Why loan modifications don’t work

November 12th, 2008, 4:00 pm · 23 Comments · posted by Mathew Padilla

A handful of big companies are pledging to modify loans to make them more affordable for struggling homeowners. The companies include Citigroup, Countrywide, JPMorgan, Fannie Mae, and Freddie Mac. But in a story I just wrote, experts say the plans generally are flawed. Here’s a clip from the story:

Michael LaCour-Little, finance professor and co-director of the Real Estate and Land Use Institute at Cal State Fullerton, said none of the plans he has seen address what happens when there is a second mortgage on a property from a different lender. In such cases, which were common during the housing boom, it can be difficult to get the second-lien holder to approve a deal, he said.

A first-lien holder doesn’t need approval to modify the first mortgage, but would have to make a more drastic change in terms if the second-lien holder doesn’t cooperate.

LaCour-Little said a moratorium as proposed by Schwarzenegger could just delay foreclosures. And cutting interest rates on loans – which is key to most, if not all plans – may lower the monthly payment but the borrower can still owe more than the home is worth, he said.

“A lot of these programs look good on paper, but when you try to implement them you run into various problems,” LaCour-Little said.

Kurt Eggert, a law professor at Chapman University, also said proposals he has reviewed to modify loans lack sufficient teeth.

Perhaps the only thing that might work would be a strong federal regulator for loan servicers, as there are regulators of traditional banks, Eggert said.

Lenders generally sell most loans they make. That means the company that services a loan often doesn’t own it, and the interest of the servicer can differ from that of the owner.

Eggert said modifying a loan can be better for investors in mortgages than foreclosure. But sometimes it is easier and less costly for a servicer to foreclose, he said. Someone needs to monitor servicers to ensure they are acting in the best interest of investors, he said. That could be better for everyone.

Read the full story HERE.

My story included a map of third-quarter foreclosures per 1,000 homes by ZIP. The map below gets larger with each click.

And in other news…

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Lisa says:

November 12, 2008 at 4:40 pm

So, do loan modifications work better if the first and second are held by the same bank? Are banks more likely to modify if they hold both the first and second?

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BR says:

November 12, 2008 at 5:02 pm

As Tim Duy at economistsview.typepad.com says, those with loan mods are just glorified renters, paying more for rent than a comparable home for rent, who have little equity at stake from their homes and further, the home is likely to be upside down again soon.

Jill Borash says:

November 12, 2008 at 8:35 pm

What does not seem to be taken into consideration is that the housing market will improve and these houses will go back up in value. The thing that also does not seem to be addressed is that these are people’s lives you’re talking about. There are human beings living in these houses with hopes and dreams. What might not look good on paper for a bank can help save the American dream for thousands of Americans.

shadow735 says:

June 26, 2009 at 8:25 am

What you are forgetting is that the “American Dream” isnt something that everyone can afford. SO where is it stated that someone has to have a house, I have hopes and dreams as well but that doesnt mean I am entitled to a home. I dont own a home because I cant afford one.

Our society needs to move away from, you have to have a home to be successful. ANd move it to if you have a job, can support yourself, your kids and loved ones if need be and have food on the table then you are successful.

This implied idea that home ownership is a right is a joke. The USA used to be built on you work your butt off to earn the american dream, now its implied that you deserve the american dream and if you cant afford it then thats okay because big brother will bail you out.

If you want to help people, help those that have lost jobs becuase of those that reached farther then they should have.
Oh an banks are not non-profit corporations.

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nb1978 says:

November 13, 2008 at 12:05 am

What is exactly American dream ? Paying through the nose for a home ??

3rdBillygoat says:

November 13, 2008 at 8:52 am

Jill Borash:

Are these the same human beings who lied on their loan apps to take on a debt load way beyond their means (a federal crime)?

Are these the same human beings who got dollars from heaven plopped in their lap and which they proceeded to blow on consumer bullshit like SUVs, fancy home electronics, and vacations?

Are these the same human beings who get to live rent/mtg free for months on end?

Are these the same human beings who get to walk away from a huge pile of debt with no recourse that all of US will have to pay for; responsible and irresponsible alike?

Though some are decent folks just caught up in a bad situation, most others are certainly not and are getting away with a scam; just as bank execs, et al.

“Hopes and dreams”? How about greed and fear?

How convenient that you have an adsense splog that hopes to make a few bucks off showing people how to work loopholes.

