Loan Modification

Underwater Mortgages and the Science of the Perfect Loan Modification

By Andrew

Loan Modifications have taken over the financial news in the last year. This is not at all surprising, with over 11.3 million people, nearly 25 per cent of all homes, with underwater mortgages; this is an issue that has the nation?s attention.

This makes any research into the issue of loan modifications and their effect on foreclosure of great interest to borrowers, banks, and the government.

One professor whose research has received a lot of attention is Sanjiv Ranjan Das, from the University of Santa Clara in California. Last year Das attacked the underwater issue, this refers to borrowers whose mortgage balances are larger than the market value of their homes. The underwater issue is one of the big problems the United States housing market has to deal with.

Professor Sanjiv Ranjan Das had a large and interested audience to his research; one big fan was his namesake Sanjiv Das, a top executive at CitiMortgage, the fourth biggest bank in the US, lender and servicer of over seven hundred billion dollars in mortgages.

Interestingly, these two men, one a professor and the other a banker, share more than just a name. Not least among the things they have in common is an education at the Indian Institute of Management.

Now they are working together on research that seeks to explain the behavior of borrowers that are stuck with underwater homes, unemployment and mortgage payments they cannot afford.

Interestingly the partnership between the two Das, began when the professor started receiving emails meant for the CitiMortgage Das. However, the accidental emails were great for the research of Santa Clara?s professor.

According to Das? research the perfect or optimal loan modification includes an element of forgiving some of the balance in the loan. This is not easy for bankers to accept. Reducing the balance of the loan increases the speed at which the bank must accept losses and there is the added fear that it will create a counterproductive culture among borrowers.

However research has shown that re-defaulting on mortgages is much higher among borrowers that do not receive a reduction of their mortgage balance. This is because having an underwater home, a house with negative equity, makes many homeowners feel there is no financial sense in keeping their homes. However, when a principal reduction is carried out, even if only a modest one, re-defaulting on mortgages is sharply reduced.

Nevertheless lenders still shy away from this radical loan modification method and prefer using interest rate reductions and term extensions to reduce the monthly payments of troubled homeowners.

The good news is that the research carried out is getting the attention of the right people. The more is studied about the effects of income shock, or wealth shock, on troubled borrowers the more effective loan modifications and debt management as whole will be.

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Related posts:

1. Loan Modification Alternative by CitiGroup: Refinancing 30 Year Fixed Rate Mortgages
2. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
3. Loan Modification Alternatives: Wells Fargo Interest Only Loans

1. Loan Modification Alternative by CitiGroup: Refinancing 30 Year Fixed Rate Mortgages
2. Foreclosure Re-default Drops by 26.5 When Loan Modifications Reduce Loan Balance
3. Loan Modification Alternatives: Wells Fargo Interest Only Loans

Full post as published by Blown Mortgage on March 04, 2010 (boomark / email).