Are loan mods the solution….well, no.
Not if you consider the fact that its widely believed that up to 75% of all loan mods will re-default.
Agents who are speaking with potential short sale sellers, what is one of the top reasons sellers give for not listing their home?
“We want to try a loan modification”
Share this article with your howeowners. Let them know that statistically very few mortgage loan modifications actually work beyond the initial period.
What homeowners don’t understand is that they will often be required to forfeit many ‘rights’ they may have. For example, we have seen loan modifications that literally make it so if the homeowner misses (or is late)
on ONE payment during the trail mod their home is rushed into foreclosure, don’t stop at GO. Additionally, its a rare mod indeed that actually cancels out the negative equity. In other words, the mod may lower the payment temporarily but, the negative equity is still there.
Another fun fact, most mortgage loan modification are only for 3-5 years with a balloon payment often times including ALL that they still owed including their late fees, missed payments….etc
And don’t forget, homeowners have to qualify for a loan mod. Its treated like a fully documented loan application. Many homeowners won’t qualify for the home that they are currently living in!
Loan Modifications are clearly not what people think. Understand what mods are and aren’t…counsel your homeowners so they know what they are signing themselves up for.
Its no wonder why, up to 70% of all loan mods fail…..
Source: SNL.com
Economists and analysts predict redefaults will severely plague loan modifications, including one projection that 70% of all modifications will fail.
In a recent report projecting the level of shadow inventory in the housing market, Standard & Poor’s analysts noted that they assumed a 70% redefault rate on loan modifications in the study.
Diane Westerback, S&P’s managing director of global surveillance analytics, told SNL that the previously reported 30% to 40% redefault rates typically only count borrowers after two or three months of payments. A year after the modification, Westerback expects redefaults to hit between 60% and 70%.
See Above comments for just a few of the reasons why loan mods fail…
“I’ve always taken the position that if a guy pays for a year, he’s really made it. If he makes a few payments, you don’t really know,” she said.
Fitch Ratings on June 16 issued similar projections, albeit only for subprime and Alt-A loans in RMBS. The rating agency projects modifications on those product types to redefault at a 65% to 75% range, while prime loans in RMBS are expected to redefault at a rate of 55% to 65%.
Fitch said the government’s Home Affordable Modification Program appears to be “falling far short” of its stated goals, with Managing Director Diane Pendley noting in a news release that changes to the program mean “final determination of the program’s ultimate effectiveness will continue to be delayed.”
Where does all of this go….what happens to all of these failed loan modification? Millions of those homes will become short sale listings.
Agents, are you finally ready to learn the new ways to list and sell short sales? Chances are you have learned the very basics of how to do short sales…maybe, you have even successfully closed a few short sales. Its obvious that helping homeowners avoid foreclosure by selling their home as a short sale is one of this markets greatest opportunities.
The most recent mortgage metrics performance report released by the Office of the Comptroller of the Currency and the Office of Thrift Supervision showed stronger performance as of the 2009 fourth quarter than Fitch and S&P expect. Redefaults three months after modification have fallen to 14.7% for modifications completed in the 2009 third quarter from 35.1% for 2008 third-quarter modifications.
The report posted two redefault rates for a year after modification: 60.7% for 2008 third-quarter modifications and 57.9% for 2008 fourth-quarter ones.
A spokesman for the Office of Thrift Supervision told SNL that a new mortgage metrics report will be released in the next week or two, with the agency shooting for a June 23 release date.
A pair of economists told SNL that they do not consider a 70% redefault rate on loan modifications outlandish.
James Hamilton, a professor of economics at the University of California, San Diego, told SNL that concerted efforts to keep unsustainable loans out of foreclosure will translate to high redefault rates over the near term.
“I think I would rather err on the side of using too big a number,” Hamilton said.
In fact, Hamilton might be more pessimistic than Westerback, whose expectation of an up to 70% redefault rate is based on historical trends. “To the extent that we were modifying loans that historically you would have just given up on, that would make you suspect that the ultimate failure rate on those modifications would be higher than the historical rate,” Hamilton said.
Dean Baker, co-director of the Center for Economic and Policy Research, is not any sunnier on the outlook for loan modifications. On the 70% redefault projection, Baker told SNL that “it certainly doesn’t strike me as an absurd number. It’s certainly a very high number, but it’s not obviously unreasonable.”
Rather than historical trends, Baker attributes his pessimism on loan modifications to a naggingly high unemployment rate and chronic negative equity exacerbated by a renewal in falling prices.
Even on permanent HAMP modifications, Baker said, “I think you’re still going to be at a high redefault rate. Again, it’s both the weakness of the economy and you have so many people who are going to be underwater on their mortgages. You have limited incentive to struggle and pay your mortgage if you’re underwater. And that’s the situation a lot of people are going to be in.”
