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What a Surprise, the Ability to Pay Matters on Mortgage Modifications, Too.

posted by Kathleen Keest

Last week the Center for Responsible Lending posted a foreclosure ticker on its web site that counts projected new foreclosure filings as they occur: a new one every 13 seconds in 2009.  That puts it at nearly 276,000 as I write this post.  (You can check out your state’s share on the map.)

Cool as technology is, the figures are as depressing as the slow pace of response to the crisis is puzzling. In a December guest blog,  Tara Twomey lifted the veil on the OCC’s report of disappointing re-default rates on modification.  Professor Alan White’s analysis of remittance reports from loan servicers found that only 35% of modifications reduced the homeowner’s monthly payment, while 20% stayed the same.  The largest share-- 45%--actually increased payments.

Yesterday, Fitch Ratings released a report that says (you heard it here first) "the key to a successful loan modification program is that the modification is sustainable." The modifications with 10-20% increases in principal and interest (P&I) payments had a 49% re-default rate within 6 months, more than double the re-default rate for modifications to a 20% or greater reduction in P&I payment (21%). Imagine that!

The Fitch report notes that payment reduction, at least so far, has a more direct impact on re-default than principal reduction. (They also, though, believe principal reductions that give homeowners equity are also likely to improve sustainability.) Fitch projects a high rate of re-defaults unless servicers start focusing more on – (ahem) – long-term ability to pay.

Seems that we’ve come full circle: Hey, guys, maybe you should think about whether people can make the payments when you originate the loan. Hey, guys, maybe you should think about whether they can make the payments when you try to fix the loan.

Should it really be this hard?


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"Should it really be this hard?"
apparently it is for anyone involved in originating or approving mortgages.

But, of course, any new law that would allow bankruptcy judges to modify mortgages as part of a Chapter 13 Plan is the work of the devil, bad economics, and the end of the American Way Of Life.


The Mortgage Bankers Association
"We've taken care of the problem. Trust us. We're Mortgage Bankers."

Cute post. I Like when you clear your throat that was too funny. "American Way of Life" LOL! To take advantage of the have nots or rather the ones who had but no longer have. That's where all the profit is!

I must be one of the "Devils'" minions then. Oh, wait! What am I sitting on? .... oh, its just my devilish tail. I'm always scheming and networking with other demons, on different ways I can help TANK the economy! ...... Damn! I forgot someone already beat us to it!

Testimony before the House Financial Services Committee reflects Citi's CEO's view that the biggest problem with this whole mortgage situation is that debtors aren't contacting their nice bankers. They are putting their heads in the sand during the slide into foreclosure:

Facing Foreclosure: Get Your Head Out Of The Sand


"Congresswoman Nydia Velazquez asked Citigroup CEO Vikram Pandit why his bank recently came out in support of legislation to allow bankruptcy judges to modify home loans.

His answer was surprising.

He said it was because the law required the borrower to speak to the lender at least ten days before bankruptcy proceedings. In other words, it forces the borrower to get in touch with the lender. He says he believes Citi could save the borrower in those ten days and avert bankruptcy.

He said the biggest impediment to foreclosure mitigation is actually getting the borrower on the phone. He said, "people put their heads in the sand," and added that half of the foreclosures his bank sees are for people they can't reach.

I've heard that before but never in quite that way."

Funny, I never hear that from the debtor's side of reality, where they describe sitting on the phone for hours, being shuffled back and forth between people who can't help them, finally getting the voluminous forms to fill out and send back in, only to face weeks and months of silence as the foreclosure marchs forward.

I wonder if Pandit gave out his cell number?

OMG! Are you fu#$%@& kidding me? That just ruined my day bro. Can you really lie like that when you are before Congress? Is it a lie when you warp the truth so bad that you can't even see the truth? I guess its a 1/4th or more like an 1/8th truth. I agree, talking to borrowers about foreclosure options is a huge problem but when some one sees a "sale date" on a certified letter, they are hounding that Servicer! I have seen that particular scenario but its like 1 out of 70-80 cases or so which represents 1 case in all the cases we see in a 6-8 month period. Asking the debtors if they have called the Servicer is one of the first things we ask them. I'm going to have all new appointments answer that one question on the questionnaire we give them to fill out! I told Boss and she said "I don't think so!".

Clarification: She (Boss) said "I don't think so" about the congressional testimony. Not the questionnaire.

This is scary. Car dealers know how to sell cars (and make lotsa money)by emphasizing the monthly payment and month-to-month affordability over purchase price and financing cost. Maybe the Jolly Johns and Crazy Eddies of the (auto) world could conduct seminars for the mortgage lenders.

Great Post! Draws attention to a key problem - modifications experience a significant redefault rate. This is especially important now that legislators, bankers and the administration are rushing on the modification band wagan with $50 billion + of TARP money and talk of the Government buying bad mortgages!

I've read through the Reuters report carefully. The most shocking finding: Principal Reductions do not seem to improve redefault rates: 28% of loans with principal reduction greater than 20% redefaulted within 6 months. This compares to 30% redefault rate for loans that saw a 10% balance increase due to the mod! Are you kidding me? How is that possible? Even the best performing modifications, those that reduced p&i payments by more than 20%, saw a redefault rate of 21% within 6 months. Over the life, more than half of such mods will likely go down!

What if modification is the wrong answer? What if we are asking borrowers to catch a falling knife? Isn't modifying a loan (even with pricipal and interest reductions) the same thing as asking borrowers to buy Citi stock on a margin with 100% borrowered funds? Who is crazy enough to do something like this?

What if we used the TARP money to buy the foreclosed properties rather than the modified loans, and then lease those properties back to the borrowers with an option to buy them back in 5 years at a pre-determined price! In effect the government will take on the risk that property values will continue to go down, while giving the borrower the likelihood of future appreciation. The funny thing is that the government's risk profile will be the same whether it buys the loan or the property!!! You are long the property no matter what. However, it will sure feel a lot different to the borrower! Plus this home purchase + lease program can be extended not only to borrowers who are being modified but to all properties that are being foreclosed - in effect achieving two huge goals -improving performance of loans that are modified into leases and taking foreclosure supply off the market!!!

A 'must read' on the current mortgage situation from Business Week - long, but well worth it:


Kathleen, what you're overlooking is the penultimate reason for loan "modifications," and the fact that many wind up with larger payments only bears this out: The purpose is to get the borrower to indemnify the lender/servicer/trustee from any past AS WELL AS FUTURE liability.

It's simply very low-cost litigation armor. Once signed, a borrower can't mount even a legitimate defense to a foreclosure nor bring a TILA or RESPA tort case under the terms of the alleged modification.

The Honorable Judge Roy Bean

The observation that many modifications as presently offered by the mortgage companies often do not reduce payments is consistent with my experience. I think any other good consumer bankruptcy attorney will agree with me that the modifications presently offered leave a lot to be desired. The mortgage industry has shown that they cannot police themselves. The solution is to pass HR 200.

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