Lenders voluntarily rewrote the terms of 136,785 mortgage loans in 2008, in compliance with a 2007 agreement with Governor Schwarzenegger. Of these loan workouts, 58% involved lowering interest rates to reduce monthly payments. As foreclosures became more frequent in 2008, lenders’ willingness to modify loans increased as well. However, lenders will not be willing to reduce the actual balance owed on loans, and increasing joblessness makes foreclosure a greater threat than ever for lenders and homeowners alike.

first tuesday take: Although these mortgage loan modifications may make a difference for some, many will be at best a temporary fix. Up to 60% of buyers will redefault on their loans unless the actual principal of the loan is reduced, as has already occurred with the FDIC handling of IndyBank. Short sales are a necessary tool if homeowners with negative equity are to quit their homes effectively, and the current rise in unemployment will make the short sale all the more important to lenders.

The bankruptcy courts need authority to treat homeowner’s demands for loan cram downs the same as a second home of investment real estate loan – which can be reduced to the property’s market value, etc.

The sooner the California and national governments get out of the way and force the lenders to clear out their loan problems in the open market, the sooner we can all get back to normal real estate operations. As it is, government interference is only extending the time of recovery by adding a year or two to the completion of the inevitable foreclosures and REO inventory sales – approximately 800,000 additional homes to be sold between 2009 and 2012.

Re: “Lenders modified 136,785 mortgages under state deal” from Sacramento Bee