Study Modification Not Enough to Stop House Repossession

A report suggested that the federal government’s loan modification programs are not enough to stop house repossession across the country.

According Federal Reserve Bank of Boston economists, faulty economic assumptions may be one of the reasons why the Obama Administration’s Home Affordable Modification Program (HAMP) has so far failed to achieve its target goal of helping about 7 to 9 million distressed homeowners across the country avoid home repossession.

When the foreclosure crisis started, there was a widespread consensus that in order to prevent the problem from spreading across the country, lenders and banks should modify the troubled loans of homeowners to make them affordable.

According to industry experts, the initiative is a win-win deal for both lenders and borrowers. Lenders would modify the loan by reducing the interest rate or outstanding principal. Borrowers get to stay in their home while lenders avoid the trouble and cost of house repossession and reselling foreclosed properties.

In line with the program, the Department of Treasury offered about $75 billion to subsidize the cost of reducing the monthly payments of borrowers to not more than 31 percent of their gross income. The program also provided incentives to lenders by paying them $1,000 for each successful loan modification and additional $1,000 for every modified loan that remained current after three years.

But the program has so far failed to make a dent in the foreclosure problem. Industry experts said that the slow progress of the program may be due to the increasing unemployment rate.

Meanwhile, federal economists pointed out that modification downplayed the underlying reasons why lenders would want to foreclose. They said that an estimated 30 percent of borrowers would be able to make their account current without modification. That means the same percentage of the total cost of loan modification is wasted.

And because lenders do not have advance knowledge of who are these borrowers who could eventually make their accounts current, they hesitate to provide loan modifications.

Another issue is the risk that homeowners would default again on their modified loans. By the time that homeowners redefault, the foreclosure costs for lenders would even be higher.

Federal economists concluded that the number of house repossession that could be prevented is fewer than what the public were made to believe.

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• Bank Delays Hinder House Repo Prevention Efforts
• Loan Modification Myths Dispelled for Homeowners Facing Foreclosure