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
Numbers released by the Treasury Department for successful, permanent home loan modifications from October 2008 through June 2011 are again underwhelming.
All loan modifications begin with a three to six month trial period. During this time, eligibility for a permanent loan modification is assessed. The modification is then either cancelled or reduced to a permanent loan modification.
Permanently modified loans are later cancelled when the borrower either pays off his loan balance or (more likely) defaults on the modified terms.
The Treasury Department reported:
- Bank of America subsidiaries initiated 401,251 trial modifications, of which 54.1% were cancelled during the trial period, 31.7% were permanently modified and 5.2% were cancelled after their permanent modification;
- CitiMortgage, Inc. initiated 130,347 trial modifications, of which 55.5% were cancelled during the trial period, 35.8% were permanently modified and 4.8% were cancelled after their permanent modification;
- JP Morgan Chase subsidiaries initiated 256,560 trial modifications, of which 49.9% were cancelled during the trial period, 34.8% were permanently modified and 7.3% were cancelled after their permanent modification; and
- Wells Fargo Bank, NA initiated 234,666 loan modifications, of which 50.3% were cancelled during the trial period, 43.2% were permanently modified and 6.3% were cancelled after their permanent modification.
Revealingly, of the terminated modifications, only 937 of the 68,114 total permanent modification cancellations recorded by banks had been paid off; the remaining cancellations resulted from borrower default.
These tabulated results of the Administration’s attempts to modify home loans demonstrate only a soft impact on the much larger problem. Overall, the majority of home loans receiving a trial modification does not survive the process and are cancelled. Only a small percentage of permanently modified loans have proved successful; for the rest, the program offered no succor.
first tuesday take: More of the old “extend and pretend” debacle for your further absorption. Not pleasant stuff.
Obstacles to the loan modification process are ubiquitous, and the data here serves only to back up what every broker and agent already knows. All complications relate to the naturally adversarial relationship between lenders and borrowers.
Both homeowners and lenders vie for maximum financial benefit, but lenders do not have the will to compromise and homeowners are unable to force a compromise through any help from any aspect of government — courts, Congress, the Administration or the Federal Reserve (the Fed). However, the most insurmountable problem for loan modifications is the increased negative equity which survives the process. [For more information on the bottom line of loan modifications and cramdowns, see February 2011 first tuesday article, HAMP loan modifications remain scarce.]
Though lenders object to loan modifications as against their best business interests, this option is equally undesirable and impractical for underwater homeowners, a temporary band aid on a gaping wound. Loan modifications as practiced do not cure negative equity; they only prolong the bleed to the lender’s benefit, extending debt periods indefinitely by dividing mortgages into more numerous, smaller payments. The ineffectiveness of loan modifications hinges on their lack of principal reduction — the lender-detested cramdown. [For more information, see February 2012 first tuesday article, Cramdowns shot down: another missed opportunity.]
Prudent borrowers who are able to make payments, but value long-term solvency and are willing to take a temporary hit to their credit, will strategically default rather than remain chained to their black hole assets. [For more information on strategic defaults, see January 2012 first tuesday article, The morality of strategic default: businesses vs. homeowners.]
No wonder the Administration’s push for lenders to “be nice” and give a little has not worked. Foreclosure prevention programs have so far treated symptoms, but have not attempted to cure the terminal disease of negative equity.
Re: “The State of the Government’s Loan Modification Program” from Pro Publica