SavingInLA says:

November 13, 2008 at 10:13 am

Jill BORAT - are you really that clueless

All stock owners also have hopes and dreams too should we help throw money at the stock market to inflate it back to a level where hopes and dreams can be restored. How about commodities - poor miners, farmers, and owners of commodities alike they are now hurting because the value of gold, copper, corn, wheat has plummeted. Let us return their hopes and dreams and give them free money too.

The bottom line is that most people are better off walking away…. that is right walking away. The only reason banks are modifying now is not to help people but they are hoping to appease current owners into staying in their homes.

We already heard the numbers yesterday - half of all homeowners in OC owe more than their home is worth. With prices headed down south the next two years the difference in what you owe and what your home is worth is only going to grow larger and larger. A bank refinancing your loan to 1% lower is not going to erase that … they are just hoping your foolish enough to say who cares if my home is now worth 400k and I owe 600k at least I can make my payments the next 3 years.

All I have to say is SUCKERS!!!!!!!!!

Something to consider. My brother’s neighbor was angry that his home had turned upside down. So he took action. Bought another home nearby and said he was going to rent his current house. As soon as he had his new home for 200K cheaper he stopped making payments on his old house.
While this shows a complete lack of responsibility and taking ownership for your decisions ……… without a doubt he will be personally better off.

mav says:

November 13, 2008 at 10:29 am

This article is correct, but it’s correct in a myopic way.

The more macro reason that loan modification don’t work is because our entire economy was based on debt spending.

Loan modifications destroy the debtor - creditor relationship that was the key to our debt driven economy. Loan modification are in essense deflationary. Not only do loan modifications deflate the underlying value of the asset, they simultaneously destroy future credit markets as investors can no longer trust the old debtor - creditor relationship that fueled our economy.

Liar Loan says:

November 13, 2008 at 11:16 am

This entry is too vague to support the thesis.

For one thing, modifications are as varied as the number of mortgage products out there. Some modifications are temporary, some are permanent, some reduce the rate, some freeze the teaser rate, some write off principal, some defer principal into a balloon payment, and so on and so on.

Secondly, once a 2nd mortgage gets an NOD, it will eventually be charged off, becoming a total loss for the holder of that loan. So it’s in the 2nd mortgage holder’s best interest to work with the senior note holder to get the borrower paying again.

Neither of the professors quoted has any experience with modifications, so they’re both basically talking out of their ass. If you want to present better evidence, use the report from the California Dept of Corporations posted a few weeks back:

http://mortgage.freedomblogging.com/2008/10/29/more-homeowners/2509/#comments

Or check out this report from the State Foreclosure Prevention Working Group, which provides a nationwide perspective:

http://www.csbs.org/Content/NavigationMenu/Home/SFPWGReport3.pdf

Lou Pacific says:

November 13, 2008 at 11:39 am

I think the real point that was missed is what are the number of successful loan modifications? Once the mod was done how long before the borrower defaulted on the mod? I can tell you it is very high.We need more time to sort through all the data.

Lou Pacific
Real Estate and Mortgage Company Consultant
Serving OC and the Industry for 30 Years.

November 13, 2008 at 1:18 pm

Jill,
Losing a home is better than throwing good money after bad, given that would be the eventual endpoint anyway. Besides, renting is not exactly a life sentence, it’s what many of us are doing all this while, patiently waiting on the sidelines. Lastly, if you sincerely want to help these people, I’d suggest you find ways to show the bank how it actually looks good on paper.

david says:

November 13, 2008 at 5:27 pm

So how does one save his home? I have a year left till My 1st and 2nd , go up. I will not be able to aford that payment. It seems like no one whats to help. I call the mortgage, they wont help, Call govt. they give you the run around. Be nice to see in the paper how people are getting help and how other people can read that……….

shadow735 says:

November 14, 2008 at 9:18 am

3rd BillyGoat you hit it on the head there.

Jill we all know that these are people but losing a home you cant afford (or that you dug yourself upside down due to using your home as an ATM or only paying the min amt for pmts) They can always rent, losing a home doesn’t mean your a homeless bum.

It used to be that you had to work hard to achieve the American Dream. But in today’s society of get it now pay for it later. The work has been removed and people get it now while other pay for it later, as well as the borrowers pay in the form of screwed up credit.

Mods will only work if Principle and interest are cut, you cant roll the default to the back of the loan on a house you cant afford in the first place, You are only postponing the inevitable..

