A new study shows why restructuring mortgages and implementing a loan modification plan that works is harder than it seems.  Even though the foreclosure crisis is awful, there has at least been nationwide agreement on the best solution for foreclosure prevention: Get more mortgage lenders to modify the home loans of more homeowners. Whittling down the principal, interest or both should benefit all concerned: Homeowners get to keep their houses; lenders save the huge cost of repossessing and reselling a distressed homes; and neighborhoods avoid the appearance of dropping property values. It should be a win-win-win — which is why the Bush administration launched an effort to promote loan modifications and the Obama administration continued the expansion of loan workouts.   Even so, none of these loss mitigation programs has quite lived up to its promise. Under the Obama administration’s Home Affordable Modification Program (HAMP), the Treasury Department offered lenders up to $75 billion to help them defray the cost of reducing borrowers’ monthly payments to 31% of their incomes. It also enticed loan servicers with $1,000 for each modification, plus another $1,000 for each modified loan that is still performing after 3 years. The Obama administration estimated that as many as 4 million households would benefit. But after 4 months, only 350,000 borrowers have even been offered new home mortgages, just over half of which have gone into effect, according to the Treasury. . According to RealtyTrac 1,155,299 homes are facing new foreclosure filings from March through June,

FOX Video on Loan Modification for Preventing Foreclosures

It’s still too early to pass final judgment on HAMP. Cleary the program and others like it are struggling in part because of the rising rate of unemployment, which makes it impossible for many people to pay any kind of mortgage, even a more affordable one. No doubt, as critics of the financial industry suggest, many servicers have been slow to train enough staff to do modifications and investors in mortgage-backed securities pose a lingering obstacle.   But new research suggests that the mortgage loan modification effort may also be based on faulty economic assumptions.

According to economists at the Federal Reserve Bank of Boston, the win-win-win concept of mortgage modification understates two of lenders’ strongest incentives to foreclose. The first is that roughly 30% of troubled debtors eventually can pay without a loan modification; thus, for lenders, 30% of the total cost of the loan modification is wasted. And since lenders can’t know in advance which 30% will “self-cure,” they hesitate to offer any mortgage modifications.   The 2nd problem is the risk that homeowners re-default on a modified loan. By the time that happens, the value of the house has declined further, and foreclosure costs the lender even more than it would have earlier. The HAMP program includes $10 billion for partial protection against that risk, but it may not be enough, especially given the sour outlook for employment.

What are the chances of getting a loan modification through a company like Countrywide or WAMU if we are current on our mortgage?

Unfortunately most loan modification firms report better results from clients that were a few months late.  It may be simply that mortgage lenders do not see the need to modify or restructure a loan in which the borrowers are not delinquent.  With the foreclosure crisis moving down Main Street and hitting the prime credit homes, we may see these results change. For now distressed borrowers who are achieving better mortgage relief results because the mortgage lenders and investment banks do not want the deeply depreciated properties that will increase their loss even more.

Do you have to pay thousands of dollars to get a loan modification?

No, most mortgage lenders do not require borrowers to pay for a mortgage loan modification agreement. However, loan modifications can be complicated and most loan work-outs take 3-4 months to complete.  The mortgage companies have not invested the build the staff needed to keep up with the demand of funding loss mitigation departments during this foreclosure crisis.  Paying a law office or loan modification company a few thousand dollars to negotiate a new mortgage with lowered interest rates that potentially could save you hundreds of thousands of dollars is a small price to pay for such a significant financial gain.

Is Loan modification the best solution to losing a home to foreclosure?

Loan modifications have become the most popular choice for loan relief for homeowners.  It is not the only loss mitigation solution however.  Traditional refinancing has typically been rejected before applying for a loan modification. If you have a significant amount of equity left in your home, a foreclosure bailout loan may be an option to get your outstanding balance caught up, but the interest rate are usually high with hard money loans, so it would be more like a band-aid.  Short Sales can be effective if you absolutely can’t afford your home with or without the modification or maybe you believe that you’re home is so far underwater with your mortgage balance being so much greater than the property value that you would rather sell it short and move on. 

Is it lawful to charge homeowners money upfront to assist in negotiating a loan modification with the lenders loss mitigation department?

Foreclosure prevention has evolved into a big business.  With millions of delinquent borrowers facing foreclosure, the demand for negotiating services has escalated into a new type of loan origination.  Attorneys are allowed to charge for their legal advice in advance.  If you are working with a non attorney backed loan modification or real estate broker they are required to hold any money advanced in an escrow account until a loan modification is agreed.  Predatory lending laws are in the process of changes to protect homeowners against abusive practices from unscrupulous mortgage lenders.

If a loan workout is not achieved what are my other options?

Let’s face it; you don’t always get everything you want in the first stages of loss mitigation. Short sale, forbearance, and a deed in Lieu are several popular alternatives if a loan modification is not initially negotiated with the mortgage lender to check out.

Foreclosure relief plans, like loan modifications and forbearance continue to be called the best solution to tone down the rising foreclosure crisis.  The government want homeowners to be able to stay in their homes and weather the storms.  Clearly they will need significant participation from the mortgage lenders and investors that hold the mortgage notes. 

Federal Reserve Chairman Ben Bernanke said Thursday that the government must do more to address foreclosures.  Bernanke, speaking at a Fed conference in Washington, D.C., said that beyond just keeping homeowners in their homes, the Fed must continue to focus on foreclosure prevention to help stabilize the housing market and economy as a whole.  “The housing market remains central to the economic and financial challenges that we face,” Bernanke said. “Reducing the number of preventable foreclosures would not only help families stay in their homes, it would confer much wider benefits.”  The Fed chief says a revitalized housing market is key to economic recovery, and that foreclosure prevention deserves increased government attention.

According to Bernanke, about 15% to 20% of borrowers are “underwater” on their mortgage loans, meaning their homes are worth less than they owe. In addition, he said, 20% of sub-prime mortgage loans are seriously delinquent. Bernanke estimated that 2.3 million foreclosures will be initiated in 2008, compared to an average of 1 million before the mortgage meltdown.  Bernanke said the Fed, Treasury Department and Federal Deposit Insurance Corp. have already planned or put in place several measures aimed at stemming foreclosures.   The government has, among other things, cut mortgage rates and announced a plan to buy $500 billion of mortgage loan-backed securities and $100 billion of debt issued by government-sponsored mortgage financers Fannie Mae and Freddie Mac.But Bernanke said more can still be done and outlined several “promising programs.” One was FDIC Chairwoman Sheila Bair’s loan modification plan, which would lower mortgage rates, extend loan terms and offer government insurance against bank losses if borrowers who receive help end up in default anyway.   Another proposal includes strengthening the Federal Housing Administration’s Hope for Homeowners program by reducing the premiums paid by the lender. Bernanke suggested that Congress could give FHA home loans the ability to set premiums on a case-by-case basis rather than an across-the-board approach.