Loan Modifications Aren’t Working…..
by Tom on November 30, 2009
in Market Musings
The New York Times has an article outlining some of what the government is doing and is thinking of doing in an effort to stem the growing losses in the mortgage world and stop the rising foreclosures.
A couple of reactions to it:
- A lot of people (present company included) felt that the incentives that the government was offering to lenders weren’t strong enough to make lenders interested in a significant effort to modify loans.
- It’s frankly a strictly financial decision for the banks. Do they make a loan modification, accept less in payments and still run the risk that they’ll end up taking the house back?
- I’ve heard a number of reputable economic analysts, the only modifications that will have any type of long term impact in terms of what a borrower can afford are modifications that have an impact on the principal balance. Let me explain that in a bit more detail: 1) The “typical” modification will lower the interest rate or defer the principal payments for a period of time (18 to 60 months usually). 2) The “typical” modification doesn’t address the balance of the mortgage in relation to the value of the house. 3) As the economic mess continues, borrowers are continuing to struggle and many of those who are in the temporary modification phase are continuing to struggle and realizing that they just aren’t going to be able to make it.
- The government is attempting to “shame” lenders into doing more. I don’t expect that will work at all. The main thing that appears to motivate banks and financial institutions at this time is money, profit, or the bottom line (take your pick).
So what would it take to make loan modifications more effective? A couple of thoughts:
- Substantial principal reducations – if prices in some areas have fallen by 40%, then there are a lot of struggling homeowners who are so far upside down on their house that they can’t see the light at the end of the tunnel and correspondingly a relatively moderate and temporary reduction in payments aren’t enough to make a difference.
- I’ve seen a lot of people who inquired about refinancing and while it would save them money, it didn’t save them “enough” to make what they felt would be a difference. In other words, “Yeah, the $100 a month would be good, but if I lose my job, my wife loses her job, or something like that, it won’t be enough to keep us from having big problems.”
I’ve said it before and I’ll say it again. The answer to our economic problems is systemic and substantial deleveraging and until we collectively accomplish that, we’re going to continue to struggle and limp along.
I’m working on a new website where, in collaboration with Jeff Brown and Max Whitmore, we’re going to tackle the bigger issues in real estate, finance and the stock markets. We’ve decided to call it All Markets Considered and it should be live in a matter of days.
I hope you’ll stay tuned. It’s going to be an interesting ride…..
Tom Vanderwell
Treasury to Pressure Mortgage Companies to Cut Payments – NYTimes.com
The Obama administration on Monday plans to announce a campaign to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence mounts that a $75 billion taxpayer-financed effort aimed at stemming foreclosures is foundering.“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”
Even as lenders have in recent months accelerated the pace at which they are reducing mortgage payments for borrowers, a vast majority of loans modified through the program remain in a trial stage lasting up to five months, and only a tiny fraction have been made permanent.
Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments.
Technorati Tags: Mortgages, Loan Modifications, AllMarketsConsidered.com
