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December 2018
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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.

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Chase announced today that it has extended its mortgage modification efforts to their mortgage loans that are owned by investors that it services — about $1.1 trillion of home mortgages — significantly expanding the outreach and effectiveness of the mortgage relief announced previously with their mortgage modification programs. Chase now owns WAMU, so the number of loan modifications possibilities is staggering.  These foreclosure prevention efforts include investor-owned home loans held in securitizations.

Based on the company’s review of investor agreements and its experience with investors and trustees to date, Chase has made the decision that they can legally restructure loans with loan modifications of the majority of mortgage loans owned by investors consistent with the relevant investor agreements and the best interests of investors and intends to offer loan modifications where their loss mitigation department deems appropriate. Chase will continue to seek investor approval in the small number of situations where investor agreements contain specific terms that may limit modification actions Chase can take. “Building on our loan modification efforts for Chase-owned mortgage loans, we have reviewed closely the terms of our investor agreements and have worked with investors, trustees, government officials and other interested parties to fashion an approach to foreclosure prevention efforts that will work for investors and homeowners,” said Charles W. Scharf, Chief Executive Officer for Retail Financial Services at Chase.

“When homes are foreclosed, everybody suffers, so working aggressively to modify all home loans -whether owned by Chase or owned by others – on terms that should work for the borrower, makes good sense for everyone,” he said. “Our experience at Chase shows that when home loans are properly modified, using income verification and other appropriate qualifying criteria, they perform very well over time.” Chase announced enhanced foreclosure prevention efforts on October 31, and the company now has in place the people, programs and tools to help more borrowers remain in their houses. Since early 2007, Chase has prevented about 330,000 foreclosures, primarily by modifying loan terms. Since its October announcement covering Chase-owned loans, Chase has accomplished the following below:

o Delayed starting foreclosure on over $22 billion of Chase-owned mortgages of more than 80,000 homeowners so that Chase could review those home loans for possible mortgage modification under the enhanced program.

o Implemented the previously-announced, more attractive package of loan workout offers for delinquent homeowners.

o Finalized for mailing in early February proactive mortgage relief offers to borrowers of Chase-owned loans at imminent risk of default.

o Selected locations for 24 Chase Homeownership Centers in areas with a high rate of foreclosures and loan delinquencies where counselors can work face-to-face with struggling homeowners. Two of the centers are now open; 12 are expected to be open by Feb. 28; and the remaining 10 are scheduled to open by mid-March.

o Added 300 new loss mitigation counselors in the last 11 weeks to provide better help to troubled borrowers, bringing the total number of counselors to more than 2,500.

o Initiated an independent review process to ensure each borrower was contacted properly and offered loan modification plans prior to foreclosure, if appropriate.

o Developed a robust financial modeling tool to analyze and compare the net present value of a home in foreclosure to the net present value of a proposed loan modification; use of this tool will allow Chase to determine that it is acting in the best interests of investors when making loan modifications.

o Worked to help establish a non-profit clearinghouse to join Chase and other mortgage lenders who want to donate or discount their owned real estate with the non-profit and government agencies that can use these properties. Chase is continuing to work with individual non-profit and government agencies; to date, Chase has completed five donations and has 47 discounted sales pending.

o Worked with Fannie Mae and Freddie Mac to implement their new Streamlined Modification Program for borrowers at least 90 days delinquent; 19,000 letters were mailed in the last week of 2008.

Chase continues to work with Fannie Mae to implement Fannie Mae’s previously announced program to assist distressed homeowners in an effort to minimize loan defaults and foreclosures. Through the initiative, Chase believes it will be able to meaningfully increase the number of homeowners it can help.

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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.

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