In your experience, what level of impact have home loan modification programs had on California homeowners?
- Little-to-no (93%, 13 Votes)
- Moderate (7%, 1 Votes)
- Significant (0%, 0 Votes)
Total Voters: 14
If you’re anywhere from three months to two years behind on your year-or-older, Fannie-or-Freddie-backed mortgage loan for more than 80% of your home’s value, expect a letter in the mail.
That’s right: yet another federal home-loan recovery program has entered the stimulus mix.
The Federal Housing Finance Agency’s (FHFA’s) Streamlined Modification Initiative went into effect July 1st and expires August 1st, 2015. This means qualifying homeowners will begin receiving offers from their lenders to modify their loans without having to provide any documentation, prove any hardship, or even ask.
The program’s stated goal is to help homeowners avoid foreclosure by curing defaults early.
Editor’s note – In effect, the streamlined program and other home-loan recovery initiatives keep homeowners in their underwater homes rather than freeing them to move about the country.
Fannie and Freddie will automatically reset the interest rate to the prevailing conventional loan rate plus 0.5% – which would be roughly 5% today – and extend the term up to 40 years.
Further, homeowners who owe more than 115% of their home’s value will also be eligible to have 30% of the principal deferred, removing it from the amortized new monthly payment. This deferred portion will not become due until the loan is paid off or the property is sold or refinanced. To sweeten the streamlined modification deal, no interest will accrue on the deferred principal, a free ride for part of the excessive loan amount.
These adjustments are designed to reduce the amount of monthly payments required to retain ownership of the underwater home. Homeowners don’t even have to formally accept the modification offer. To accept a modification, owners merely make three “Trial Period” payments at the modified terms to seal the deal, rendering the modification permanent.
Homeowners conscripted into the streamlined program can still apply for a loan modification under the Home Affordable Modification Program (HAMP). HAMP requires a burdensome amount of documentation and proof of hardship but can provide more substantial relief, such as payments based on 31% of a homeowner’s gross monthly income.
The FHFA admits streamlined modifications may not alter some homeowners’ monthly payments significantly enough to enable them to hasten the return of a positive equity. Thus, it may be necessary for some homeowners to put in the work and qualify for HAMP.
first tuesday Insight:
This program addresses the symptoms, but doesn’t cure the underlying disease – negative equity. Thus, don’t expect this program to have any dramatic effect on the still-tottering housing recovery.
Until the FHFA gives its full blessing to principal reductions for over-encumbered homeowners – cramdowns, not this deferred payment of 30% of the principal balance without interest – the negative equity wound will remain. Home sales will continue to fester at recessionary levels, as this program stops turnover for the very homeowners most likely to relocate if they had a positive equity.
40% of homeowners with HAMP modifications still default, and negative equity keeps homeowners locked into mortgages they can’t afford. Why would a loan modification program with fewer teeth take a bite out of that figure? If a government stimulus plan is to give the real estate economy a shot in the arm, principal balances owed to lenders must shrink, not just monthly homeowner payments.
Related Article: New loan mod program – automatic, ineffectual
Turnover of ownership by underwater homeowners must soon be attained across the entire state of California to return sales volume to normal levels. Today, home sales volume stagnates at the same recessionary levels we have now experienced for nearly seven years. Negative equity precludes selling: you cannot upgrade or relocate to improve your living conditions or job status if you can’t escape from your black hole asset.
The remedy is simple and oft repeated: cramdown the mortgage principal to 94% of the home’s current value. This will to get people out from endless, unmanageable mortgages and the tainted homeownership that makes them insolvent.
Related Articles: A formula for debt forgiveness
At the same time, FICO credit reporting has to be reorganized. FICO scoring must not permit debt discharged in a cramdown (or shortsale) to damage the homeowner’s credit. Otherwise, the underwater homeowner has no ability to purchase a replacement home and is forced to wait it out in a rental penance period. This only further suppresses home sales volume and hampers the real estate recovery. If lender over-reliance on abstract, malicious FICO scoring is not reformed, the home sales volume benefit of ownership turnover is lost.
Related articles: The FICO farce
Today’s zombie housing economy has been temporarily reanimated by the speculator effect. In this market environment, cramdowns will get buyer occupants moving again as they will be able to quickly sell. That will create the multifaceted ownership turnover needed to breathe some life into the economy. Let us list the merits:
- freed homeowners relocate to where the better jobs are;
- consumer spending is improved as freed homeowners’ monthly outlay for shelter is halved
- new home sales are bolstered; and
- home resale volume gets the shot of adrenaline it needs as relocating homeowners find superior places to live.
Related Articles:California to cram down
RE: “Loan Modifications, Proactively” from the New York Times