A recently released national study from the Urban Institute indicates that homeowners who receive foreclosure counseling are 60% more likely to avoid foreclosure, and to receive some form of loan modification, than those who do not seek out counseling. This study positively assesses the National Foreclosure Mitigation Counseling program, which links troubled homeowners to nonprofit loan counselors.
Since the program’s inception in late 2007, the government has awarded more than $300 million to 1,700 participating counseling agencies. In the Urban Institute’s study, people who received counseling lowered their monthly payments an average of $454 more than those who did not. A total of approximately 730,000 have received loan counseling from the government program thus far.
first tuesday take: This is a national story, not one set in the real estate recession of California. However, one year on, after initial confusion about loan counseling and a wave of scam “paid counseling services” that still continues in California, homeowners nationwide are beginning to really take advantage of the “free assistance” available to them. No one is considering the short-term versus the long-term effectiveness of the claimed success of modifications, the “extend and pretend” routine, except that our government is siding with and joining the lenders again for this one.
The problem: most people who avoid foreclosure, with or without counseling, will default on the modification within a year– more than 60% is the present rate of “re-default,” with very few modifications becoming permanent. Achieving a loan modification is at best a pyrrhic victory if the loan-to-value was more than 125% (which is the norm in California) and there is no cramdown of principal to or below the value of the property securing the loan. To qualify for most modifications, negative equity cannot exceed 25% of the property value.
Nonetheless, those who are desperate to avoid foreclosure would be foolish not to accept a little additional help, at no charge to them, even if it brings only a temporary reprieve. Once modified, the homeowner is given time to relocate to a new residence at the right price, with the right financing, a fresh-start property tax basis and a very slight ding on the credit report, which can be easily and responsibly explained away.
Re: “Counseling helps borrowers avoid foreclosure” from the Washington Post