Mortgage Modification Programs with Good Intentions

Many of the mortgage loan modification programs that begun later also have faltered. One loan mod program intended to help at least 500,000 has helped just a few hundred a year after its launch. Another initiative to extend $1 billion to help the jobless or underemployed avoid foreclosure ended in September, obligating less than half of its funds. The money that was not distributed had to be returned to the U.S. Treasury.

As of November 30, the government had spent just $2.8 billion of the $46 billion war chest it had in 2009 to devote to the housing crisis, the Treasury Department says. More has been committed, but only $13 billion will ultimately be spent, the non-partisan Congressional Budget Office estimated in March.

The Obama administration announced new guidelines with the HARP 2.0 that promised no Loan to Value restrictions. This home refinance program is only available to underwater borrowers who happen to have a mortgage owned by Fannie Mae or Freddie Mac.

Meanwhile, 2.5 million homes have been lost to foreclosure since 2009, an additional 4 million are in the home foreclosure process or seriously delinquent and home prices are still falling in much of the U.S., shrinking household wealth for millions of Americans. “Every loan modification program has fallen far short of goals. I can’t think of one that’s been largely successful,” says John Dodds, director of the Philadelphia Unemployment Project, a nonprofit that’s been involved in foreclosure prevention for decades.

The Obama administration’s programs were hampered by failed refinance options and loan modification program flaws, their reliance on a home loan industry overwhelmed by the fallout from a historic collapse in home prices and a brutally extended housing downturn. Nor could they always overcome the conflicting interests of borrowers with too much debt, mortgage lenders unwilling to surrender profits and home loan servicers with sometimes greater financial incentives to foreclose on loans.

Today it is difficult to qualify for home refinancing unlеss уоu hаvе sоmе equity іn thе property. Ноwеvеr, іn 2009, thе United Ѕtаtеs federal government announced а nеw initiative called thе Making Ноmе Affordable Program (MHAP) thаt aims tо help struggling homeowners refinance thеіr houses еvеn іf thеу hаvе nо equity. Undеr thе plan уоu саn refinance уоur hоmе еvеn іf уоu hаvе negative equity, also known as an underwater mortgage. For the most part, banks have been pretty good about offering mortgage help to struggling homeowners.

Underwater Home Loan Refinancing

When уоu borrow money аgаіnst уоur hоmе, уоur lender secures thе debt bу placing а lien оn уоur property. Іf уоu fail tо repay thе money, уоur lender саn foreclose оn уоur hоmе аnd sell іt tо raise funds tо pay оff thе mortgage. Legal fees саn quісklу mount uр durіng thе foreclosure process, аnd bесаusе thе costs involved аnd thе risk thаt уоur property vаluе mау fall, lenders typically dо nоt allow уоu tо borrow 100% оf thе house vаluе whеn considering a refinance. Ноwеvеr, bесаusе оf thе housing crisis thаt continues to plague our economic recovery, thе government decided tо intervene аnd encourage lenders tо offer unconventional refinance loans аnd loan modification agreements.  Back in 2009 and 2010, loan modifications were more accessible. Today, many of the lenders have tightened their mortgage modification requirements.  Lenders like Chase continue to provide loan modifications in high volumes but banks like Wells Fargo wants to avoid re-defaulting situations that have been occurring at a high rate.

The government-sponsored Fannie Mae аnd Freddie Mac buy thе majority оf thе home mortgage liens written іn thе United Ѕtаtеs. Аs раrt оf thе Ноmе Affordable Refinance Program (HARP), bоth entities offer refinancing solutions tо people whоsе liens thеу hold. Wіth а HARP mortgage, а homeowner саn refinance аn existing mortgage еvеn іf thе nеw loan amounts exceeds125% оf thе property vаluе. Initially, the Home Affordable Refinance would cap the loan to value restictions at 125%, but last month the Obama administration announced sweeping reforms with new HARP guidelines in an effort to extend more payment relief to homeowners that were struggling nationally because of their underwater mortgage. Unfortunately, yоu are not allowed to refinance уоur loan undеr HARP іf уоu hаvе а government insured mortgage, suсh аs а loan backed bу thе Federal Housing Administration (FHA) оr Veterans Affairs (VA).

