Mortgage Modifications Falling Short
Lowering monthly mortgage payments for struggling homeowners, without reducing the principal balance, will not significantly reduce the number of defaults, according to a new study from Fitch Ratings as reported in the Wall Street Journal.
In fact, Fitch predicts that up to 75 percent of all modified loans will go back into default within 12 months. Diane Pendley, managing director for Finch, concluded that underwater home loans are to blame.
“Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses,” she said. “With continued home value declines in many markets, there is growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay.”
The government has been vigorously encouraging mortgage lenders both verbally and monetarily to modify loan payments and interest rates for their customers on the brink of default and foreclosure. The Fitch study found that 7 percent of prime residential mortgage-backed securities were modified, 18 percent of which were subprime or poor credit loans.
So are falling home prices really to blame for re-defaults? While Fitch maintains that mortgage loans worth more than the current home value are too financially depressing for homeowners to deal with, there may be more to the story.
I like what Douglas McIntyre had to say about it on dailyfinance.com :
The more likely reason that the programs do not work is the rise in unemployment and the increase in the business practice of turning full-time workers into part-time workers, sharply cutting many people’s incomes. Even with monthly home payments cut, mortgage holders can’t pay with money that they don’t have.
If the mortgage modification programs are going to work, two things have to happen, both of them unlikely. Unemployment would have to bottom soon and mortgage principals would have to be lowered as part of the loan modification process. Neither of those is likely to change soon.
Amber Nelson on May 26th 2009 in Interest Rates, Mortgage Credit, Mortgage News
Jay jay responded on 27 May 2009 at 7:26 am #
Instead of going to extraordinary measures to keep defaulting mortgage owners in houses, the should be speeding the process by which new owners are able to buy these houses.
Mike responded on 27 May 2009 at 3:11 pm #
Did you read the study? It found that loans with significant principal reductions DID NOT perform better than those that did not see principal reductions.
willliam S Thomas responded on 24 Jun 2009 at 1:24 pm #
refinancing —I refinanced my home in February. We were doing okay, but wanted a lower payment. I started on the loan in Nov, and it was final in Feb, at great cost to me…And we are still paying. How can I pay this. It was supposed to be finalized before Christmas, and they would tell me at the last minuted that I had to make a payment, thet the office was closed to January. One day after another. Can you help me get out of the jam, a true forebearance for two months would help. I’d like to get this toad out of the mortgage business also. how can I get the 2mos of payments back so I can get my payments on track again. This is their fault, not mine. I live in Texas
Heather Mortgage Modification responded on 17 Aug 2009 at 1:44 pm #
I also feel like there is a lot of red tape invloved in having the lenders help the homeowners. It should be a lot easier to help people who need to be helped than pull them through the ringer as stated in the above case. I know government has the thing in mind but the economy plays a factor in this too. My father lost our house we grew up in because his biggest client went bankrupt which bankrupted his company and his own personal life. Thanks for putting this information up, it seems like these programs are more of a bandaid.
suze 100 responded on 03 Sep 2009 at 1:19 pm #
If loan modifications are falling short then the government and banks who caused this problem need to amend it and offer more for the poor people who are suffering at the moment through no fault of their own.