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What's Happening With Loan Modifications?

With billions of dollars infused into the banking industry and promises to rescue millions facing foreclosure, some are beginning to wonder if the government has been serious about helping struggling homeowners. One of the early efforts, the Hope for Homeowners program, announced in the fall of 2008, has been recognized as a complete disaster, resulting in only 51 modifications. And, the latest news is even worse; 50 of those modifications are now being investigated by the FBI for potential fraud.

Newer efforts such as the ambitious sounding, Making Home Affordable program, a commitment of $75 billion for loan modification, will fall far short of its promised goal. Why is it that the government, with all its power and with billions of dollars (our money) can’t develop a workable and efficient system that can truly aid those facing foreclosure? The answer lies in both the approach and the intent. Homes have lost so much value in the past two years, that the government’s efforts are insufficient to have a meaningful impact. The amount of money required would be far greater than they have available. In fact, they have no money available, for they’ve been forced to borrow the trillions already spent.

I don’t expect to see dramatic and long-term benefits from any of the programs announced to date. Unfortunately, some homeowners seeking relief simply do not qualify for help. For many, declining credit ratings or reductions in income, combined with the loss of their home’s value, rules out the possibility of modification. And, a good portion of those who do receive a modification will be unable to maintain the payments on a new mortgage because of their precarious financial situation. Many have already fallen behind on their modified loans at a default rate that in some areas has run as high as 60%.

While the government would like for us to believe that they are concerned and making efforts to solve the foreclosure problem, they’re aware of the facts. And a significant fact is: Government can’t save 9 million homeowners from foreclosure or anywhere near that number, and they never expected to do so. Just like their other promises to restore the economy, stopping the foreclosure juggernaut sounds good, but it’s not something they are seriously committed to doing.

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Posted by John Mulkey, Housing Guru on 06/21/2009 01:31 PM

Comments (58)

Making Home Affordable in the Mortgage / Finance Channel

loan modification, housing crisis, financial bailout

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58 Comments on What's Happening With Loan Modifications?

JUN

2009

Loan modifications have become loan mortifications for most homeowners. . it does not help homeowners to postpone a future foreclosure.

I've not heard of any loan modification attempts being succesful in our market. Yet, now some of the lenders are REQUIRING that their borrowers attempt a loan modification before the lender will allow a short sale on their property. Ridiculous. What the government NEEDS to do is step in and tell the banks, SHORTEN YOUR SHORT SALE APPROVAL PROCESS TO 15 DAYS! PERIOD! If you don't we, the federal government will issue fines and penalties for unfair trade practices (may not be legal now, but hey, their the government, they can make it legal). Then and only then will we see the whole mess start to clear up. Thank you for the post. Best of luck.

Fernando - Unfortunately you're right, and for far too many, postponing is all they will accomplish.

Jerry - Yes, there are several things the government could do, and pressing the banks on short sales would help clear up some of the inventory and allow struggling homeowners to move on.

Loan modification for the home owner is simply a public relations gimmic to make the government look good to the tax payer.

They don't do much and they were never intended to. If they were, they wouldn't have so many exclusionary guidelines.

It's a crock.

The average home owner who is upside down and facing foreclosure isn't making much in the way of campaign contributions, are they.

Lenn - You've struck the proverbial nail. Why help homeowners, when the banking lobby has millions to push their agenda?

Now that no one can do them but Lawyers should tell you something.

Charles - Of course Congress needs to support the American Bar Association. They contribute some pretty big bucks : )

If the homeowner owes $225,000 and the property is valued at $150,000 what is the incentive for the borrower to do a loan modification? The loan modification program is just being blown out of porportion by the media.

Leolinda - Yes, many aren't interested on owning a home that may take years to recover from the recent losses in value even if the mortgage company makes it possible. And the exposure from the media is a direct result of the efforts by politicians to have them do so. At least the people can see that the government "tried."

