When loan modifications don’t work
December 14th, 2008 Categories: Real Estate News, San Diego county Real Estate News
SAN DIEGO– I have written many blog posts urging homeowners to consider and investigate loan modification. Each time I wrote about this, I truly believed this to be a viable option for homeowners who were in trouble of losing their homes. Unfortunately, with each new program that was introduced, there seemed to be “requirements” that prevented the program from being an effective option or even entice borrowers to apply. Some of these requirements were background checks, having to have already missed a defined number of payments or, probably the worst one, making the new modified loan a fully amortized which actually increased the payment.
Here is one example from an article in the Columbus Dispatch on 12/14/2008 that shows how a modified payment can actually be more than the original payment, yet the interest rate is lower.
She and her husband were one of a half dozen people who last week sought help from Mark Easterling, a housing counselor with Homes on the Hill on the West Side.
Counselors act as advocates for struggling homeowners. They help sort out finances and deal with lenders.
The Reynoldsburg couple ended up in Easterling’s office after the woman lost her job last month. The couple, now a month behind on their $1,237 monthly payment, didn’t want their names used because they are embarrassed that after seven years, they can’t afford their house payment.
They were hoping to lower their payment but ended up agreeing to an extra $155 a month to catch up for the missed month. After 12 months, the couple will have repaid the lender $2,237 for a $1,237 skipped payment.
The couple, with two children ages 10 and 11, said they will cut their monthly grocery bill from $400 to $300 and eliminate cable TV while the woman looks for another job.
They came to Easterling looking for a lower payment and left with a bigger one.
Another reason payment for an increasing payment on some loan modifications is due to the borrower having to accept an amortized loan versus another interest only loan that were so popular. A $400,000 loan at 6% interest only equals a loan payment of $2000 a month. If you modified your loan to 5% but amortized, the payment would INCREASE to $2148.00.
I try hard to keep track of these programs and it has been no real surprise to me that very few people have actually worked out new loans. According to a New York Times article dated December 12, 2008, a program designed 
to help 65,000 borrowers of the now defunct IndyMac mortgage holders has only benefited 7,200. However that would be considered remarkable results when compared to the 300 billion dollar program congress approved to help 400,000 borrowers. Because of the requirements of this program, only 200 people have applied for the program and NO loans have been modified.
But there have been loans modified by banks yet unfortunately, what is currently being done does not seem to be always helping. According to data from the office of the Comptroller of Currency, more than half of the loans modified in the first six months of 2008 were delinquent within six months.
“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today.
But it’s not just the requirements and loan modifications presented by the bank that are the sole cause of this trend. As noted on Seeking Alpha, Farah Jiminez, executive director of Mt. Airy USA, the community development corporation sums up a credit truth best.
“There are individuals for whom any loan modification would result in a mortgage payment they can’t afford, because they couldn’t really afford the original mortgage in the first place,”
So what’s a homeowner to do? If you are truly struggling with your mortgage you should, need to, still investigate the possibilities of loan restructuring. As more news comes out showing that the loan modifications are not working and the consumer gets more educated there will most likely be better deals written. Remember, this is your home and if you would like to keep it, be smart, be persistent and seek help.
Additionally, if you do not feel comfortable with what’s being presented or you feel that you can negotiate a better deal, DO NOT SIGN the agreement!! Seek counsel with someone you trust to look out for you or personally go back to the table and negotiate harder. At the end of the day the bank DOES NOT want to foreclose on your home. This is your best tool during negotiation, so do not be afraid to use the F-word as often as necessary!!
