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Rethinking Needed on Loan Modification

I'm reblogging this post from a Vegas realtor because it succinctly summarizes the loan scenario and the general climate going on for those whose homes are now worth less than when they purchased them. Some markets are still moving in that direction. Others have been there for a year or more. Results seem to vary by the lender, but in general, the policies of most lenders do not appear to be helping those in distress.

maze light bulb manFixing the housing problem in Las Vegas and elsewhere throughout the nation is high on the growing list of priorities for new President Barrack Obama.  Recent piecemeal attempts by banks and the government to modify loans or delay foreclosure for specific groups of homeowners have not uncovered a way that will work for everyone - or a way that will satisfy every interest in the loans.

Investment bankers Credit Suisse reports that since the housing bubble burst, over 3 million homes have been lost to foreclosure while another 8 to 10 million more are headed that way over the next four years.  One in ten homeowners are in foreclosure or more than 30 days late with a payment - the highest delinquency rate on record.

Loan modification plans offered by both the government and private lenders have approached the problem by lowering payments and stretching them out, often at a lower interest rate. The theory behind the plans is that they will cost the lender less than foreclosure and reselling the home.  Lenders have been resistant to lowering the principle. 

Modern mortgage financing practices complicate things these days, as mortgage loans are usually pooled and sold to investors.   Loan service companies, who have no connection to the homeowner, manage the mortgage payments to investors.  Multiple classes of investors often have different claims on the same mortgage - and conflicting interests.  Some investors benefit more from foreclosure than from keeping the loan performing, so the loan servicing firms make out better when loans are in foreclosure than when loans are modified.

From the borrowers' standpoint, loan modification plans currently on the table fall short of being helpful.  The loan modification process is lengthy.  Some borrowers, especially those who vastly overstated their income, those whose job status has changed, or investors, may not qualify for refinancing options.  Unless the principle is modified, the payments on the modified loans are still too high for many borrowers.  Many plans use 38% of monthly income, a figure that consumes too high a percentage of income for most borrowers.  Some homes were purchased at an inflated price and financed with teaser rates; a modification to even 38% would stretch out the term of the loan far beyond what the lender would want to offer.  Recent figures from that Comptroller of Currency affirm that loan modification as currently implemented are often not a long-term solution;  of loans modified in the first quarter of 2008, 37% were 60 days past due within six months.

With homes prices still declining in most areas, some borrowers are reluctant to refinance a home that is continuing to fall in value, they see little hope of ever having equity, and easily yield to foreclosure or shortsale.  Programs like Hope for Homeowners that encourage the lender to write down the loan value to 90% of a home's market value require the homeowners to share any future equity with the government.  Hope for Homeowners was funded to help 400,000 but only 350 loans have been processed due to lack of enthusiasm for the disincentives to lenders and borrowers alike

As noted by Evan Wagner, a spokesman for Indy Mac Bank, loan modification programs seek to make a home temporarily affordable to borrowers - not good investments.  Once arrears, interest, and fees are tacked on to the mortgage balance, the consumer often owes as much or more than before but has longer to pay.  It's a tough sell for banks when the loan is "underwater" and the customer will still end up owing much more than what the home is worth.

With 3.8 million more mortgages expected to be 60 to 90 days past due by the end of 2009, the need for an effective solution only increases.

To search for your new home in Las Vegas, including bank owned properties available at great prices, contact your Prudential Americana Group Realtor® Yonas Woldu at (702) 236-8997 or visit www.VegasRealProperty.com. The N&Y team, lead by partners Nebi Adhanom and Yonas Woldu, is always ready to serve you.

Ron Margolis, RA, CDPE, ABR Hawaii Life Real Estate Services 808.346.7095 email: ron@hawaiilife.com

Comment balloon 0 commentsRonnie Margolis • January 29 2009 10:32AM