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One Quarter of Loan Modifications Already In Default

[Dec 8, 2009.]


Even as the Obama Administration has exerted increased pressure on major lenders to modify or refinance troubled home loans, borrowers who have had their mortgages modified are defaulting at high rates.

For the Home Affordable Modification Program, the percentage of re-defaulted modified home loans stands at 25 percent. Meaning that one fourth of all homeowners who received loan modifications with government assistance are behind on their new, lower payments again.

That is a striking and troubling statistic for a program that only recently got going.

The temptation, for people who are paying their mortgages, may be to dismiss these re-defaulted borrowers as recidivist deadbeats. However, these numbers should be sliced and diced a bit more before that conclusion is chosen.

HAMP Modifications Rarely Involve Principal Reduction

Originally, when the major mortgage lenders (Bank of America, JPMorgan Chase, Wells Fargo) were given hundreds of billions of dollars in taxpayer money to cover mortgage default losses, the notion was that struggling borrowers would see their loan amounts reduced to reflect declined home prices.

This has not happened. Instead, the HAMP program is basically a government-subsidized refinance program. The interest rates on the home loans are lowered to artificial levels--say, two percent--but the principal balance stays the same, i.e. the borrower still owes the bank the same amount of money.

Yes, interest rate refinance/modifications have yielded an average monthly savings of $500. But homeowners are still not exactly jumping out of their seats to pay the bank $400,000 over the course of 30 years for a house that's now worth $200,000.

The math just doesn't make sense for a lot of borrowers.

The Cold Reality: No Easy Solution to Ongoing Mortgage Finance Crisis

Mortgage interest rates remain at or near record lows. Housing sales have been up slightly, spurred by the First Time Home Buyer Credit of $8,000.

But beyond that, the housing situation is still uncertain for millions of Americans. The cold reality is that there is really no easy solution to the structural problems affecting the mortgage finance market.

For individual borrowers who are having trouble refinancing into an affordable home loan, the HAMP program is a great option to have, even if the deal is only a refinance and does not include principal reduction. It would be hard to get rid of this program entirely, flawed as it may be.

Nevertheless, startling statistics like the 25 percent figure can be expected to shock both lenders and borrowers alike with the continuing seriousness of our collective mortgage problem.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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