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 Modifications can be a way to save your home from an imminent foreclosure. It will also affect your credit score, and this could affect your chances of getting another loan or when applying for a job. This makes many people think twice before applying for a loan modification. The truth is that you could end up without being accepted for a loan modification but still suffer a drop on your credit score. There is also the time wasted applying and waiting for a response. Some troubled homeowners automatically assume they are not eligible for such a modification. A good way to make sure you are even eligible for a loan modification under the HAMP program is to visit http://makinghomeaffordable.gov/modification_eligibility.html and see if you pass the program’s requirements. This will help you save time and your credit rating without asking for an outright modification. The requirements are straightforward and will give you a clear understanding of your position. This questionnaire will also help you get used to the kind of question you will be asked if you go ahead with the modification. Use it as a trial run that has no negative consequences on your record. The questionnaire is set as a test that tells you if you are eligible for a HAMP modification based on the information you provide. What questions are asked? There are only 5 questions that determine your eligibility. 1) Is your home your primary residence? 2) How big is your mortgage? The key question here is if it is below the $729,750 mark, the maximum mortgage size to fall in the HAMP program. 3) Are you struggling with making payments toward your mortgage? You guessed! If you say no here you will not qualify. I tried! 4) Was your mortgage contracted before 2009? This is also a key question as all loans after this date do not qualify. 5) The final question relates to your debt to income ratio. That is how much money you owe in relation to how much you make. The key question is if it is higher than 31%. If your debt to income ratio is not higher than 31% HAMP cannot help you. You will have to find some other kind of alternative. Put simply you must answer yes to all five questions to be eligible. If you knew anything about the HAMP program you probably did not get much out of that questionnaire. However, after you determine if you are eligible for a loan modification you can download an RMA form at http://makinghomeaffordable.gov/docs/RMA%20Interactive%20-%20Updated%2011.10.09.pdf . This form will help you collect the information you need to apply for a modification. You can then contact a free counselor and ask for advice on your particular case. Unfortunately qualifying for a HAMP loan modification is the easy part. The hard part is getting your lender or servicer to approve it. There are also grey areas when applying for a loan modification, which makes the questionnaire we looked at above a little bit of an oversimplification. However, it is a great place to start. As you can see the process is not that difficult, you can do it yourself and save yourself a small fortune instead of spending your last dime on a foreclosure rescue company. Nevertheless, you must accept that applying for a loan mod is going to be complicated and require a lot of your time and patience. If you do not have either you might still want to use a paid company.
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Recent projections estimate that by June, over 5 million homeowners will be heavily underwater. Let us define that a little more precisely. You are heavily underwater if the current market value of your home is only 75% of the balance on your mortgage. Between you and me, this means you are pretty screwed. The scary part is that if this projection proves true 10% of all US homeowners will be in this pickle; not the place you want an economy to be if you are trying to dig yourself out of a recession.
This is why the Obama Administration is running about like headless chickens trying to find solutions to this problem, quick, mid-term, and long term solutions; any kind of solution that will get us out of this.
It was this kind of panic that caused the government to put all their weight behind HAMP, the government’s loan modification program. Loan modifications were and always have been procedures designed to help homeowners stuck with sub-premium loans. Sub-premium loans as you all know is a kind way of talking of usury, loans with interest rates so high they give you vertigo if just to think about them. However loan modifications are not, and never have been a fix for homeowners with great loans that are unemployed and cannot afford their mortgage.
What alternative solutions are there?
One proposal is to buy time by simply banning foreclosures until other options have been looked into by the homeowner and lender. You have to love that proposal, if you cannot stop homes foreclosing by economics just make it illegal. As crazy as this measure seems it is designed to buy time and allow homeowners to find ways of keeping their home. This would take the current guideline of asking lenders to evaluate defaulting homeowners for a loan modification to the next level by making it compulsory.
The Mortgage Bankers Association says its members are already following this principle, and that foreclosure is always a last resort when all other options have been exhausted.
Another plan sponsored by the Mortgage Bankers Association is to not modify permanently the loans of troubled homeowners that have lost their jobs but simply to reduce their mortgage payments substantially for up to nine months to give homeowners a chance of looking for a new job.
As you probably guessed the Banker’s Association is requesting Treasury to pay for the program. Nevertheless, it does seem like a good idea to provide a homeowners with a break until he finds a new job than taking forever to marginally reduce the mortgage payments of an unemployed borrower.
However, many are analysts are saying that the real strategy to follow is to find a way to improve the economy. A strong job market would pull out the housing market from the fix it is in. On this theme, there were some good news last week. The number of homeowners starting to default unexpectedly dropped in the fourth quarter of 2009. However, the government also reported that home prices dropped by 1.6% in December; making it clear that the economy still has a long way to go before it gets a clean bill of health.
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