BluefoxToday blog : Mortgage loan modifications ought to have more bite

Mortgage loan modifications ought to have more bite

As foreclosure numbers keep growing nationwide lenders are facing more pressure to make home loan modifications, or workouts, more meaningful. Up to now their efforts have mostly been half measures from the borrower's perspective, backed by recent stats that around half of modified home loans re-default within six months. That surely isn't helping the pummeled real estate market to recover, something everyone ought to strive for, and thus help the entire economy get back on track.   

The entities operating between distressed homeowners and the investors who have bought their underlying mortgages usually are the servicing firms. They are the key players, work under contract for the investors and naturally first look for what's good for them. And that means modifying as little as possible. For loan workouts to have more bite the contract terms need to be adjusted or otherwise the whole exercise is largely wasted. Foreclosures would keep rising, home values head further south and at the end the investors would suffer even bigger losses when their deeply discounted, foreclosed property is finally sold.

To make modifications work better loan balances should be lowered bravely and not just a token 10% or so. They ought to be brought down close to where the market is, which of course will hurt the investors at first. But that's the reality right now. When homeowners are upside down by a large percentage they really have very little incentive to do everything they can to make payments. However, if they are looking at newly-adjusted mortgage balances hovering somewhere near actual market value they will most likely make the extra effort to struggle on. It's clear that the housing market is not turning around any time soon and bail the investors out. They have to accept that and base their decisions accordingly.

Another way to lower payments meaningfully is reducing interest rates. And do it so that it would make a real difference, enabling homeowners to stay in their houses. If this avenue is used aggressively, the mortgage balance may not need any adjustment at all, or very little, making it perhaps a more palatable option for the investors.    

It has been rather puzzling to watch lately how aimless the investment community has been in dealing with the growing foreclosure problem. Because of that Washington is likely to get involved and that might not be the best alternative either.


Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 6 commentsEsko Kiuru • January 22 2009 09:22PM


If Washington CAN get involved, they WILL.

Posted by KAREN THOMPSON, GRI, REALTOR, Colorado Homebuyer Pro (KTHOMES, LLC) about 10 years ago

Esko, I had no idea the stats were showing such a high default rate and in only 6 months?  A lot of the loan mods I've seen have been quite substantial amounts.  I agree that a 10% downward fix isn't going anything over the long haul.  No wonder these poor people end up in the same place they started.

Posted by Maggie Dokic | Miami, FL | 305.81.HOUSE (46873), GREEN, CDPE, SFR, Pinecrest | Palmetto Bay | (eXp Realty LLC) about 10 years ago

Esko I know that what I am about to write might seem cold, but it is how I feel. I can see adjusting the interest rate to what the conventional rate would have been for those with high interest loans, but I do not agree that loan amounts should be reduce because regardless of what he values are now, that is what they were when they purchased the house.  It is not fair to those who bought at the same amount and have not defaulted.  Many of these people that are defaulting and continue to default even after the loan has been modified is because they could not afford the house at anywhere near what it is even worth now.  They should not have purchase the house to begin with, and now the right thing is for them to lose the house.

We are a country of I want and therefore I will have even if I can't afford it.  Well it is time to get back to you can't have if you can't afford.  Home ownership is not a right it is a privilege.

I guess it just comes down for me that people should not be rewarded for making STUPID decisions.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) about 10 years ago


Washington is about to get into it in a more forceful manner.

Posted by Esko Kiuru about 10 years ago


The workout efforts so far have been pretty much meaningless.

Posted by Esko Kiuru about 10 years ago


Your point of view is very valid and broadens the discussion here to everyone's benefit.

Posted by Esko Kiuru about 10 years ago