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New Modifications: Nonsense or Does It Make Sense?

Last week ended with a somewhat surprising announcement that the administration has decided to offer an addition to their modification program called Making Home Affordable Program Enhancements to Offer More Help for Homeowners. The new enhancements look to give relief to people who are unemployed and those approaching 20% negative equity in their homes. Why this change in course now?

The current modification program is failing.

This announcement comes on the heels of two reports, which strongly suggest that the current modification program has done little to address the challenges of current homeowners who are rapidly falling behind on their mortgage payments.

The first report was released by Neil Barofsky, the Treasury’s Special Inspector General for the Troubled Asset Relief Program. In a Reuter’s article on the report it was noted that:

When HAMP was launched in the first few months of 2009, Treasury proclaimed the program would help up to 3 million to 4 million at-risk homeowners avoid foreclosure…In its latest monthly report, Treasury said there were 1,003,902 active loan modifications through February and 168,708 of those have been made permanent.

Instead of 3-4 million people avoiding foreclosure so far we have less than 200,000 receiving a permanent modification.

The second report was released by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. In the report it was pointed out that the re-default rate of those receiving modifications is over fifty percent. As Bloomberg News reported:

The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.

So we can see that the current plan is failing. Why?

The reasons people are falling behind have changed

The previous modification program was set up to help people who were having difficulty with their payments because they had a mortgage (subprime) they never should have been offered or taken. Bad mortgage choice is no longer the main reason people are unable to keep up. Unemployment and negative equity are now the major forces driving delinquencies. The modification program needed to change.

In a CNBC report mortgage analyst Howard Glaser said it best:

“They (the administration) have recognized that the complexion of the mortgage crisis has changed. This is no longer about risky subprime loans—it’s about home value declines that have made default a rational economic choice for homeowners.”

Glaser emphasized the importance of targeting the jobless and borrowers whose homes are worth less than they owe—so-called “underwater” mortgages—and said the administration’s new efforts would help stabilize the housing market.

Do the new ‘enhancements’ help people in these categories?

The new enhancements cover both of these categories of default. From the administration’s announcement:

Unemployed borrowers meeting eligibility criteria will have an opportunity to have their mortgage payments temporarily reduced to an affordable level for a minimum of 3 months, and up to six months for some borrowers, while they look for a new job. If homeowners don’t find a job before the temporary assistance period is over or if they find a job with a reduced income, they will be evaluated for a permanent HAMP modification or may be eligible for HAMP’s alternatives to foreclosure program.


Alternative principal reduction allows some underwater homeowners to reduce principal balance of their mortgage in steps over three years, if they remain current on payments.

Does this make sense?

Most people would understand the argument that a person who has lost their job to no fault of their own should be shown leniency and if possible be given some sort of assistance. The trickier question is why should we give relief to people simply because their house has fallen in value and now they might be more apt to ‘walk away’ because of this negative equity. And isn’t principle reduction a strong response to the situation?

Why negative equity is such a problem

The reason negative equity (where the mortgage is higher than the value of the home) is crucially important is because studies have shown that once a person reaches 20% negative equity the chance of them no longer paying their mortgage surges.  Here is the consequence if that continues to happen:

If we don’t stop homeowners from falling further into negative equity, there is no telling where prices will eventually bottom out. That is why the administration is addressing this issue – in order to stop the cycle.

Will banks agree to principal reduction?

They will not be required to. However, before the administration’s announcement, Bank of America had already announced their program to reduce principal. And the Mortgage Bankers Association issued a press release in which they said:

As the causes of the problems in the housing market have evolved, it is only right that we should find new workable solutions to help troubled borrowers.   As the industry worked its way through the problem of subprime borrowers who could no longer afford the mortgage they had taken, it became apparent that the emerging challenges lay with borrowers who had lost their jobs or seen a significant drop in household income.

Last fall, MBA brought together a task force of its members to look at ways to help those borrowers.  In February, we presented a proposal to the administration that would enable loan servicers to offer forbearance as part of HAMP, reducing payments to an affordable level for up to nine months for those borrowers who had suffered a reduction in household income.  We are pleased to see that the administration’s plan incorporates some of the components of that proposal.

What does this mean to you?

A housing recovery will not happen until we get a handle on the foreclosure issue facing this country. We have not heard the last in regard to finding ways to avert the millions of foreclosures predicted to come to market over the next few years. Our hope is that some of these ideas prove to be a true solution.

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3 replies

Trackbacks & Pingbacks

  1. […] One of the reasons the administration is trying to curb the effects of delinquencies and foreclosures is to stop the downturn of home values. As the values continue to drop, there are more homeowners who become at risk of a short sale. Unless the trend is curbed, equity in homes will continue to be lost. Last week, a new effort was made to assist more homeowners with mortgage modifications. […]

  2. […] yesterday’s blog, I covered the reasons the administration’s new modification program could make sense. Today, I […]

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