Ebook Loan Modifications and Redefault Risk
The foreclosure crisis shows no sign of abating. Over 2.3 million homeowners faced foreclosure in 2008, an 81 percent increase from 2007. Almost 900,000 properties were repossessed by lenders nationally in 2008, almost double the figure in 2007 (Aversa and Zibel 2009). The foreclosure crisis and the resulting credit and financial turmoil have now become a full-fledged national and global recession.
Payroll employment has declined by 3.6 million since December 2007 and over one-half of this decline occurred between November 2008 and February 2009 (Bureau of Labor Statistics 2009). Job losses lead to more foreclosures, which, when added to the already oversupplied real estate market further reduce home values, leading to even more foreclosures. The $2.8 trillion financial losses in household real estate wealth from 2006 to the third quarter of 2008 further weaken the overall economy, leading to more income loss (Board of Governors of the Federal Reserve System 2008).
With the large number of foreclosures and the increasing numbers of delinquencies, actions to reduce the rate of preventable foreclosures would promote economic stability for homeowners, their communities, mortgage lenders, and the nation as a whole. To date, government initiatives appear to have been unable to fix the problem as foreclosures continue to mount. The expectation is that the new Obama administration and the new Congress will focus on policy proposals to assist homeowners directly. Tools being considered include more aggressive loss mitigation programs (Inside Mortgage Finance 2009). Lawmakers want to expand access to FHA refinancing, the HOPE for Homeowners program (H4H), and other initiatives, such as the loss-sharing modification program of the Federal Deposit Insurance Corporation (FDIC).
Borrower inability to meet mortgage payments is the core of the foreclosure problem, and loan modifications are seen as a means to reduce the payment burden. By providing troubled homeowners with relief, modifications can be regarded as a tool for foreclosure avoidance. For instance, under the FDIC’s streamlined loan modification program, mortgages that meet certain criteria can be modified to decrease the borrower’s payment by 10 percent or more and help borrowers achieve sustainable payments by lowering their housing payments to 38 percent of their gross income (FDIC, 2008).
As recently announced by President Obama, the Homeowners Affordability and Stability Plan creates a $75 billion program to subsidize loan modifications that would reduce the monthly mortgage payment of a troubled homeowner to as low as 31 percent of monthly household income (Stolberg and Andrews 2009). In practice, OCC and OTS (2008) documented that about 133,000 loans were modified in the third quarter of 2008, a 16 percent increase from the second quarter of 2008, but the number of modifications continued to fall further behind the number of new delinquencies.
A primary concern with loan modification efforts is the seemingly high rate of recidivism. Within six months, over half of all modified loans were 30 days or more delinquent and over a third were 60 days or more delinquent (OCC and OTS 2008). Do these high rates of re-default imply that loan modifications are failing?
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