This is amazing to me, "Hope for Homeowners program, announced in the fall of 2008, has been recognized as a complete disaster, resulting in only 51 modifications".

The truth is, the 15 million homeowners that are underwater present a systemic risk to the housing market and banking system. I have not heard about any government plans to address this.

Wow. Thanks for the post.

I only know of one loan modification completed and ironically, the owner was mad that they did it. He is an investor who bought a Myrtle Beach condo that's now plummeting in value as another building is scheduled to be built that will eventually kill his ocean view. He decided to let it go (several other issues with the property, too), and perhaps a deed in lieu once his late payments caught the Lender's attention.

Called the lender only to find out that they AUTOMATICALLY tacked his 2 or 3 late payments to the end of his loan and started him fresh with a current mortgage! He had no idea! The lender just did it!

So this tells me: it must not be that hard to tack late payments to the end of the mortgage. And I bet there is a significant portion of homeowners that this type of modification is all they need as their financial distress was temporary. Maybe not...what do the ActiveRainers think out there?

I know that this would definitely help the landlords out there that have a property that went a few months vacant, but has now been rented again.

John, from my experience the program is employing people because I get calls all day long congratulating me, I've been approved for a loan modification. Funny thing is, I don't need one! I think the spirit of the program was fine in the beginning, but you can't hand money to big money and expect them to give it to the little money people.

I am not in agreement that only 50 have been completed because I know several people who have benefitted. And while my friends are numerous, I would need to know about 20 million for this number to be accurate. I have no idea what the true number is, but I'm sure it's higher than 50.

Also, there needs to be clarification on what constitutes a loan modification. If you call up the CS line of a bank, they see a modification as more of a 'deferment'. They'll let you slide on a few payments or lower the payments for several months to help you catch your breath and tack that on the end of the loan. In my book, that is NOT a modification. As Leolinda's example above shows, there's no incentive to the homeowner.

A TRUE modification involves either a lowered interest rate or a lopping off of some of the debt (or a combination of both). That's a motion that provides a tangible benefit to the homeowner. Anything short of that isn't a modification. Unfortunately, too many CSRs do not get that.

Mark - The reason is: THEY HAVE NO PLAN. Nor do they have a clue!

Shannon - If the property has significantly declined in value and the lender is only adding the payments to the end of the note, it does little to help most homeowners.

Tchaka - We're talking about 2 separate programs. Hope for Homeowners, by the government's own admission, has been a failure. Thus far, 200,000 loans have been modified through Making Home Affordable, but that's still far short of what's needed. And you're right moving the missed payments to the end of the loan is no help to most borrowers.

Hope or Homeowners was doomed from the start. Policticans are not loan officers or mortgage companies.

Ron - And most of them are only looking towards the next election.

Just interesting to see the numbers. It doesnt sound like an efficent solution from this.

Loan modification is not the answer. The picture is clear - we need the jobs back in this country so people can make payments with their mortgages. We cannot expect a loan modification to work if the borrower has 2 months left on his unemployment benefit or using unemployment income.

From what I hear the number is less then 2% of the loans being submitted for modiciations are going through. Watch the bankruptcy numbers begin to skyrocket. The banks really aren't helping they are adding on late fees, etc to the back end of the loan and in some cases reducing the interest or taking the loan out 40 years, but only if the homeowner can qualify income wise. Have also heard advising homeownesr they must sell pay back the difference or sale within 5 years.

The qualifications to get help were suppose to be eased but in fact have gotten harder.

Unfortunatly, as we know ,the bank writing off the loan is a better deal for them.

Could be so simple, hello Mr. Bank/Investor, meet homeowerners half way with principle reductions, set the rate and we (Govt) will loan you the money after we speak with the homeowners you have helped. Mr/Ms. Homeowner, if you default after the modiciation within a certain time period then you will pay taxes i.e. the 1099 rule once again.

They write it off it is a short sale why not a modificaiton?

