Loan Modifications are going through an interesting stage. Enormous efforts are being made to save homes from foreclosure, and while some results seem to be made, millions are still heading straight to a foreclosure. The government has increased the pressure on loan servicers and lender, and relaxed the requirements for a HAMP modification. What have been the results? Is there any good news to share? This short article will look into the good news, and the bad, of loan modifications at the end of March 2010, and try and separate the spin (a.k.a propaganda) from the real news.
The Spin: There has been a 45% increase in the number of permanent loan modifications in February 2010, according to HAMP.
The Truth: The total number of permanent loan modifications is still only around 170,000 loan modifications.
The Spin: Homeowners that receive a loan modification will enjoy much lower mortgage payments because they are granted a fixed 2% interest rate for five years.
The Truth: This is true, payments can be lower for borrowers that receive a modification. Unfortunately there are still more than 830,000 homeowners that are awaiting a decision on their temporary loan modification, and are languishing in loan modification limbo.
The Spin: The figures look worse than they are because there are over 91,000 troubled borrowers that have been approved for a permanent modification, but has not signed the final paperwork yet.
The Truth: Granted, however there were also 90,000 trial loan mods cancelled.
The Spin: More than 1.35 million trial loan mods have been extended, which includes over a million HAMP modifications.
The Truth: The vast majority of these mods are trial loan modifications, and in any case, only represent a 35% of the troubled homeowners the Obama administration predicted the plan would help. It must also be noted that half a million of these troubled homeowners could easily lose their trial modifications. A even more worrying fact is that more than half a million of borrowers on a trial modification have already made the three monthly payments. Why? Apparently many will not receive the permanent modification because lenders have finally decided their income is too high, or too low, to justify a modification. The benchmark for qualifying, or not, is set in such a way that having just a few hundred dollars more or less in your banking account can make the difference between approval or denial.
This had created in many the feeling that trial loans are often just a way for banks to squeeze a few months mortgage payments out borrowers that either had no hope of qualifying or the bank feels they are hopeless cases that will most likely re-default whatever measures are taken.
In conclusion, and to be fair, there has been some progress in the last months. However, this is too little, too late for most homeowners. However, a new problem now arises. Now a new wave of unemployed troubled homeowners with prime mortgages is hitting the housing crisis shore. It is unclear what solution loan modifications can provide when the mortgage already has low interest rates and a long tenure.
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Few subjects have created as much debate as the issue of walking away from of your home when there does not seem to be any financial sense in staying. Walking away from your home when it is worth less than the balance on your mortgage seems like the sensible thing to do for many. Research shows that when homes drop in value by over 25% owners start to think seriously about letting their homes go.
Many ask themselves, “why not let the home go in default and rent a better place for less?
It is worth noting that we are talking about people who can afford their mortgages but simply decide to let their home go as a financial strategic calculation. The difference between truly troubled homeowners that would like to keep their homes and those that are defaulting on a mortgage to save money can be separated by a very thin line. But the evidence points to a growing number of borrowers that simply do not want to live under what many are calling “house arrest”.
Some experts are pointing out that around 17% of those that defaulted in 2008, over half a million homeowners, did so because of a strategic calculation and not due to a lack of income to pay the loan.
It does seem like we are at the turning point in society’s psyche, a kind of revolution. People are not as attached to their property. Mortgage brokers are advising many to walk way, and a lot of them are listening. Something that has become common again is for homeowners to simply mail their house keys to the lender as a way of setting off a foreclosure, what is also called jingle mail.
There is nothing new to this reaction; previous recessions and crisis were also characterized by homeowners walking away from their homes. However what is different is the scale of the number of foreclosures. Four years ago, a handful of people had negative equity on their mortgage, now there are over 4.5 million homeowners whose house is worth less than 75% of the balance of their mortgage. The Real Estate is not doing any favors to the economy and is stalling again; causing experts to estimate that by June the number will climb to 5.1 million in June. That is simply a huge figure, it will mean that 1 out of every 10 homes in the United States will be going through a foreclosure.
Still many believe that this so called jingle mail revolution is the product of the media’s imagination. Something that is talked about but not actually carried out. The figures seem to say otherwise, but it is true that people generally do not want to move. They do not enjoying moving neighborhood, or their children’s school, which is what keeps so many underwater homeowners in their homes.
The eternal question is what the government should do about the whole matter. According to one estimate it would cost around $745 billion to bail out all underwater borrowers in the US. This is a little more than what it cost to bail out the banks in 2008. Most of us think it would be silly and wrong to bail out every troubled homeowner, but if the government does nothing it could cause even more homeowners to walk away, further crippling an already fragile economy.
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