Monday, July 13, 2009

Are Loan Modification Programs Working?

Many financial experts say they aren’t, quoting old data to support their statements. The latest data may force them to change their tune though.

DETROIT, MI – The Obama administration continues to push loan modifications as the best way to address the nation’s growing housing crisis. Many so called financial “experts’ though, disagree with this focus.

It’s interesting to note that the administration recently announced that due to disappointing numbers for its Home Affordable Refinance Plan (HARP), the program was being expanded to allow refinances to 125% of a homeowner’s property value, up from 105%. To be eligible for this program though, homeowners must be current on their mortgage and qualify with required FICO credit scores, income and assets.

The disappointing numbers for HARP are a sign that many homeowners don’t qualify for it because they’re either too far upside in their homes or they’re behind on their mortgage payments. This makes loan modifications their only option - hence the administration’s focus on loan mods.

So, what about all the naysayers against loan modifications?

Well, they all quote studies that seem to “support” their claims that modifications aren’t working due to the high number of homeowners that default on their loan modifications.

One of these studies was done by the Federal Reserve Bank of Boston, published July 6, 2009. The study had some valid points:

1. Lenders are reluctant to modify mortgages. Only 3% of seriously delinquent loans have had modifications.
2. Percentage-wise, lenders are modifying FNMA/FHLMC and mortgages held on their books the same.
3. 30% of delinquent loans become current with no intervention by the lender.
4. Most modifications result in an increased loan balance as back payments are rolled into the loan amount.
5. More and more modifications are being done and resulting in lower homeowner payments.
6. 26% of modified loans in the 4th quarter of 2008 resulted in lower payments.
7. Payment decreases before the 3rd quarter of 2008 ranged from 10-14%.
8. Payment decreases in the 4th quarter 2008 averaged 22%.
9. 30-45% of modified mortgages redefaulted within 6 months of a modification.

These are all interesting statistics. The financial “experts’ all seem to focus on the fact that 30-45% of modified mortgages redefault, while ignoring one important fact – only 26% of the loans modified resulted in a lower payment!

Why would a lender expect a homeowner that’s already defaulted on their current payment, to be able to afford that same payment or a higher one? Anyone citing this report’s redefault rate without taking that point into consideration should stop calling themselves an “expert”.

A more recent report (through 1st quarter of 2009) from the Comptroller of the Currency Administrator of National Banks, shows something a bit different:

1. A significant increase in the number of modifications made by servicers. Up 55% from last quarter. Payment plans decreased in favor of loan modifications.

2. Servicers implemented a higher percentage of mods that reduced monthly payments than in previous quarters.

3. Modifications with lower payments continued to show fewer delinquencies each month following modification than those that left payments unchanged or increased payments.

4. Modifications during the first quarter of 2009 resulted in lower monthly principal and interest payments on 54.1 percent of all modified loans

5. The percentage of modifications that reduced payments by 20 percent or more increased to 29.3 percent of all modifications made in the first quarter of 2009, up 19.2 percent from the previous quarter.

6. Modifications that increased monthly payments declined to 18.5 percent of all modifications during the quarter, down from 25 percent in the fourth quarter and 33.5 percent in the third quarter.

One very important statement from the report: “The number of modifications recorded in this report does not reflect actions taken under the Administration's "Making Home Affordable" program, which was announced in March and began to be implemented after this reporting period.”

As Obama’s plan is the most aggressive loan modification attempt to date, focusing on reducing homeowner payments to 31% of monthly income, the numbers should start turning even more positive.

Even without those numbers, statistics from the 1st quarter of 2009 show improvements in loan modification performance after previous quarters showed a trend to the negative:

What can we conclude from all this?

While it’s important to note that we’re far from out of the woods on the housing crisis and we don’t have enough recent data to really draw any long-term conclusions on the benefits of loan modifications – we do seem to be heading in the right direction.

For all the free-market advocates out there railing against bailing out upside homeowners – your arguments went out the window when the government bailed out the banks. If we can bailout upside down banks, how can we not bailout upside down homeowners?

