Obama’s loan modification program can be seen as a failure, if you focus on the millions upon millions that are benefiting, or as a modest success with over 650,000 borrowers on trials and 375,000 on the fast track to getting permanent modifications by January 2010.
As reported earlier the government is in the process of sending special task forces to win over, bully or cajole, depending on your point of view, the big lenders that decide how well the loan modification program goes.
The big question is why are loan modifications not working better with all the money, over $75 billion, being thrown at it. This article will look at some of the main problems that are creating the loan modification minefield borrowers are currently suffering.
Problem 1. Lack of information
Government firms like Freddie and Fannie are contracting the services of outside companies to go house to house providing accurate information on how to go about getting a loan modification.
This is a reply to lenders complaining that the main reason loan modifications are slow is that borrowers are really bad at filling in forms and providing the information required. Of course, the media is littered with counterexamples of model borrowers that provided all the information and battled with the conflicting instructions that lenders requested.
Problem 2. There is a lot of people that need Loan Modifications.
Around 7.5 million households in the U.S alone are delinquent on their mortgage payments. 25 percent of all borrowers are underwater in their mortgage, owning a home that is worth less than what the mortgage is worth.
Those figures are huge, to deal just with the paperwork, information and mechanics of dealing with so many people on a subject that so few of us understand is a big job that even if all the players wanted Loan Modifications to work it would be hard to do faster.
Problem 3. Banks are nearly as lost as the rest of us.
The simple truth is that even when lenders want to modify a loan it is not a smooth road because they are not used to dealing with this volume of modifications. Banks are already understaffed due to the recession and their mitigation departments are in no better shape. Add to this under-information about government programs, lost paperwork, changing fax and telephone numbers and you start to see why it is so difficult to process a loan modification.
Problem 4.The NPV test
The NPV test stands for Net present value. This test compares the money a loan is likely to generate if it is modified (and the borrower keeps the house and pays the mortgage at the modified rate) and what it is likely to generate if the modification is not carried out. The logic behind this test is not bad. Making loan modifications a profitable exercise for banks is good news, if you make it profitable your chances of making it happen grow exponentially.
However the actual formula to calculate the Net present value is according to many commentators unrealistic and allows lenders to shelve loans they should modify.
Problem 4. Banks often benefit from delinquency.
Banks often are not the actual lenders behind a loan but take on the job of loan servicers. Loan servicers collect payments and deal with borrowers but don’t own the mortgage. Loan servicers profit from delinquent borrowers and the late fees and higher interest rates they generate.
Many go as far as saying the loan modification trials are simply a trap loan servicers use to get three more monthly payments from borrowers that are beyond help and would not pay otherwise.
The problems that borrowers face when trying to work out their loan modification are pretty scary, our next post will deal on how we can face these problems and increase our chances of loan modification success.
Total home values in the United States fell $489 billion in the first 11 months of 2009. A large drop, to be sure, but it marks a significant improvement from 2008, when homes lost a total of $3.6 trillion in values.
In addition, about one-third of the markets we covered (48 of 154) had gains in total home values. The Boston metropolitan statistical area (MSA) topped this list, gaining $23.3 billion. Last year, the Boston MSA lost $53.4 billion.
On the other end of the spectrum, the Los Angeles MSA’s housing market lost the most dollars in 2009 — $60.8 billion. But even that was a significant improvement from 2008, when the MSA lost $345.8 billion. The LA market has actually performed quite well recently, having seen six consecutive months of monthly gains in home values as of October, but the strong negative performance earlier in the year dug the overall market a large hole early on.
Below is a table of the markets with the biggest gains and losses. It’s important to note that these markets don’t necessarily represent those where individual home values are performing the best and worst. When figuring the total value of real estate, the number of homes in an area come into play, so big markets are more likely to have the biggest total dollar-value gains and losses.
Markets With Biggest Gains 2009
Markets With Biggest Gains 2009
The 2009 numbers are encouraging, but our optimism for next year is cautious. The government’s tax credits and low mortgage rates are spurring a lot of demand, but the tax credits will end after the first quarter, and mortgage rates are likely to rise at that time as well (as the Fed ramps down its purchase of mortgage-backed securities). In addition, foreclosures are likely to rise. All of these factors will put downward pressure on home prices, so the possibility of another dip in prices does exist.
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U.S. Home Value Losses Stabilize in 2009; Nearly $500 Billion Drops Off, Compared to $3.6 Trillion Last Year
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When looking at a crisis it often pays to see what got you there if you are to learn anything from it. The current mortgage and credit crisis was either unavoidable or a surprise depending who you ask. Loan Modifications are now being sold as the solution to the crisis as if changing the interest rate, tenure or principal of loans were the heart of the problem. But what is at the heart of this worldwide crisis?
History tells us that depressions, recessions and crisis are as part of the free market economy as free trade and private enterprise. Take this example; in 1908 a financial crisis spread panic “in every part of the globe. It was as if a volcano had burst forth in New York, causing a tidal wave that swept with disastrous power over every nation on the globe”, as reported in the The Wall Street Journal.
In 1929 there was a Great Depression, earlier there was the Long Depression (1873), a Panic in 1837 which has been described as “an American financial crisis, built on a speculative real estate market.
Any of that sound familiar? If it didn’t it soon will. But how did the current mortgage crisis occur? To answer that we need to go back a little over a quarter of a century.
Since the Reagan Administration in 1980 America has been pioneered globalization of free trade. This opened the U.S market to new products and investment unparalleled in any other economy. America’s entrepreneurial spirit combined with political freedom and a trend of economic deregulation fuelled a rapid expansion in new types of investments that also spurred an increase in international finance and commerce.
Unfortunately America’s growth came to rely on debt. The economy needed more consumers that could only buy on credit. The largest debt and purchase for many was their own home. Credit was easily available so buying wasn’t a problem; this fueled home prices in particular.The result was a housing boom that created the feeling that prices could only rise.
In 2007, as we know, the housing boom finally collapsed showing the fragile structure that had held it up behind the glossy veneer. Loans had been provided to families that couldn’t afford them, especially if the economy weakened. Most had purchased homes they couldn’t really afford. As housing prices fell, homeowners could no longer sell their homes to pay their mortgages. These bad loans were the foundation of an international web of speculation on mortgage securities and financial contracts which were toppled by the housing collapse.
The catastrophe revealed weaknesses in the U.S economy. Savings had been outpaced by spending and reckless consumption. Financial regulators underestimated the risk and fell into a dangerous state of complacency that led them to forget the lessons learnt from previous crisis.
So will loan modifications solve the problem of millions of households that risk losing their home? Some might take advantage for them but most will have to look for alternative solutions. Ultimately we will all have to relearn the lesson that we need to save more than we spend to keep our head above water.
