Are loan modifications worth continuing?

A newly released report from the inspector general for the Treasury Department’s Troubled Asset Relief Program doesn’t say why such a high percentage of owners who take part in the Home Affordable Modification Program (HAMP) are unable to maintain their loan modifications.

They only say that the longer the owners remain in the program the more likely they are to default again. It does go on to say that people who take advantage in the program to modify their mortgages in an effort to save their homes are defaulting at an alarming rate.

At the end of the first quarter of 2013, the report found nearly half of the oldest HAMP modifications from the third and fourth quarters of 2009 going back into default. Even loan modifications from 2010 have failure rates as high as nearly 38 percent. Owners who cannot sustain their reworked loans and fall out of HAMP are left with the terms of the original mortgage, and then are responsible for making up the difference including any late fees.

This can result in re-defaulting borrowers ending up owning more than they did before their loans were modified.

The Obama administration has recently extended the HAMP program until January 1, 2016. This allows borrowers with loans made before 2009 whose payments, including interest, taxes, and insurance (PITI) in excess of 31 percent of their gross income are still eligible. But HAMP does not subsidize troubled borrowers. Rather, it provides financial incentives to mortgage servicers that work with borrowers. This may indicate that some servicers may be modifying loans they know will eventually fail just to earn the fees approved by HAMP.

Please note, financially strapped homeowners who are close to foreclosure may want to face the music sooner rather than continue to struggle with their monthly payments. Statistics show there is a high probability of losing the house anyway even with the government’s help with permanently reduced loan payments.

Another study done by the Federal Reserve Bank of New York found that the lowest re-default rates occurred when the payment reduction was paired with principal reduction. In other words, the servicer agreed to forgive some of what was owed. The study found when borrowers’ principal is reduced, problematic borrowers are four times less likely to default again.

So, the message here for underwater borrowers considering a loan modification is: unless your servicer offers to rework your loan in such a way that you no longer owe more than the house is worth, think hard about what you are doing. Is there a real chance you can save your house? Or are you merely putting off the inevitable?

If you have questions regarding available inventory to purchase or the current bank servicer’s short sale incentives to sellers, please Mike Mason, Broker/Owner of Mason Real Estate DRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors® (SRCAR), Short Sale & Foreclosure Resource certified by National Association of Realtors® (NAR) at

[email protected] or (951) 296-8887.

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