For those who believe we have to lower mortgage balances to effectively modify mortgages, I disagree that we have to do so. It would be nice as I’m upside down in my own home, but I think it’s more important to lower house payments.

People buy cars all the time where as soon as you drive it off the dealer’s lot, you’re upside down in it. I don’t hear anyone asking for a bailout on their car loan. Why do they continue to pay on their upside down car? Because they need transportation and they can afford the payment.

Why are people losing their homes? Because they can’t afford the payments. Statistically, most people are emotionally tied to their homes. Most won’t do the logical thing and walk-away from their upside down home anymore than they would walk-away from their upside down car. Give them an affordable payment and even if they’re upside down, they won’t walk. Bring the payment down to their local rental rates and they won’t be able to live anywhere cheaper. Yes, their will be a small percentage that move in with relatives or move to a lower income area, but most will stay.

It seems the so called “experts” live in their own little worlds and seem to have their own agendas. Few actually report unbiased facts, instead preferring to only focus on what supports their positions while ignoring all other facts. Heaven forbid they actually take the time to digest & think through the statistics.

The media is just looking for sensational headlines to sell more advertising. Very little actual research seems to happen these days. What’s more, they all seem to regurgitate the same stories, propagating incorrect stories, fooling the public into believing them because of the repetition.

So be forewarned not to buy into what you read in the headlines or what so called experts tell you. Click on the links I’ve provided and read the material for yourselves to come to your own conclusions.

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Drew Sygit writes and speaks about the mortgage & real estate industries. He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He’s presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA’s, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications. He also publishes his own blog: He can be reached at


  1. nice post.

    I too question that fed study. How can one take it seriously when it was conducted before current mod programs were in place? Also, these programs have 90 trial periods, so we haven't even seen the data for how these programs are doing!

  2. Thanks Drew for a positive light on what I do for a living! People are so intimidated by the banks and are affraid to fight for their homes. I too state the fact that statisticly, people are emotionally attached to their home and want to stay.

  3. Suggesting that bailouts for homeowners are justified because we bailed out the financial sector is not logical.

    By bailing out the financial firms and allowing they to remain in place we failed to change the culture. This is in stark contrast to the 90's when the RCT siezed the assets of institutions and exterminated the companies. Those who failed were stripped of their corporate jets, extravagant benefits and their castles. Today we have rewarded stupidity and greed.

    To expand this program further is going to grow the culture of depending on the government to cover the downside. You will have equally reckless home buyers dealing with the same institutional cultures that got us here.

    The mostly ignored downside of botht the banking and homeowner bailouts is that the burden of the bailouts plus all the other trillions of pork will affect our economy for decades to come. Once again , those who lived responsibly, honorably and within the law will be punished.

    Just as the SEC had years of advance notice of the Madoff scheme, the banking system and bank regulators had years of warnings concerning the quality of loans that were being underwritten and the inability of the borrowers to make the payments required under the loans. Steve Cauley, Andrew Lahdy, and others clearly identified the risks and the downturn on the horizon. Others like Sam Zell quietly sold assets at the peak of the market.

    History is not kind to those who choose to sacrifice the future for short term gains.

  4. Excellent post and some excellent comments. The end of that last comment is a kicker. "History is not kind to those who choose to sacrifice the future for short term gains" Are we to suggest that nobody ever try to better themselves? So many things to think about. I am working on MODS myself and although it can be tedious I have seen some new efforts by the Courts to keep people in their homes that are stunning. It is also obvious that now that the first bail out is over the second is not so obvious and the mortgage companies may be slowing down the idaa of taking the homes back, cutting losses quick and getting us as taxpayers to bail them out with our hard earned money. Kind of sick isn't it? They take people's homes, kick them out, sell them at 75% less then owed, install a judgement againt the owner, get bailed out in full by the government (our taxes) and leave the family homeless with debts impossible to pay.

    It is crazy! Great posting!

    Scott Wright

  5. Interesting!

    The loan modification process can be frustrating and confusing for many distressed homeowners. But you have to know what exactly is loan modification. A loan modification is a permanent change in one or more terms of a borrower's home loan.

  6. Thanks for sharing information about Loan Modification