TARP Watchdog Says Loan Modification Plan Is Failing

Scores of homeowners aren’t getting help they qualify for, says Neil Barofsky, who is stepping down. The HAMP loan modification program was designed to lower interest rates and mortgage payments for struggling homeowners, and it has worked for around 600,000 people across the country. But critics say it should be reaching a lot more people. As lenders continue to tighten refinance loan guidelines, more and more homeowners will be in need of mortgage relief.

There are “3.3 million families who might have been reached by this program if only it had been better designed, better managed and better executed by the Treasury department,” said Neil Barofsky, the special inspector general installed to oversee the government’s bank bailout efforts. Speaking at a House hearing Wednesday, Barofsky responded to questions from North Carolina Republican Rep. Patrick McHenry, who recently introduced the legislation that would end the program. [There are] 3.3 million families who might have been reached by this program if only it had been better designed, better managed and better executed by the Treasury department.

www.youtube.com/watch?v=cnIKEP6H5FA

A recent Nation Public Radio article revealed some interesting insight. TARP special inspector general, gave his thoughts regarding the Home Affordable Modification Program. Neil Barofsky has been critical of the Treasury department for not doing more to make the program work better and reach more people, and for not offering a current estimate of how many homeowners the program will actually reach. “It is somewhat shameful that at this point — here we are in March 2011 — and the Treasury department will in one breath say that, ‘Well, we know the number is not going to be anywhere close to what we originally said it would be,’ ” Barofsky said, “and then in the second breath refuse — I mean, this is such a basic failure in transparency, to refuse to tell you what their expectation is as to the total number that are going to receive permanent modifications. It evades accountability, and it’s trying to cover up a program that is clearly a failure.”

The Treasury department and Barofsky both agree that the banks and mortgage service companies have not been doing a good job.  Barofsky said. “But Treasury has done nothing to punish or penalize these loan servicers.” It would cause a huge amount of damage to a very fragile housing market and leave hundreds and hundreds of thousands, if not millions, of Americans without the chance to take advantage of a loan modification programs that enable homeowners to keep their homes.

Treasury Secretary Timothy Geithner said it would “cause a huge amount of damage to a very fragile housing market and leave hundreds and hundreds of thousands, if not millions, of Americans without the chance to take advantage of a mortgage modification that would allow them to stay in a home they can afford.”

According to NPR, Barofsky was critical, but did not of call for the Home Affordable Modification Program to be eliminated. Instead, he has long called for the Treasury to fix the program so it will help more people.

In a recent report, the Congressional Oversight Committee admitted the government’s HAMP loan modification program has failed to help enough homeowners to correct the housing crisis. The vast majority of loan modification requests fail, in part, experts believe, because banks have balked at offering a reduction in mortgage principal, the most effective way to halt costly foreclosures. Fannie Mae and Freddie Mac immediately proclaimed, however, that they remain opposed to making this option available to struggling homeowners. Protecting the interests of the banking industry over the consumer, the Federal Reserve also blocked new foreclosure regulations that would have reined in foreclosure abuses.

Although the economic collapse of 2008 has caused the tide to rush in on everyone, there has been no bailout for the “little guy.” Left to fend for themselves, increasing numbers of homeowners are turning to a little-known provision in the federal bankruptcy law, which permits the discharge of a second or even third mortgage in its entirety in a Chapter 13 bankruptcy. The American Bankruptcy Institute recently reported that Chapter 13 bankruptcies have risen by 9 percent in 2010 compared to last year.

Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can’t afford and can’t sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what it used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law — at least in most states — permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy. Read the original Huffington Post article, written by Richard Gaudreau.

Friday’s report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say.  More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year.  “The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody’s Analytics.  Besides forcing people from their homes, foreclosures and distressed home sales have pushed down on home values and crippled the broader housing industry. They have made it difficult for homebuilders to compete with the depressed prices and discouraged potential sellers from putting their homes on the market.