I have an idea......bail out for all the banks, and now they are paying it back? How can that happen? This election was built on HOPE, FOR WHO? If banks will not take the "incentives" to the loans, as this administration talked about and has set forth, call it modification is you must, then pull their FDIC insurance, or we as citizens need to pull our MONEY out of their banks...may lumpy or slightly lumpy mattresses prevail!

Those of you old enough to remember the 60's? What happened to our spirit!

I believe many people that need a loan modification are living in a home that has maintained value, even if it has come down a bit. They are not needing a short sale. They simply want to stay in their home through these difficult economic times. They may have lost a job, then found another one or a second one. I am also hearing of many people - cut back to a 4 day week, or unpaid week or more vacation time off. Entire school systems and town governments are trying to adapt. Companies are struggling to maintain their employee labor pool. They are making adjustments.

The banks need to make adjustments, too. Like Shannon mentioned, perhaps just adding the months to the end of the loan is simpler, helps everyone including the bank. A true modification changes the rate and term. perhaps that is not needed in many situations.

John: You're absolutely right. The Hope for Homeowners program helped ONE homeowner. You're also right in saying "Government can't save 9 million homeowners from foreclosure or anywhere near that number, and they never expected to do so." The plans may SOUND good as reported by the media, but clearly they have not helped!

The government does have a plan in place for streamlining the short sale process with details to be ironed out by late July. Let's hope so. They have to bring that approval timeline down. Only then could short selling help the homeowner avoid foreclosure and begin to bring some of this mess under control.

John congratulations on your post getting featured. As far as the Loan Modifications go all I have to say is that since the government can't solve it's own problems, why were we expecting them to be able to solve anything else.

I'm with Jerry Murphy above... The correction has to take place for any meaningful recovery and lenders getting off of their butts concerning short sales would certainly speed up the progress..

Anything else is just delaying the inevitable and wasting money on feely feel good programs from entities that got us here in the first place.

Chuck - It's government. They don't understand efficiency.

Charita - You obviously understand both the problem and the solution.

Kelly - It is simple, but the politicians have made the process unworkable.

Susan - This never was for the homeowner. It's been about the big money guys.

John - Thanks for the clarification....I didn't realize I was mixing programs.

Mercure - Your suggestion does work in some cases, but there are millions who would need a modification in order to survive.

Barbara - As slow as things appear to be moving, the recession will be over before the program is in place to reach those who need it. Every month thousands lose hope and their homes.

Suesan - Thanks. It would be nice if they could surprise us occasionally.

Paul - Bureaucracy and a lack of concern certainly aren't helping.

I agree with many of you in that one of the "keys" to getting past this housing dilemma is speeding up the short sale process. The banks are losing TONS of money by letting homeowners live in these homes for FREE while they take months and months to process everything. Investors who own rental properties are losing out on rental customers, homeowners who are short saleing their homes will just have that much longer to wait until their credit scores recover..............it all jus drags on on and on. As mean as it sounds, I think what would help the market in the long run would be to speed up both the foreclosure process and the short sale process. If the government had dedicated funds to help/require banks to gear up their short sale departments I think we would be in a better place or at least on track. But who knows. It does seem like many of the lenders I'm dealing with on short sales are getting a little more organized.

The disease has to run its course. I don't think there really is another way to stop it for the next generation. If we sip the part that hurts, we will get another worse bubble sooner.

And the solution to the problem is to promote savings... individuals, government... everyone. And then we need to start building back small business...

First lets clear up a couple of things. The Hope for Homeowners program was a new FHA insured mortgage, not a modification of the existing loan. This program was doomed from the start, as the people who wrote the law have no clue what they are doing; probably some interns working for the senators and congressmen? In addition, no lender wants to take on this new loan with a borrower who is/was on shaky ground to begin with. The intention was good, but this loan was just not juicy enough for all the parties involved.

