with 6 months. The good news is that that loan mods done in the second quarter show a lower initial re-default rate. This could be because lenders are making more generous loan modification and reducing monthly payments more aggressively to make payments more likely.

So how are mortgages performing? Badly seems to be the sad consensus. 87 percent of all US home loans are listed as performing, which obviously means 13% aren’t. Government backed mortgages are not faring much better, in some cases worse. Only 83% of the Veterans Benefits Administration loans are “performing”. Fannie and Freddie mortgages (with government backing) are not celebrating with 8% of their mortgages “not performing.

It is not all bad news. The housing market with low interest rates and a large portfolio of “cheap” homes is attracting buyers. This large inventory is likely to stay with us for a while as banks continue to try to unload their distressed properties and troubled homeowners continue to agree to “short sales”.

According to First American CoreLogic one in four home loans is still “under water” or has a mortgage that is worth more than its current value.

What is the government doing to fight this situation?

Two main strategies: 1) Keep the housing market stable by keeping the interest rates low.

2) Loan Modifications.

The first strategy does seem to be helping by encouraging buyers to invest in a new home. Loan modifications are not meeting with the expectations but the latest figures do show that re-defaulting has dropped with the latest more generous mods.

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Loan Modifications, NPV Test the Key to Loan Modification Success

December 23rd, 2009 No comments

What is a NPV test?

If you are trying to work your way through a loan modification you know what it is, if you are planning to get a loan modification you should find out soon.

NPV stands for Net Present Value. It is a financial concept that allows lenders to work out if it is profitable to make a certain financial choice. In the case we are currently considering banks and lenders use the NPV test to decide if it makes sound financial sense to approve a loan modification or not.

Passing the NPV test is paramount if you want to get a loan modification. Put simply if you fail this particular test there is no loan modification for you. The bank will simply foreclose your home and bite the bullet on any losses they have to deal with, you are not worth the risk of a loan modification.

Understanding how the NPV test works is therefore a priority for borrowers. The only problem is that many of the variables in the NPV formula are secret so that homeowners can’t rig the test. However there are some steps a homeowner can take to at least tip the scales in his favor.

The Net Present Value provides a way for lenders to quantify the current value of a property taking certain factors into account. These factors include the cost of foreclosing the property, the chances of the borrower defaulting in the future despite the loan modification, this is called the loan modification re-default rate, which unfortunately for borrowers is rather high.

What can you do to improve your chances of passing the NPV test?

As we mentioned above the exact formula and values of variables are secret to make it harder for delinquent borrowers to influence the test. The test calculates / guesses on various factors:

a) How many months you are likely to pay before re-defaulting.

b) What are the chances you can fix your own finances without the help of a loan modification.

c) The value of your home.

d) The estimated value of your home next year.

e) The cost of foreclosing your home.

f) What the house is likely to go for if it is foreclosed.

However there are three steps a borrower can make to improve his/her chances.

1) Make it clear that you really want to stay in your house. If you can prove that staying in your house is very important for you despite the financial investment you have vested in your home this will give added strength to your claim. You might want to stay in your home because you live near to your aging parents, or you don’t want to change your children’s school or it would be a huge embarrassment for you to go through a foreclosure. If you prove that you will do anything to avoid a foreclosure the lender might rate your risk of re-defaulting more positively.

2) The value of your home is critical for your NPV test. Banks expect homeowners that own underwater properties to default. After all why would someone keep paying for a house that is worth less than the mortgage? It is hard to influence the valuation of your home but the federal government’s home value projections change at the beginning of every quarter. Even if you were turned down one quarter there is a chance you could be accepted the next quarter.

3) Make a good case of your current inability to pay the mortgage but how you are very willing to pay if the monthly payments are reduced. Be prepared to back these claims with evidence. Prepare a budget and provide bills and other proof of your income and expenses.

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