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Sunday, Apr 21, 2024

Banks Under-Performing in Home Loan Modifications

Notices of default and home foreclosures continue to be a sore spot in the state of California. According to a recent survey, big banks are falling short when it comes to working with borrowers to modify their troubled debts. “In general we’ve felt for a couple of years that banks were not doing enough to keep people in their homes, even though they were saying the opposite,” said Kevin Stein associate director of the non-profit California Reinvestment Coalition, which conducted the survey. “People are getting lost in loss mitigation.” The group surveyed non-profit mortgage counseling agencies who served 14,796 struggling homeowners statewide in March 2009. It found that 54 percent of counselors reported foreclosure is the most common outcome for clients, and 18 percent reported loan modification as being “very common.” In April 2009, there were 2,140 notices of default in the San Fernando Valley, up 37.2 percent from 1,560 a year before. For the same period there were 359 foreclosures, down 41 percent from 608 the year before. Foreclosures peaked in the Valley at more than 900 in August 2008. “We’re concerned about the state and San Fernando Valley because they’re disproportionately represented in the foreclosure crisis (nationwide),” said Stein, adding California got hit especially hard by decreased property values and a large number of subprime loans. Borrowers trying to avoid foreclosure were often caught in problematic loans and experiencing family financial distress, said the survey. More than 80% of responding counselors cited underwater clients, option ARM loans, and change in family income. The report said even when loan modifications occur most servicers are offering short-term solutions of one or two years. These modifications are not sustainable for the long term, said the group, and may just defer foreclosure. The five servicers most often cited as difficult to work with were: Wachovia/World Savings (now owned by Wells Fargo); Wells Fargo and ASC, a subsidiary of Wells Fargo; Countrywide (now owned by Bank of America); Litton; and Washington Mutual (now owned by JPMorgan Chase). Counselors reported servicer’s procedures were often unclear; they lost authorizations; offered inconsistent information; failed to communicate internally between departments; and made numerous errors. To add insult to injury, the California Department of Real Estate (DRE) has issued a consumer alert about loan modification scams. Last July, the DRE had fewer than 10 complaints involving loan modification companies; today it has 750 pending investigations. Nationally, progress on the issue is mixed. During the first quarter of 2009, servicers that manage 64 percent of all first lien U.S. mortgages implemented 185,156 new loan modifications nationwide, up 55 percent from the previous quarter and up 172 percent from Q1 2008, according to the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS). Delinquency increases Delinquency rates on modified loans increased each month following modification, but delinquency rates were considerably lower for mortgages in which monthly payments were reduced, said the OCC and OTS. And the federal government’s Making Home Affordable program, which started in March, is offering incentives to mortgage lenders to either modify or re-finance loans. To date, 25 or more servicers are participating in the program. Some of the eligibility requirements for a modification under the program include: borrowers must be taking the mortgage out on their primary residence, owe less than $729,750, and their monthly payment must be more than 31 percent of current gross income. They also must prove that some sort of hardship has affected their ability to pay. Re-finances require that the first mortgage does not exceed 125 percent of the current market value of the home and that the homeowner is current on existing mortgage payments. Since April 6, Chase has approved 138,000 trial modifications under the Making Home Affordable program, and said another 155,000 are in the review process. Since January, the company has added 950 loan counselors nationwide and 2,000 mortgage operations employees. Wells Fargo reported it provided more than 200,000 trial and completed modifications in the first half of 2009 under the Home Affordable Modification Program. And it refinanced approximately 750,000 mortgages using the Home Affordable Refnance Program and other standard refinance programs. Skepticism Paul Willen, senior economist and policy advisor with the Federal Reserve Bank of Boston, is skeptical about how many loan modifications banks will make in the long-run, even with the help of the Making Home Affordable program. Lenders face significant disincentives to modifying loans, said Willen, the risk of re-default, where the modification just postpones foreclosure, and “self care” where a third of the time borrowers will recover from distress on their own, so modification is all for not. Willen recently co-authored a report that looked at lender’s willingness to re-negotiate from the first quarter of 2007 through the fourth quarter of 2008. The report, which used a dataset that accounted for approximately 60 percent of mortgages in the U.S. originated between 2005 and 2007, found that renegotiation was rare. Approximately 3 percent of seriously delinquent borrowers nationally received a concessionary modification in the year following their first serious delinquency, and fewer than 8 percent received any type of modification. At the same time, foreclosure proceedings were initiated on approximately half of the loans in the sample and completed on almost 30 percent of the sample, according to the study. Willen said the study did not document re-negotiations in 2009 and there will likely be an uptick with the Making Home Affordable program. But, given the risks lenders face in re-negotiating loans, the uptick may be negligible. “If the number goes from 3 percent to 10 percent, they’re still leaving a large number of borrowers unattended to,” said Willen, adding a large percentage of borrowers are unemployed and will not qualify for a new or modified loan. “What we’ve argued is to prevent foreclosures you have to target unemployed borrowers.”

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