Sunday, January 31, 2010

Why Your Lender Will Not Approve Your Loan Modification

Loan Modification has been all over the news for the last two years, as the Credit Crisis /Housing Bubble / Mortgage Meltdown debacle has played out and left many a homeowner trapped with a burdensome loan on an un-lendable property or in an un-lendable circumstance.

I've been right there with you trying to see past the smoke and mirrors to find out if modifications actually work. And when most inquiries end up being answered by snake oil salesmen, it's pretty easy to get discouraged. The media has made a sport out of exposing some of the worst con artists out there preying on vulnerable, desperate homeowners.

But when the White House came out with a "Home Affordable Modification Program" (HAMP) last year, there was some promise in the idea of a sanctioned and systematic approach to the process. And then the numbers just didn't show up. Sure, there have been some modifications, but not nearly as many as there are distressed homeowners. Banks are not just handing these out.

So why not? Because tt's a waste of money. A lost cause. The Boston Federal Reserve puts it to numbers in a recent paper. You don't have to even read past their title to get into the arguments, but there are some interesting data in the paper for the statistically-inclined.

  • Securutization makes it logistically difficult for lenders to identify the end-invesors and modify terms
  • Redefaults occur in roughly 1/3 of modified cases, thereby rendering the effort wasteful
  • Self-cure occurs in roughly 1/3 of untouched delinquent cases. Another 'why bother?' argument...
I find the self-cure idea particularly interesting, as it doesn't paint the picture of a vortex of distress in the housing sector like you hear from other sources. It may be a little early to tell still, but i's going to be something to keep an eye on.

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