Over the last 10-years, Teresa has not only built and managed advanced business systems to handle her high-volume REO transactions, but she has also helped hundreds of other brokers break into the REO market to position their business for REO rapid and sustainable growth. Two years ago, she refined her REO rapid growth model and turned it into an advanced development curriculum that brokers of all levels could use to rapidly grow their REO business through the development and management of scalable systems. After the housing industry crash took a domino-effect toll on the national economic crisis, many sources, including the Obama Administration stepped in to combat and mitigate the amount of growing mortgage delinquencies. The primary method of mitigation efforts has been mortgage loan modifications, with the forerunner being the Treasury Department’s Home Affordable Modification Program (HAMP). The original plan was to salvage the housing market by forcing lenders to reduce borrowers' monthly mortgage payments to a more convenient percentage of their income. However, the administration’s bet on the odds that borrowers underwater would continue to pay their mortgages if they could afford to, irrespective of sinking or balanced investments, is not playing out so well.
Only a year shy of the HAMP program’s implementation, according to the Treasury’s own estimate, 1.8 million borrowers are behind on their payments and qualify for the HAMP program. The administration’s February HAMP report card shows that 1.3 million homeowners were given offers for trail modifications, which represents 35 to 45 percent of the goal of
Even after borrowers are receiving permanent modifications under the HAMP program, the Treasury reports that 8.2 percent of permanent modifications have been canceled. Nearly 90,000 trial loan modifications have been canceled as well and about 500,000 more have passed the required three-month threshold without receiving an offer for permanent loan modification from their lenders. That means more than half of borrowers who do receive mortgage aid under the HAMP program could eventually lose their assistance.
If that’s not troubling enough, since 2008, over half of modified loans have gone bad or re-defaulted within six months. This does not mean that loan modifications do not work. The problem lies within the type of modification that is given. The majority of loans that enter into re-default status only reduce interest rates and extend the loan period. On the other hand, borrowers who receive mortgage loan modifications that reduce the principal loan balance are far less likely to re-default on their loans.
According to a study conducted by the Federal Reserve Bank of New York, the Feds suggest that principal write-downs are more successful in avoiding re-defaults. In fact, loan modifications that write down loan balances can double the reduction in re-default rates, more than those achieved by payment or interest reductions alone. Principal write downs seem to be more effective at avoiding re-default given they reduce negative equity and give the borrower greater incentive to keep their loan current. The study took into account a hypothetical borrower whose home is valued at around $30,000 less than the $200,000 home mortgage in two different scenarios. In each scenario, the monthly payments are reduced by the same quantity, but the probability of re-defaulting is drastically different.
With a loan modification that decreases the borrower’s interest rate by 2.8 percentage points to reduce monthly payments by 25%, the borrower’s chances of defaulting within 12 months reduce by 11%. With the alternative loan modification method, which lowers monthly payments by 25% by reducing the amount owed on borrower’s principal loan by 25% and via a small interest rate reduction, the borrower’s probability of defaulting within one year decreases by 26.5%. The New York Federal Reserve study also states that borrowers who have to repay 15% or more than their homes value have a 51% higher possibility of re-defaulting in any given month. So why aren’t more servicers offering principal reductions over traditional loan modification programs? Well, that is because the administration’s current loan modification effort only provides incentives to loan servicers who reduce monthly payments by lowering interest rates and extending the loan term. Therefore servicers are benefiting more from traditional loan modifications in which they receive government incentives for participating in loss mitigation programs and they get to retain the original value of their loans.
However, in regards to servicers, many of the largest major lenders and banks are offering aggressive loan modification programs. Wells Fargo remains at the front of the pack with 24,975 permanent modifications completed. Bank of America has converted 20,666 loans to permanently modified status and has an additional 22,000 permanent modifications pending. JPMorgan Chase has transformed 19,835 trial loan modifications to permanent status, while CitiMortgage has completed 15,607 permanent modifications and GMAC has permanently modified 14,675 troubled loans. These major banks are expected to practically modify hundreds of thousands more of mortgage loans in the upcoming year and beyond, largely thanks to a new line of incentives funded from the $50 billion the Troubled Asset Relief Program (TARP) has on hand in their reserves which was set aside for mortgage recovery efforts.
In spite of this, as far as loan modifications are concerned in the housing industry as a whole, the outlook seems very bleak. While things will not be ideal, many people believe that the market has already reached its bottom. This equates to increased activity in the housing market for the times ahead which will lead to increased home prices, and help the economy in general. However, as far as interest rates are concerned a better performing housing market means increased interest rates.
Industry experts are predicting that around April of 2010 mortgage interest rates will rise by nearly 1.25%. Given that may seem slight, it in fact adds up over the course of a 30 year mortgage. Such an increase may make some homeowners unable to benefit at all from refinancing a mortgage. If the typical rate for a 30 year fixed mortgage reaches a new normal of 6.25%-6.50% and if loan modifications continue to be primarily centered around interest rate reductions, a loan modification will place struggling homeowners with modified rates largely close to interest rates that can be had today without any modifications.
As far as the government’s HAMP program’s ambitious efforts to extend loan modification offers to nearly