To ensure that the $75 billion Homeowner Affordability and Stability Act is accomplishing what it was created to do, the federal government announced late last fall that it would check up on loan modification servicers throughout the month of December. In response to widespread complaints that an insufficient amount of permanent modifications are being granted to homeowners, the federal government sought to further regulate the process by checking in with the lenders twice each day last month.
Officials checked in to see what was slowing the loan modification process, and they began to require the lenders to explain their processes and decisions on individual cases. In addition, servicers had to give a plan as to how they would communicate with borrowers regarding the status of their loan modification, a problem that has only grown over the past months as homeowners wait longer and longer to hear back from their lender. This is all in hopes that the stimulus package money will be used to its full advantage in helping to rebuild the housing market.
Though the number of loan modifications over the past two quarters has been less than ideal considering the amount of funding behind the making Home Affordable program, the quality of the loan modifications granted has improved greatly. Before, many loan modifications tacked on interest and late fees that would leave the borrower paying the same amount as their original loan. But after the Obama administration established guidelines and goals for their loan modification process, many have seen improvements in the loans being offered.
Loan servicers are now routinely lowering interest rates, extending the term of the loan, and even reducing the principal of some loans to make the payment lower. These lower loan payments appear to be lowering the number of redefaults. Of the borrowers who had their loans modified in the second quarter of 2009, only 18.7% of them were delinquent three months later. Compared to the 30.7% of borrowers for which this was true for first quarter modifications, things are looking up. The percentage of modifications that lowered payments has increased from 53.5% to 78.3% from first to second quarters as well, evidencing improvement in loan modification quality as the year progressed.
Almost 700,000 borrowers have been placed in trial modifications since the inception of the president's plan, representing 20% of eligible homeowners who are at least 60 days behind on their mortgage payments. There were 80,400 trial modifications in the second quarter of 2009 alone under the president's plan, and these were not factored into the recently released report because adjustments are not counted until they are permanent. The concerning factor is that a mere 4% of those in the trial period have been converted to a permanent modification thus far.
Though re-defaults have been declining recently, prime borrowers' delinquency rate has increased since earlier in the year. The number of foreclosures being processed has officially topped one million for the first time, which means 3.2% of all mortgages nationally are in foreclosure. This is largely due to the high unemployment rate as well as the option adjustable rate mortgages or pay option ARMs, which allow homeowners to choose how much they want to pay each month and lead most homeowners to make the minimum payment. Currently, 16% of borrowers with pay option adjustable rate mortgages are seriously delinquent in their payments, with 12% in foreclosure.
More people are now receiving modifications as opposed to entering into foreclosure, however, which is one of the positive points that emerged from the 49-page report recently released by the Office of Thrift Supervision and the Comptroller of the Currency. There were nearly twice as many homeowners who were assisted by lenders and are able to remain in their homes than those who entered foreclosure in the third quarter of 2009 - 680,000 have been helped as opposed to 369,000 foreclosures. Additionally, borrowers who have received permanent modifications are saving an average of over $550 a month on their loan payments.
Though there are some concerns over the housing market recovery, loan modifications are emerging as a useful tool for borrowers wishing to remain in their homes. The Making Home Affordable program established by the president almost a year ago has helped many, but it has a long way to go to fulfill its potential and validate the tax dollars spent on it. Last month's checkup on the efficiency of lenders will hopefully shed some further light on the loan modification process and the program's future.
If you or someone you know is struggling with mortgage payments, we can help to see if you qualify for a loan modification. Please feel free to call or email us with any questions or stop by for a free consultation so we can help you stay in your home.
