Analysts are predicting that the country may expect a huge wave of defaults soon. Recent report, though, reveals that this may not happen. Latter borrowers who had their mortgages modified are no longer having as much problems with payments as compared to their earlier counterparts.
The State Foreclosure Prevention Working Group, composed of 12 state attorneys generals and state banking regulators, has enumerated some troubling signs. In July, sales of previously-owned homes had its most intense drop in the last 15 years. And modifications, which were implemented to lower monthly payments and the number of foreclosed homes, are said to still be outnumbered by foreclosures.
The foreclosure crisis is now three years running but 63% of those homeowners who are at least two months behind their payments are not all too keen in participating in foreclosure prevention programs – whether by the government or private institutions. Homeowners not participating in foreclosure prevention programs is a matter of picking up the phone or responding to lenders calls. Bankers say that, in exchange of short-term pains for banks, lenders should start aggressively seeking homeowners who are already way behind their mortgage payments.
“Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction,” says Conference of State Bank Supervisors president/CEO Neil Milner.
Recent modifications, with its reduced principal balance, have lower default rates as compared to the previous modifications that only cut interest components of monthly payments. This may account for why 50% who had modifications in 2009 were less likely to end 60 days behind their payments compared to those in 2008. Also, only 15% among them ended up being seriously delinquent half a year later – this is a big improvement to the 31% in 2008.
Sadly, though, only one in five modifications trims the overall balance. Also, 70% of those looked at in the first quarter of the year actually increase the total payment due to service charges and late payments.
There is some good news, though. Interest rates adjustments saw reduction in monthly payments of 89% of first quarter modifications. Also, 78% reduced payments by 10% or more.
If loan balance is not reduced, then future foreclosure prevention efforts will be in vain.
In a state official report, nine non-bank mortgage companies serviced only 4.6 million loans last March. Since October 2007, when the mortgage modification trending began, a total of 2.3 million foreclosures were completed – thrice the 76,000 loan modifications granted. Even the Obama administration flagship program on mortgage relief is failing: half of the 1.3 million enrolled have now fallen out.
With home prices falling by more than 30% from 2006 and a quarter or homeowners becoming underwater, future modifications should strike a balance between helping borrowers and cutting losses for lenders and investors. Though loan amount reduction may seemingly achieve that balance, it is not always the case.