Loan Modifications Increase, but so do Foreclosures

In a noble effort to stem the rising tide of foreclosures, “President Obama’s Making Home Affordable program is attempting to help as many as 9 million U.S. homeowners refinance or modify their home loans.” The program has already proved to be a huge hit among homeowners, which have rushed to banks to take advantage. The US Treasury Department, armed with $75 Billion, is also doing its part to make sure that lenders are properly incentivized.

In the month of April alone, 127,000 mortgages were modified. If you include repayment plans (categorized separately from loan modifications for statistical reasons), the number rises to 270,000. Bank of America alone – via its now-defunct Countryside Financial unit – has already logged 50,000 modifications, with another 350,000 remaining- if it fully honors the terms of a legal settlement, that is.

Loan modifications work as follows:

“To qualify, mortgage holders must be an owner-occupant of a one- to four-unit property. The loan must have been originated on or before Jan. 1 and has an unpaid principle balance of no more than $729,750 for one unit properties –higher limits apply to multiple units. The mortgage payment must exceed 31 percent of gross monthly income, and the payment is not affordable because of a change in income or expenses.”

Once the terms are met, “Borrowers must make three months of timely payments before they qualify for federal aid, which will keep their interest rate as low as 2 percent for five years.” Participants are naturally advised both to be on the lookout for scams and to be aware that loan modification is not a given, and that in most cases lenders will only reluctantly agree to do so.

The unfortunate contradiction in this program is that for most homeowners, a loan modification does not get to the heart of the problem; home values have fallen so much and economic conditions remain so abysmal that a slightly lower monthly payment isn’t ultimately enough to make a difference.

According to Fitch Ratings, a “conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change.” Sure enough, the record number of loan modifications has also been accompanied by a record number of foreclosures, with “3.85% of all mortgages somewhere in the foreclosure process at the end of the first quarter, compared with 3.3% in the fourth quarter.”

Still, qualifying homeowners need not be discouraged. The flip-side of this grim statistic is that 25% of homeowners avoided foreclosure in the near-term after modifying their mortgages, right? I would encourage you to check out Making Home Affordable, HUD, and the Homeownership Preservation Foundation for more information and/or to see if you qualify.