Exceptional times call for exceptional measures. That was the reasoning behind the bailout of the big banks and insurance companies. We had to swallow the bitter pill of using taxpayers money to bail out corporate America. It was after all in the interest of the American economy. However, this reasoning does not seem to apply to loan modifications.
Obama’s loan modification revamp includes cutting the principal balance of millions of mortgages in the United States. These cuts are aimed at chipping away at the negative equity of underwater mortgages. These mortgages are worth more than the market value of the houses they are paying for, and are the main force behind the rising number of foreclosures.
Obama’s administration is talking to the leaders of the top banks and servicers and telling them they need to cut back on the principal balance of underwater mortgages. Although banks like BoA, Citigroup, Well Fargo, and J.P Morgan Chase accept the need of reducing the principal balance in some situations they will not accept it as a generic measure for all underwater mortgages.
This is not a surprise because the measures suggested by the government would be very expensive. Currently there are over 11 million underwater mortgages. Cutting back the balance of these mortgages to their current value would cost the American taxpayer $700 billion to $900 billion according to the CEO of Morgan Chase Home Lending, not to mention what it would cost banks. Let us not forget that Fannie and Freddie, the government chartered and sponsored leader of the secondary mortgage market, would also have to absorb a chunk of the losses that could amount to up to $150 billion.
Not surprisingly banks do not think this would be responsible or even beneficial for homeowners. In fact Morgan’s CEO is also quoted as saying: “such programs could be potentially very harmful to consumers, investors and future market conditions”. It is nice to have the banking community taking an interest in the consumer’s interest. I guess the $700 billion bank bailout was in the consumer’s interest, so it was money well spent.
This is not to say that big banks are not willing to provide principal balance cuts on principal. Bank of America has famously promised to offer balance cuts to 45,000 homeowners that are in serious financial difficulties, with subprime loans and seriously underwater. Banks are apparently scared of creating a default avalanche if consumers get wind of the possibility of reducing their mortgage balances by thousands of dollars if they default on their mortgage payments.
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The Treasury’s report on the MHA for March explained the drop of new loan modifications as a result of banks requiring that borrowers present all relevant documentation before trial loan modifications could start. However, there could be another factor that is causing this drop in loan modifications; the rise in the number of houses banks are repossessing. Figures provided by RealtyTrac show that the number of homes repossessed reached 257,944 during the quarter, which is a 35% increase from the same period in 2009.
The whole purpose of government relief programs like HAMP, is to keep people in their homes and stop foreclosures. These programs temporarily stalled the number of foreclosures but as the government’s efforts tail off foreclosures are expected to continue to increase. According to research firm First American CoreLogic, 29% of all house sales were distress sales, i.e. foreclosures and short sales. This is not good news for Obama’s revamped MHA program that seeks to specifically target the troubled homeowners that are spiking figures of distressed home sales.
The results of these efforts are not all that encouraging. According to Treasury’s own data the number of homeowners that have secured a permanent loan modification is 230,000. 150,000 troubled homeowners dropped from the program because of failing on payments during the trial period, because they did not provide the necessary documentation, or because the servicers did not feel they qualified after all. The number of borrowers that have benefited from the program has reached 1 million. These borrowers saw their mortgage payments drop to 31% of their monthly income. However, the majority of these trial modifications do not end up in permanent loan modifications. Needless to say these figures do not create consumer confidence in a turbulent housing market where faith in homeownership is dropping, and fast.
Even though most people still feel owning a home is important and preferable to rentals, a survey by Fannie Mae shows that many are skeptical about the chances of prices rising and underwater mortgages gaining any equity. Underwater mortgages are home loans that are worth more than their current market value. For instance if you owe $100,000 on your home but its market value is only $80,000 you are $20,000 in the red, or underwater. Underwater mortgages are much harder to refinance as lenders are not willing to invest in a property that is no longer a suitable security for the loan it is backing. In many cases the only practical ways to deal with these loans is to short sale or foreclose, which explains the rise in distress sales we are witnessing.
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