David sad to say but I do know what you are talking about and all I can say is it is a training issue, best thing for you to do is file a complaint (I forget who it is you do that with can anyone post that info?) as it is, these issues are being addressed by mortgage companies and hopefully things wil start approving. Its just a matter of time.

mortgagemaker says:

November 14, 2008 at 9:20 am

Loan Mods wont work in CA, NV, AZ of FL. Why? Simple, how can there be a true market value if you modify loans that should be on the market as a foreclosure? You can’t. All it is going to do is delay the free market process. Its simple math. A lender modifys the loan based on a market value that comes from what? Minimal sales in an area that should have another 1000 foreclosures on the market. So, all they are doing is again giving money out on bad collateral, that will continue to have to be modified until its foreclosed. A much better idea would be to loosen up the guidelines for FHA and FNMA purchase loans for people with previous foreclosures. its basically the same thing, but one will get us a true market value and the other will only delay the process longer and longer.

November 14, 2008 at 10:19 am

mortgagemaker-

Mods are generally qualified on a borrowers ability to pay. (Usually after they hit 90 days late). The market value isn’t even a consideration, so I think your point is a bit off. Some borrowers may walk because they’re underwater, but many won’t because they want a home to live in, not equity on their balance sheet.

November 14, 2008 at 12:52 pm

You make my point. Mortgage loans are collateral loans. Not credit loans or the ability to pay loans. The #1 part is the collateral. Why is that the #1 part, because if the borrower doesnt pay the bank they can still get the money back…….. Modifying someones loan doesnt make it a good loan for business, it is charity that the buyer still will eventually not pay and the bank will still be stuck with the foreclosure. Why delay the inevidable? Just foreclose on it and sell it at market price so we can turn this economy around. Like I said, go ahead and let people that have a foreclosure buy another house right away if the government wants, but modifying is a waste of time and it wont bring new buyers to the table, which is what we really need to have happen.

November 14, 2008 at 12:54 pm

anyone who needs a mod is not even subprime

they are not credit worthy at all

and there in lies the problem

Louis says:

November 14, 2008 at 3:03 pm

tale of a responsible borrower: joe, bought a home for 500,000 and wanted to make sure could afford the payments, so he put down a $100,000 of his hard earned savings to ensure the payment was affordable…….market plummeted, now the home value is worth $300,000 making his loan $100,000 upside down, not to mention the $100,000 down payment.

His fricken neighbor, bought at the same time, and same price, but with zero down, and on a stated income, with a ARM and is also upside down a total of $200,000 and can either walk away….or get it modified to a 38% debt ratio of his “actual income” (stated income was more) and at a better rate that Joe………who no one is willing to help out…………

Is this a bunch of B..S..! or what???

fcprop says:

November 18, 2008 at 8:30 am

Here is the truth of loan mods: “DIY” Do It Yourself. It’s free. And you will have legal recourse if the Lender/Servicer does not co-operate. Just remember to send everything Registered Mail! So that someone signs for it. Just send in the signed 1003 with the Loan Mod request specifying the originators name and that you are providing full financial disclosure to reconsile. If the loan was “Questionable” in its processing/application accuracy well then you and the bank were bamboozeled. But if you cant show hardship “legitimatly” then forget it because.

1. 30 yr fix loans dont get adjusted
2. Divorce is voluntary and common law/seperation has no clout.
3. I/O is not an excuse
4. Undocumented borrowers (ITIN) can and will not be acceptable for either GSE or FHA. Even if there is a co-borrower.
5. If you took out cash in the last 12 months forget it.
6. You listed and cant sell and it is still listed.OMG
7. If you own more than 1 property

Jennifer says:

June 25, 2009 at 11:42 pm

We have a 30 year fixed, applied for modification when job loss created 50% of original income,we were denied, bank ignored us, we stopped paying, , bank paid attention, we were modified.

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rita says:

November 18, 2008 at 10:59 am

THE AMERICAN HOME OWNERS DREAM HAS TURNED TO THE AMERICAN HOMEOWNERS NIGHTMARE

Ruth says:

November 18, 2008 at 12:42 pm

To Saving in LA:
Your neighbor is what has started the latest twist in trying to get a mortgage and that is called “buy and bail” Both FHA and FNMA now have this policy and it does not allow anyone to show rental income if the home is upside down and does not have at least 25% equity. So now, even legitimate borrowers may not be eligible due to irresponsible people like your neighbor. They are just perpetuating the downturn…

dreamluverz says:

May 13, 2009 at 11:28 pm

This is interesting. I’ve been looking for info about loan modification and if it really works. Thanks for sharing.

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