Nationally, twice as many loan modifications were arranged through independent foreclosure prevention initiatives by lenders during the past three quarters than through the federal Housing Affordable Modification Program (HAMP), according to data released by the Hope Now Alliance, an organization dedicated to helping home owners stay in their homes. Mortgage lenders completed 644,000 loan modifications without a subsidy from HAMP, compared to 332,000 through HAMP. Not much voluntary compliance.
The recent criticism of HAMP for failing to meet modification goals has given lenders an opportunity to champion their own less consumer-protective programs. Wells Fargo reported a reduction of more than $3.1 billion in principal on 60,000 loan modifications ($52,000 each on average) in the past 18 months, nationwide. Monthly payments are kept low by a combination of principal adjustments, interest rate reductions and term extensions.
While most lender modifications outside of HAMP do not reduce monthly payments to 31% of pre-tax income as required for HAMP subsidies, borrowers are attracted to the interest rate and principal reductions boasted by independent lender modification programs — a measure not used by Fannie Mae and Freddie Mac.
Very little information is released to the public about loan modifications, except by HAMP. Housing counselors, however, are reporting horror stories of non-HAMP modifications calling for balloon payments of more than $150,000.
first tuesday take: Lenders do not do homeowners any favors. The primary objective of a lender purporting to help a homeowner modify a loan is not to benefit the homeowner, but to keep the loan on their books at a loan balance that, in California, nearly always exceeds the value of the home. Lenders only reduce monthly payments below interest-only payments when they include a balloon payment in 3 to 5 years. The home is still upside down, now and then.
A simple mathematical calculation tells the lender if they will receive more money by foreclosing or through a loan modification. Their objective is to get the most net present value (NPV), or worth in “today’s” dollars, from each transaction. Homeowners are almost never aware that whether or not they qualify for a loan modification hinges on this NPV test.
A monthly payment reduction does nothing financially for homeowners who owe more than the fair market value (FMV) of their home. Until lenders have to compete with bankruptcy judges to be the first to cram down loan balances, the only rational financial option available to negative equity homeowners is the strategic default. [For more information regarding HAMP, see the July 2010 first tuesday article, HAMP is losing participants; for more information regarding strategic default, see the April 2010 first tuesday article, The underwater homeowner, his future and his agent: a balance sheet reality check – Part II and the August 2010 first tuesday article, Fannie Mae, our government and strategic defaults.]
Real estate professionals are the gatekeepers for the multiple listing service (MLS) real estate, as well as the primary advisors to drowning homeowners. They need to inform the public, since the news media is not.
Re: “Surprise! Banks help more homeowners than Obama” from CNN Money