Obama Mortgage Relief Helps Some Homeowners

Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government loan modification program have been cut loose through July, according to the Treasury report. That’s about 48 % of the those who had enrolled since March 2009. And it is up from more than 40 % through June.  Another 421,804, or roughly 32 % of those who started the program, have received permanent loan modifications and are making their payments on time.

RealtyTrac reported that the number of U.S. homes lost to foreclosure surged in July to 92,858 properties, up 9 % from June. The pace of repossessions has been increasing and the nation is now on track to having more than 1 million homes lost to foreclosure by the end of the year. That would eclipse the more than 900,000 homes repossessed in 2009, the firm says.  Lenders have historically taken over about 100,000 homes a year, according to RealtyTrac.

Zandi said the government effort will likely end up helping only about 500,000 homeowners lower their monthly payments on a permanent basis. That’s a small percentage of the number of people who have already lost their homes to foreclosure or distressed sales like short sales – when lenders let homeowners sell for less than they owe on their mortgages.  Zandi predicts another 1.5 million foreclosures or short sales in 2011.  “We still have a lot more foreclosures to come and further home price declines,” Zandi said. He said home prices, which have already fallen 30 % since the peak of the housing boom, would drop by another 5 % by next spring.  Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork.

The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.  Obama officials dispute that they pressured banks. They have defended the program, saying lenders are making more significant cuts to borrowers’ monthly payments than before the program was launched. And some of the largest mortgage companies in the program have offered alternative programs to those who fell out.

Homeowners who qualify can receive an interest rate as low as 2 % for five years and a longer repayment period. Those who have successfully navigated the program to reach permanent modifications have seen their monthly payments cut on average by about $500.  Homeowners first receive temporary modifications and those are supposed to become permanent after borrowers make three payments on time and complete all the required paperwork. That includes proof of income and a letter explaining the reason for their troubles. But in practice, the process has taken far longer.  The more than 100 participating mortgage companies get taxpayer incentives to reduce payments. As of mid-June only $490 million had been spent out of a potential $75 billion the government has made available to help stem the wave of foreclosures

Under-Water Home Mortgages

www.youtube.com/watch?v=VCgKkjNqlm0

Zillow published a recent report that indicated that more than 20% of U.S. mortgage loans are currently underwater.  This is one of the reasons why so many banks are extending loan modification plans in such a great volumes.  The mortgage lenders are focused mostly on modifying mortgages for homes in these distressed states.  Besides, very few of borrowers in Arizona, California, Florida and Nevada qualify for fixed rate mortgage refinancing.

Miami-Fort Lauderdale property values saw a year-over-year decline of 15.2%, while values in Phoenix, Arizona, fell by 11.8 %. Despite the high percentage of negative equity, the 2^nd quarter rate 21.5% is actually lower than from the 1^st quarter figure of underwater home mortgage loan, which was reported at 23.3 %. However, some areas that benefit from both state and federal tax credits have seen home values increase, the report shows. For example, the state of California saw values rise by 27.8 %, marking five consecutive quarterly increases.

Economists continue to examine the devastation that underwater mortgage loans have influenced.  They like this study because it remains a strong indicator of forecasted home foreclosures. In addition to not being able to afford home loan payments, some homeowners who are unable to modify their mortgages are strategically defaulting on their home loans.  This means that they are walking away from their homes and letting the bank repossess their property.  “It is the paramount challenge facing housing markets,” Zillow’s chief economist Stan Humphries told Reuters. “We already have had record levels of foreclosure and, combined with high unemployment, negative equity is very toxic to the market.”

Though fewer Americans are strategically defaulting on their mortgage loans, foreclosure rates continue to increase with RealtyTrac reporting a first-quarter foreclosure rate of 1.65 million. Analysts project that the number of mortgage defaults, repossessions and scheduled auctions are likely to reach 3 million by the end of the year

The housing department hasn’t set a deadline for a decision, said Lemar Wooley, a spokesman.  According to Anthony Hsieh, CEO of LoanDepot.com, an online mortgage originator based in Irvine, California, the process costs $3,000 to $6,000 to train and pay the fees for each new employee to comply with the mortgage-licensing system. “The mortgage reform law is supposed to make sure we kick the bad ones out,” said Hsieh. “It could be the opposite, keeping the good loan officers out.”