Second, as for the loan mods, there are a couple of problems here. Mainly, the lenders just don't have enough staff to handle the thousands of people calling in, let alone have enough people who are well qualified. While i believe that a loan mod is a good thing for the right person, the process leaves a lot to be desired. I also believe that the reason that a lot of loans mods are still going into default is that people wind up losing their jobs anyway. It doesn't matter how low your payment is if you cant pay it, because you have no paycheck! Not until we stop losing jobs every month will loan mods have a positive overall effect.

Lastly, as for the making Home Affordable Program, this is also a greatly flawed program, as the the credit score requirements ,pricing hits, and ltv limitations keep this loan out of the hands of many "responsible" borrowers. I say responsible because that is the word Obama used to describe the intended recipients. I personally know many responsible borrowers who are at ltv's of 140-150%.

If the govt wants to do this right, make it simple. Get rid of the appraisal, have no minimum credit score, and dont limit closing costs and prepaids when including them in the loan amount. Oh, wait a minute, they already have this loan. Its called the VA STREAMLINE REFINANCE, or the IRRRL. Anybody with me on this one?

Loree - thanks for the feedback on the banks getting more organized, your comment gave me a glimmer of hope. I've had buyer prospects call and say they are renting a home that is being foreclosed on, they want to buy the home at a discount from the lender, but the lender refuses to talk with them because they are not the homeowner in default, and the home is not for sale. Hence they are looking to buy the home down the street. And our government is sending this lender a bailout check, ON MY DIME?? What??

These #s are sobering to say the least. I wish we could get the Administration's chief economic advisers (or subordinates) to join AR and comment on these relevant posts.

Insightful discussion. If all this is so obvious to us, why can't someone in this administration see it? Streamlining processes, especially short sales, would go a long ways towards stabilizing the housing market and the economy.

JUN

2009

Loree - Perhaps the banks have "seen the light" and realize that it's up to them to get their houses in order.

Lane - I agree. It's just that politicians aren't willing to promote programs that would cost them votes, and the majority of the electorate aren't ready to vote themselves some pain.

Joseph - Yes, that's the point. The government could have made the process easier, but they're more confused than the public.

Chris - What a novel concept--government listening to the people.

Al - The government suffers from an extreme case of myopia.

John: I'm not surprised. I've only heard of one couple who were helped so far. Plus, the whole business is ripe for scam artists. Perhaps people need to be foreclosed upon or sell their place. Loan mods. sounded good but the results just aren't there! Thanks for the post.

Paul - With the potential for billions of dollars, these and other government programs have attracted thieves in droves.

Way too little and way too late. I do not think any TARP funds have actually been used to buy Toxic assets. The best thing that we can do is cut taxes like crazy to get people working. Ease the foreclosure burden by letting people get an FHA loan 2 years out of Foreclosure.

The banks and certain Agents need to be investigated by the Justice Department for the way REO's are being handled. They are not being well marketed and it is turning into one giant fraud.

Gene - Fraud is rampant. It's just too tempting for the crooks who see the potential for millions of dollars. And, it seems to me that the government has misplaced its focus by not taking a more aggressive stance to help the housing market.

Lenn is right..it's all a crock.

I have personally been on the list and they still haven't contact me about a refi. I thought I would throw myself in the frying pan and see what happened - well NOTHING! It's been 3 months and nothing. Rates are now up. What was supposed to be a help is just a bunch of PR nonsense. It's just an OBama PR Scam! If you keep telling the people there is help out there - the perception will be that it is. It's just not!

We give the big banks billions of dollars and they do NOTHING - from what I've seen to help. It is harder than ever to get loans in higher price ranges even with great credit scores. Each loan is like being dragged through the mud.

Some banks paid back some of what they owed. Maybe they just sat on the money, got interest, then gave it back. I've been told by a second mortgagee they could care if a house gets foreclosed on as they are insured for more than the first mortgagee was going to pay them and the first mortgagee has a set in stone operating procedure of only giving the second $3,000. Both of the lenders I'm talking about got bailout money.

