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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There is a proposal for new guidelines in the way lenders and servicers deal with borrowers throughout the foreclosure process. These new guidelines are designed to improve communication between lenders and borrowers to improve the rate of troubled borrowers receive a loan modification for their mortgage.
One of the issues that leave many homeowners without a home is time and awareness. Troubled homeowners that are behind on their mortgage often do not realize the details of what will happen to their home and when.
This proposal suggests that lender and loan servicers, which are the companies that actually manage mortgage payments, should be required to provide homeowners with at least 30 days to reply when their loan modification has been denied under the HAMP program. These 30 days would give the borrower time to appeal, time during which the lender would not be allowed to continue with the foreclosure procedure.
The new guidelines would also put the responsibility on lenders and servicers to contact borrowers that are 60 days or more behind on their mortgage payments and fill the basic requirements for a HAMP loan modification. The guidelines are very specific in the nature of the notifications lenders must make before a foreclosure can proceed. There must be at least 4 telephone calls, two notices in writing, one of them which must be by certified mail. If these guidelines are approved it will mean a drastic increase in the work required for lenders to carry out a foreclosure. Extra staff will have to be brought in to fulfill these requirements.
However, these guidelines would also provide lenders with the right of denying a loan modification application that was filed within 6 days of a foreclosure sale. Loan Modifications can be lengthy processes and include a large investment in time and resources for lenders and servicers. Nevertheless, lenders will have to inform borrowers of the foreclosure schedule, and the deadline they must meet so that their application can be considered.
These are part of a list of requirements and guidelines the US Treasury is considering in their efforts of improving the rate of loan modification trial conversion and the number of troubled homeowners that apply for a loan modification. The idea is to screen those that actually qualify for the HAMP program and would benefit from the aid it provides.
Unfortunately the HAMP program is only designed to help troubled homeowners that still have a regular income and whose home has not dropped in value too drastically. For instance, if your mortgage is worth over 150% of your current home value, you might struggle to pass the NPV test required for a loan modification.
These proposals are working in line with others that are also being prepared for California and four other states that have suffered from a severe drop in house prices. The Obama Administration announced last week that these states will receive 1.5 billion dollar to be used at the discretion of each state to provide flexibility when considering borrowers for aid and loan modifications.
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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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The Credit Crisis of the last two to three years has changed the whole face of the economic landscape. The knee jerk reaction of the government didn’t take long to appear in the form of HARP, HOPE and other cute acronyms.
A program that hasn’t received half as much attention has been TARP. Maybe because the acronym is not as cute or because TARP is not as linked with reducing loan payments as with cleaning the mess when things don’t work out.
This article deals with what TARP is and what it means for homeowners as well as providing a short analysis how Loan Modifications have fared so far. TARP stands for Troubled Assets Relief Program which sounds nearly as bad as TARP which sounds like something you would paint on your fence to keep woodworm away, which is kind of what TARP is designed to do for Banks and foreclosures.
Enough bad illustrations, what is TARP all about and how is it linked to Loan Modifications?
Troubled Assets Relief Program (TARP) was established by the Secretary in consultation with the Chairperson of the Board of Directors of the Federal Deposit Insurance Corporation and the Secretary of Housing and Urban Development. What did such a venerably group of people prepare?
Well, Tarp is designed to provide lenders and loan servicers with compensation to cover administrative costs for each loan modified according to a set of standards. This was an important factor in cajoling banks into accepting the whole Loan Modification program. Banks and other loan servicers are designed to provide loans and receive payments not modify loans.
The government offered compensation in exchange of lenders re-tuning their administration to allow for faster loan modifications. This hasn’t quite worked as the government hoped, but more on that later. The second “job” of TARP is to provide loss sharing guarantees for certain losses incurred if a modified loan were to re-default. This is a kind of insurance for banks and other loan providers. This of course costs money. The government has set aside up to $100,000,000,000 for these purposes.
So what has been the result of all this investment, not only in TARP but also HARP, HOPE and other government sponsored programs? There is no doubt the government in the United States and other governments alike around the world have put a lot of energy and money into it. The results have been disappointing to say the least.
Many would say that the government is dealing with the wrong issues, that this is a credit crisis not a mortgage crisis. Others will grant that loan modification programs take time to prove themselves.
What are the figures so far? Nearly one in four loan modifications in the fourth quarter actually increased the monthly payments of homeowners. Which is a pretty bad result for loan modifications that are designed to make loan payments more affordable.
The re-default rate was about 50 percent where the monthly payments remained the same or increased, while it was 26 percent when monthly payments dropped.
That means that people are more likely to meet their monthly payments if they are cheaper… mmm, no surprises there.
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