Loan Modification

More than Half of Completed Loan Modifications Re-Default; Why?

By Andrew

The latest federal report on loan modifications shows that loan modifications carried out from January to April 2009 had a re-default rate of 51.5%. Re-default is defined by the report as any modified mortgage that has pending payment that is 30 days or more late. The  same report highlights that re-default rates of modified loans in the last 12 months is 57.9%. This means that loan modifications are a) not doing what they are meant to; help people keep up with their monthly mortgage payments. And b) are getting worse at it.

Homeowners that have qualified for loan modifications are still struggling to make payments for a variety of reasons. Some have since lost their jobs, or their income has been reduced. Others simply do not see the sense in continuing to pay for a mortgage that is completely underwater. There are a lot people in that last category; around 24% of all homes with a mortgage on them were underwater in the last quarter of the 2009. The median price of a house in the United States has dropped by 28% since July 2006. It does not take a degree in Economics to see that loan modifications are just not working.

The question is why bother spending money on loan modifications that do not help homeowners keep their homes? A growing number of analysts are saying there is simply no rational reason to rewrite all these underwater loans. The number of homes facing a foreclosure is huge. The last quarter of 2009 had 2.39 million borrowers that were 60 days late on their mortgage payments, which is nearly a 50% rise from the previous year.

The pressure is on for the Obama administration to provide real solutions to the oncoming wave of foreclosures. Projections expect over 4.5 million foreclosure filings just this year. Some critics say the government’s current loan modification program is a disservice to the public, because it has extended the problem over years by helping homeowners, but not enough to make a real difference.

Of the 594,000 loan modifications that have started the application process from September to December process only 21,000 have received a permanent modification. In the entire lifetime of the HAMP program only 168,708 have received a loan modification, according to the Treasury’s own analysis.

Not surprisingly, owners whose mortgage monthly payments were reduced the most had the least chances of re-defaulting on their homes. The magic number of loan modifications seems to be 20%. When a loan modification reduces monthly payments by over 20% re-default rates dropped considerably.

One of the big issues that feed on this scenario is that many homeowners are underwater on their homes and are not interested in keeping their homes. They prefer to simply let them go back to the mortgage owner. Treasury has responded to this issue by creating HAFA, a mortgage aid for designed to get people to short sale their home. HAFA helps to fast track the short sale process by paying servicers, junior lien holders and borrowers to complete a short sale.

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Related posts:

1. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
2. Loan Modifications Are They Just A Big Scam
3. Loan Modifications, Hope, Lies and Misinformation

1. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
2. Loan Modifications Are They Just A Big Scam
3. Loan Modifications, Hope, Lies and Misinformation

Full post as published by Blown Mortgage on April 06, 2010 (boomark / email).