Are Loan Modifications Good or Bad?
by HISCEC Staff
November 30, 2009 - 9:56 pm
November 30, 2009 - 9:56 pm
A new report from bank regulators shows that lenders are beginning to lower the principal balances due on home loans for some struggling borrowers, a practice known as a Loan Modification. Lenders are betting that by taking the hit now they can improve their chances of being repaid. Over the next few years banks and other lenders will be sorting through endless of loan modification applications. The approval rate of loan modifications in the second quarter of 2009 was 10%, which is a 7% jump from the first quarter, based on a Office of the Comptroller of the Currency Report.
Banks now have the cash to justify mortgage modifications because of their balance sheets have strengthened with an influx of government cash. The Obama administration announced plans to help troubled homeowners in March. The plans include financial incentives for lenders that modify loans. But, the plan involved giving billions of dollars to strapped banks with very few strings attached. Ultimately it has taken until now for the lenders to use the federal hand-out as an incentive to modify mortgages.
Obama's critics say that banks should have never underwritten mortgages on a stated income basis, and that many home buyers should have known that the homes were beyond their means. Obama's plan has been very controversial, because many see it as using tax dollars to unjustifiably help these two irresponsible parties. Almost a half million mortgage modifications were recorded in the second quarter of this year, and 10% of those involved lowering the principal. Even with this help, some homeowners are beyond help. This is often a sign that the loan was irresponsibly approved and processed.
Over one quarter of the loans modified in the first quarter of 2008 were in default again within three months. And furthermore, of the loans modified in the second quarter of 2008, 56% were in default again a year later. The most common procedures in loan modifications have been to either lower interest rates or extend the term of the home loan. These methods help homeowners without requiring lenders to reduce the principal owed. The last resort for any bank is to write off some of the loan altogether, but this is happening in some cases. Banks first try to modify loans by lowering the interest rate for qualifying borrowers.
If that doesn't lower the payment enough then the bank may extend the term of the loan, which will lower the monthly payment even more. Despite of the loan modification efforts of lenders, foreclosures still continue to rise. In a report last week, an estimated 12% of U.S. homes with mortgages will be in foreclosure over the next few years. The report said that loan modification efforts are not expected to slow or stop the problem, mostly because so many homeowners default again.
Because of the rate of defaults after a loan modification, many believe that the governments involvement is just slowing the inevitable. In the end, all of the irresponsible lending and borrowing would have fixed itself quicker without government resources.
California Home Loan Services by SDMTG. Our 58 years of experience in California mortgage financing makes us the best home finance option.
Article sponsored by San Diego Mortgage Group.
Obama's critics say that banks should have never underwritten mortgages on a stated income basis, and that many home buyers should have known that the homes were beyond their means. Obama's plan has been very controversial, because many see it as using tax dollars to unjustifiably help these two irresponsible parties. Almost a half million mortgage modifications were recorded in the second quarter of this year, and 10% of those involved lowering the principal. Even with this help, some homeowners are beyond help. This is often a sign that the loan was irresponsibly approved and processed.
Over one quarter of the loans modified in the first quarter of 2008 were in default again within three months. And furthermore, of the loans modified in the second quarter of 2008, 56% were in default again a year later. The most common procedures in loan modifications have been to either lower interest rates or extend the term of the home loan. These methods help homeowners without requiring lenders to reduce the principal owed. The last resort for any bank is to write off some of the loan altogether, but this is happening in some cases. Banks first try to modify loans by lowering the interest rate for qualifying borrowers.
If that doesn't lower the payment enough then the bank may extend the term of the loan, which will lower the monthly payment even more. Despite of the loan modification efforts of lenders, foreclosures still continue to rise. In a report last week, an estimated 12% of U.S. homes with mortgages will be in foreclosure over the next few years. The report said that loan modification efforts are not expected to slow or stop the problem, mostly because so many homeowners default again.
Because of the rate of defaults after a loan modification, many believe that the governments involvement is just slowing the inevitable. In the end, all of the irresponsible lending and borrowing would have fixed itself quicker without government resources.
California Home Loan Services by SDMTG. Our 58 years of experience in California mortgage financing makes us the best home finance option.
Article sponsored by San Diego Mortgage Group.
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