Consumer Law

Loan modifications: still not happening

By Alan White

by Alan White
Hundreds of thousands of homeowners facing foreclosure are calling mortgage servicers in the hopes of negotiating a solution to keep their homes. What happens when they call? The news is not good.

Moody?s rating agency reported in August that only 1% of mortgages facing rate resets and payment shock in 2007 had been modified. In a November update, Moodys now reports that number has increased?to 3%. The survey covered twelve servicers with 60% of the subprime market. Of all subprime mortgages scheduled for an interest rate reset (i.e. a payment increase) in the first eight months of 2007, and not already prepaid, about 50% were current in payments, and the other half were delinquent, in foreclosure, or already foreclosed.

The Moody?s survey confirms that the foreclosure crisis will get worse before it gets better. For one thing, throughout 2007 many borrowers facing reset were still able to refinance or sell their homes, but that exit is rapidly closing. Of all loans due to reset in the first quarter of 2007, 29% were paid off in the six months before the reset, and 13% were paid off after the reset. For resets in August 2007, 21% were paid off in the six months before reset, and only 4% were paid off after the reset. The combined effect of falling home values and the end of subprime lending as we know it will surely shut down prepayments even further in 2008.

The rating agency report expresses concern that servicers do not have the staff and resources to work out defaulted loans on the massive scale that will be required in the coming year. This concern has been expressed elsewhere.

When homeowners do reach the servicer, they are often put on short-term repayment plans, typically calling for increased payments over a short period of time, instead of having their loans permanently modified. The Moody?s survey found that 10% of active loans with 2007 resets were on repayment plans, compared to the 3% that were modified. Servicers are motivated to offer unrealistic repayment plans because A) the plans can mask delinquency rates and make the monthly report numbers look better and B) unlike loan modifications, repayment plans are not restricted or capped by securitization contracts.

The state of Maryland has proposed new rules mandating that servicers report in detail on their foreclosure prevention activities including loan modification statistics. A little sunshine may prod these companies into helping more homeowners. The Moody's study was done before the announcement of the Paulson plan to modify loans a little more systematically. But it will probably take more than public scrutiny and the Paulson plan before subprime servicers will invest the staff, money and time needed to deal with the growing crisis.

Full post as published by CL&P Blog on January 16, 2008 (boomark / email).