Monday, November 10, 2008

Modifying Mortgages

There is a set of unfortunate choices that lenders are faced with making - losing a lot of money and owning a home or losing some money by modifying a mortgage. Due to the long and complex process, including the individuals circumstances, of mortgage modification many times the foreclosure process takes wins. Even at the times when loan modification would have been relatively simple and much less costly.

One bug (perhaps really a design during the good times) of the system is that the foreclosure process is cut and dry. Ninety days late the foreclosure process is triggered. But some are trying to change the system. Pointing out that the bug has turned into a parasite that is threatening the life of the housing market - which in turn is pushing towards systemic collapse. I

In an article in Newsweek titled Focusing on Foreclosures, a look at increasing realistic modification is examined. Lets take a look -

It's an effort that began more than a year ago, when the government began offering programs like FHA Secure and the Hope Now alliance. Those programs are intended to help homeowners refinance into more affordable mortgages or work with lenders to modify their loan terms and reduce their payments. But as unemployment increases and more people face the prospect of foreclosure, critics say these initial programs aren't doing enough to help. With taxpayers putting up hundreds of billions of dollars to bail out financial institutions, it's time for the government to become more proactive about saving people's homes.

While there is no shortage of proposals for what should be done, by far the leading contender is being pushed by Sheila Bair, the chairman of the Federal Deposit Insurance Corporation (FDIC). This summer, the FDIC took over a failing bank called IndyMac and went to work swiftly modifying thousands of homeowners loans. Instead of doing a painstaking case-by-case analysis of each loan, which is what made existing modification programs move so glacially, IndyMac began applying standard formulas, based on each homeowner's income to determine whether they could reduce the interest rate or extend the term of the loan to create an affordable monthly payment.

Does the FDIC plan make sense? To get an answer, I called Bruce Marks, CEO of the nonprofit Neighborhood Assistance Corporation of America. Marks, whom the Boston Globe once called "one of the most feared men in the corporate boardrooms of the nation's leading financial institutions," has spent years advocating for homeowners. In the last year, his group has helped thousands of U.S. homeowners work with banks to modify their mortgages. His take on the FDIC plan: "It's a huge step forward ... Sheila Bair gets it."

As Marks sees it, there are fatal flaws with the existing government programs to help refinance or modify loans. For many homeowners, refinancing is out of the question, since their homes are now worth less than their loan amount, and their credit scores have fallen due to missed mortgage payments. Marks says too many loan modifications don't take a realistic look at whether the homeowner will really be able to make the new payment.

In contrast, the FDIC program starts by taking a hard look at what homeowners can actually pay. Once it calculates an affordable payment, pros start playing with the mortgage numbers to see what they can adjust to hit that magic number. They start by reducing the interest rate. If that doesn't push the payment low enough, they'll extend the term of the loan. As a last resort, they'll consider lowering the principal amount of the mortgage. The mortgage holder loses money in any of these scenarios, but the appeal of these deals is that they usually lose less than if they foreclose on the house. Marks says these deals are also better in the long run than modifying a mortgage that winds up in default a few months later.

Changing the system is the first step. Evolving from a parasitic relationship to a symbiotic one would do a lot to stabilize the system. If the triggers are in place as readily for modifications as they are for foreclosures the our national devastation may not be mirror the housing cartography of Nevada, Arizona and California.

No comments: