theirstaxblog.com

A Big Push for Little Results

Last year, the federal government pushed lenders very hard to rework deals for thousands of mortgage holders. The sudden fall in home prices pushed the entire market to near complete collapse. The feds wanted to do something for the individual homeowner and developed the loan modification program. Under this program, lenders were supposed to re-work mortgages to lower payments, principle, and/or interest rates whenever possible. A lot of homeowners qualified for a 20% reduction or more. That seemed like good news for borrowers and for the economy, as well. That said, the Office of Thrift Supervision stated that 40 percent of the income of borrowers receiving a 20 percent reduction in monthly payments, were delinquent again in a year or less. The news follows President Obama's recent lash of the tongue at the expense of the banking industry, for not doing enough. The high rate of default after the modifications could give the banks justification for proceeding cautiously.

Contributing Problems

One of the main contributing factors to the continued struggle for homeowners is the unemployment rate. If the income of a borrower drops to almost nothing because they must subsist on unemployment, a house payment that's only 20 percent lower hardly cures all ills. This idea might have worked better if recovery had progressed at the rate the feds were hoping for. Lingering doubt and sluggish productivity have hampered the economic recovery in all sectors.

Another factor that hampered the effectiveness of the program was the way banks structured the modification process. A lot of banks created a trial modification process that required 3 timely payments during the trial period. Borrowers just couldn't keep up with the requirements in this economic weather. Also, a lot of banks raised monthly payments in the trial period. After the 3 month trial, proof of adequate income was the only other criteria that had to be met to permanently modify the mortgage to a lower payment. It's not a stretch to see how borrowers, that lost their jobs in the trial period, were denied a solution. In fact, of the 760,000 modifications offered, only 31,000 have been made permanent. Around the same number have voluntarily dropped themselves from the program, and the remainder is yet to be determined. The number of homeowners delinquent or in foreclosure remains at a record high 14 percent. These numbers do not show much success for a 75 billion dollar program.

Not as bad as it used to be

The reality is that the modification program is not a complete failure. The impact of what it prevented cannot be directly measured. Had the program not been created, a lot of people probably would have lost their homes. In fact, a break out of some of the latest data shows an encouraging trend. The April-June, 2009 analysis by regulators showed 20 percent of borrowers whose loans had been permanently modified had missed 2 out of 3 payments. Though it sounds bad, it was 35 percent 3 months before. Paired with a pick up in the number of jobs, it could look promising.

Tags: 75 billion dollar program, loan modifications, mortgage holders, the federal government, the unemployment rate