Melissa, Lyn, Anna - Crock, PR scam, that pretty well sums it up.

A mortgage broker I know successfully modified two of her own loans. However, it took 5 months and she said that diligence on her part was what worked. I've heard from others too, that the paperwork process is cumbersome, that different service reps give out conflicting information and that the left and the right hand don't seem to be in sync. The process is practically meant to instill frustration and many homeowners just give up. When paperwork is lost, communications cross in the mail, files get mislabeled as short sales, or closed prematurely, it's no wonder people give up.

If there isn't a sincere purpose to actually do the modifications, it seems rather pointless to dedicate staff and other resources to the task.

Karen - Yes, it's pointless--that's the point. And, it's sad for the millions of homeowners who need and deserve help.

Actually John we have many folks who are qualifying for loan mods in our area since values have not dropped signifcantly. The problem with most modifications is the lenders are not skilled. Thankfully one advantage of the stimulus funds is that lenders are now INCENTIFIED to modify. The bank now gets $5K for doing it correctly and keeping the borrower alive for 5 years. Cha CHING!

I wrote a blog on this: http://www.equitytalks.blogspot.com Some of my borrowers are doing it themselves if they have the time and patience to chase their lender relentlessly. Others I refer to a trusted licensed pro who is getting results.

JUN

2009

Susan - It's unfortunate that many lenders can't respond more quickly. Glad that you are able to help.

John--there are a lot of reasons for the current foreclosure problem. One of the biggest is that people with shaky credit were given loans during the hay-day before the bubble burst. If these people had a hard time paying their bills before they were given mortgage, what make us or the gov't think they are going to change their ways if their loan is modified?

Congrats on featured post.

Mary - Thanks. If it looks so simple to us and millions more, why can't the guys in DC get it? Just wondering....

JUN

2009

John--And why aren't the lenders more responsible? Their greed and the greed of the investors created a BIG MESS.

Mary - The attitude seems pervasive throughout Wall Street and banking. Not sure how to cure this disease.

John--we can't control others, but we can do our best to try to influence them through our actions. As fomer manager I cautioned agents not to get their clients involved with risky loans.

JUN

2009

Either you all are profiessional brokers or realtors because reading your comments makes it look so obvious that you guys are pushing for short sales where you can make any kind of commession. obviously, with this loan mod you are shafted, not making any money and hance dissing the plan :) get a real job for yourself. LOL THINK how rediculous you guys sound here...let the plan work for heavens.

Average - That's the problem. It's not working--and I'm neither in nor connected to the mortgage or real estate business. With little success coming from these programs, homeowners are struggling to get relief. Just check the numbers; they're depressing.

Folks, it is not as easy as it soundsto "speed up" short sales. You are requesting that several contracts be either broken or modified/negotiated. We are living in the age of securitization (the alternative of which is a balance sheet bank loan with 20-30% down and a 5 year term-the good old days).

Note - Contract between borrower and lender to repay a debt

PMI - Contract between lender and insurance carrier to insure lender in the event of loss

MBS (Mortgage Backed Security) - Contract between issuer and investor regarding % payments

Pooling and Servicing Agreements - Contractbetween between MBS bondholders and loan servicers

Getting through this "stuff" takes time and man hours. You can not just call up Bob the Banker and get his OK to take a big hit on a loan that is in default.

The REAL problems are economic: declining home values and high unemployment. You can't fix either of these problems with a loan mod or a short sale.

Thom - That was my point. All the hoopla was irresponsible political rhetoric.

And a good point it is. Band aides can not fix a sucking chest wound. Cheers:)

JUL

2009

John. The government is treating the symptoms (people losing homes) without treating the causes (the owner's overspending). The Result: People will be bailed out temporarily until they continue overspending, thus, losing their home anyways.

JUL

2009

Mark - That's pretty much the process. Government almost always treats the symptoms; it's what they do.

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