Mortgage Modifications before the Making Home Affordable Act
USA Today published an article that focuses on mortgage modifications negotiated before the March 3 passage of the Making Home Affordable Act. It brings up a good point: A mortgage modification that doesn’t significantly reduce the monthly payments is basically worthless. It was the HAMP program that focused on a goal of 31% of income to mortgage payments. The other major point is that success of a modification often depends on negotiating unmanageable consumer homeowner debt. The lawyers that I represent recognize that possibility and are focusing on that aspect.
I don’t know who negotiated the unsatisfactory modifications referred to in the article, but I’d bet a bunch that it wasn’t a US national attorney like the ones I represent.
The article is linked below.
Tens of thousands of financially strapped homeowners who have asked lenders to lower their mortgage payments are instead winding up with higher monthly payments and larger debts on their homes. Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.
It’s too early to know if this pattern will continue under the Obama administration’s $75 billion initiative to get lenders to reduce monthly payments for homeowners struggling to make their mortgages. A total of 360,165 mortgage modifications are now in a three-month trial period under the government’s plan announced in March. But the initiative focuses on reducing interest rates rather than cutting principal, which has been found to be one of the most effective modifications for helping homeowners avoid defaulting a second time (known as a “re-default”).
Of loans modified from Jan. 1, 2008, through March 31, 2009, monthly payments increased on 27% and were left unchanged on an additional 27.5%, according to a recent report by banking regulators. Many modified mortgages fall delinquent — 25% to 40%, depending on the type of mortgage — often because of homeowners’ loss of income or additional outstanding debt, according to a report last month by CreditSights, a financial research firm.
“Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind. He has studied the subprime mortgage situation for 10 years. “(The lenders) focus on today and not on the future.” Even under the Obama plan, they don’t focus on permanent debt reduction, White says.
The majority of borrowers who’ve gotten mortgage modifications have seen their overall principal balance go up, according to an analysis by CreditSights and ICP of about 660,000 mortgages modified this year. In about 90% of the modifications, the principal balance after a modification was larger, CreditSights said.
How most modifications work
A mortgage modification can take several forms. Lenders may allow borrowers to skip payments and then add the skipped payments to the amount of the loan. They may reduce the interest rate charged, extend the loan term, or reduce the total amount of the loan by forgiving principal.
Many lenders say that reducing principal remains the modification of last resort.
Providing relief to borrowers is complicated because of the financial interests of the parties on the other side of the loan. Many mortgages are commonly sold to investors, and borrowers’ payments are collected by servicers, which may be the original lender or a different company.
Certain types of loans cannot be modified without the investors’ approval. Lenders and investors may shy away from reducing a mortgage’s principal balance because that requires them to write down the value of the loan. But temporarily reducing interest payments while adding to the mortgage’s principal avoids any loss.
Some research suggests lenders may gain financially if they don’t modify a mortgage at all.
According to a paper published this year by the Federal Reserve Bank of Boston, more than 30% of delinquent borrowers fix their situation on their own and are able to pay even if no action is taken.
Another reason lenders might resist modifications is the combined impact of high re-default rates and falling property values in many markets. A lender might calculate that helping a borrower avert foreclosure now only risks a deeper loss if the house goes to foreclosure anyway a year later.
And some lenders say even if they modify loans, so many homeowners are underwater — meaning their homes are worth less than their mortgages — that some borrowers are defaulting on purpose, “walking away” after the lender has spent money and time renegotiating the loan.
The Obama administration’s plan tries to overcome some of these barriers by imposing a three-month trial period during which borrowers must pay the renegotiated mortgage, discouraging them from walking away.
Also, the emphasis under the Obama administration plan is on getting lower monthly payments for homeowners.
Servicers must follow an established process to reduce the monthly payment to no more than 31% of the borrowers’ gross monthly income. To do that, lenders will first reduce the interest rate on the loan and then extend the original term of the loan to up to 40 years.
Under the program, mortgage holders and investors receive a one-time government payment of $1,500 for each modification agreement completed with borrowers who are current when they begin the program.
Short-term vs. long-term help
Some lenders are already trying similar tactics on their own. Bank of America is occasionally offering temporary mortgage forgiveness for three to six months in hopes the borrower will find a new job in that time. It is pushing the government to initiate such a program nationwide.
Read it here
