Some lenders simply aren't interested in loan modifications
A new study says it's not worth it for many mortgage servicers to help borrowers participate in the Obama administration's home rescue program.
Turns out a $1,000 incentive may not be enough to convince lenders that loan modifications are worthwhile.
The Federal Reserve Bank of Boston released a study this week that pinpointed one reason why it's so hard for troubled homeowners to participate in the Obama administration's Making Home Affordable program: because a lot of lenders simply don't want to do it.
The Boston Globe writes that for many mortgage lenders, modifying loans for delinquent borrowers carries too high a risk that they will lose money. And then there's this:
The Boston Fed’s findings suggest the Obama administration’s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.
You know, I think most of us already suspected that was the case, but I hate to see such negativity in such an official capacity. It brings a little more truth to our suspicions than I would prefer.
Boston Fed co-author and senior economist Paul Willen has an idea that I'm sure the government will quickly embrace (not): Instead of giving the money to lenders, give it directly to the homeowners who need help paying their mortgages.
Sounds great in the short term, but it doesn't sound like it would lower their monthly payments. Of course, it doesn't really sound like that's happening too much now, either.
The study also found that about 3% of homeowners more than 60 days behind on their mortgages received loan modifications that reduced their monthly payment. Meanwhile, 5.5% received modifications that didn't result in lower payments.
Now, back to the incentives. President Barack Obama's program pays companies that service mortgages a $1,000 bonus for each modified loan, and if borrowers keep up with their new payment plan, another $1,000 a year for three years.
But that's not really worth it if the lender believes the homeowner still is going to default, which would lose the company a lot more than $1,000:
Willen said the success bonus could have the unintended effect of steering loan servicers away from those who need help the most, and toward only those borrowers most likely to recover on their own anyway. He said that if modifications increase, it won’t be by much. “My guess is they are going to help people who are OK, and they are not going to help people who are in deep trouble,’’ he said.
Already, 45% of borrowers who received help with their loans have fallen behind on their payments again. And the program just started in February.
But the U.S. Treasury wants to look at all of this from a positive perspective, saying that the program so far has helped 240,000 homeowners, and that the pace of modifications is increasing. Add to that the news from BusinessWeek's Hot Property blog that foreclosures are down 11% in the second quarter, and the scales tip even more on the side of hope.
And some troubled homeowners don't even need the program. The Globe reports that a whopping 30% of borrowers behind on their mortgages managed to repair their problems without any help from their lenders.
The Las Vegas Sun, which covers one of the nation's most blighted real-estate markets, is well-aware of the problems homeowners are facing and offers plenty of tips to help you get the attention of your lender. But take heed of this quote from the article before you call:
“It’s a whole retooling of an industry,” said Julia Gordon, a senior policy counsel at the Center for Responsible Lending. “You will not get a servicer who will say, ‘I don’t want to do it.’ ” But in truth, she said, “they don’t want to do it.”
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.