Loan Modification Program Isn't Stemming Foreclosures in Phoenix



Tags: lenders, modifications, program, payments, housing, foreclosure, homeowners, borrowers, modification, government

The day after signing the stimulus bill into law in Denver back in February, President Obama came to Mesa, AZ—a suburb of Phoenix, the nation's foreclosure capital—to announce a new loan modification program aimed at lowering the monthly mortgage payments of homeowners who've taken an income hit in the recession. As the President said in his speech that day:

Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs. . . .[I]t will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

Nearly five months later, it makes sense to ask how that program is working out in the foreclosure-ridden Phoenix metro. After all, if the program is performing well here in the Valley of the Sun, it might bode well for the prospects in areas less severely hit, right?

Well, so far, not so good, as Catherine Reagor at the Arizona Republic reports today. And with only about 240,000 loan modifications completed thus far nationally, it looks like the administration is far, far off from its goal of helping 7+ million families avoid foreclosure.

So far the plan isn't working as anticipated. Many eligible Valley homeowners can't reach anyone at their lender who will work with them. More people are losing their jobs, which makes them ineligible for the government-backed program. For many of those who did get a modified payment, there was a harsh discovery. Modifications often were made on a three-month trial basis, and now lenders are revoking the terms - sometimes even when payments are met - and leaving some homeowners with the old payments they can't afford.

In June, foreclosures across metropolitan Phoenix jumped to 5,150, a 35 percent increase from May, reports the research firm Information Market. This jump came after foreclosures fell in March, April and May. Problems with the loan-modification program and the expiration last month of a government-requested lender moratorium on foreclosures are behind much of the Valley's increase, housing analysts say. [...]

Most borrowers and housing advocates blame lenders for loan modifications failing. They say lenders have not responded quickly to borrowers seeking loan modifications. And some lenders who agreed to participate have not developed their own plans for loan modifications. [...]

A new study by the Federal Reserve Bank of Boston found most mortgage lenders don't want to modify loans because they will lose money on the deals. The Fed's study found only about 3 percent of seriously delinquent borrowers had their loans modified to lower their payments. The study focused on loan modifications done during 2008 when lenders were encouraged by the federal government to modify loans and avoid foreclosure but weren't compensated for the modification. [...]

The Obama administration's housing plan calls for modifying mortgages so payments take no more than 31 percent of a borrower's income. To reach that point, lenders are encouraged to cut the interest rate and principal of a loan. But they don't have to do it for free, even though studies show keeping a loan out of default or foreclosure is less costly for lenders.

Lenders get a $1,500 bonus for working with a borrower before the borrower falls behind on payments. In addition, lenders get $1,000 for every loan modification they do. Then for each year the borrower is able to continue paying, the lender receives at least another $1,000 for up to three years. Homeowners get similar reductions in the principal of their loan for each year they stay current. The federal government also will kick in money to reduce the principal on the loan so the lender isn't out tens of thousands of dollars for a mortgage it modifies.

To qualify, borrowers must show they have had a significant change in their income or expenses so they can't afford their current mortgage. Borrowers must have a job to qualify. As the unemployment rate climbs, this element of the plan is becoming a bigger problem. Some borrowers who started the loan modification process have since lost their jobs. [...]

About 240,000 U.S. homeowners have received some type of loan modification through the plan, reports the Treasury Department. A record 5.4 million U.S. homeowners are behind on their mortgage payments. The goal is to use the $75 million to modify 4 million mortgages in the next few years. Many of the current modifications are still in a three-month trial period.

A problem emerging is some lenders are not extending modifications past that trial period. Government-sponsored lenders Fannie Mae and Freddie Mac, which back more than half of all U.S. mortgages, require the trial. The goal is twofold: See if borrowers can make the lower payments and give lenders time to process the new loans. [...]

It's unclear why lenders are revoking some of the modifications, though housing advocates believe lenders may have found foreclosing on Valley homes more worthwhile than modifying the loans. [...]

"The government programs are very challenging," said Sheila Harris, former director of the Arizona Housing Department. "(The programs) aren't flexible and don't respond to market conditions."

That's a pretty damning quote from a former state housing chief, and it helps to cut to the point. Take some program rigidity, add in a cup of unresponsiveness to market conditions, fold in the simple fact that the program is designed to push lenders into doing something they either (a) don't want to do, or (b) might otherwise choose to do on their own (but under their own guidelines and evaluation criteria), and bake that in a hot oven of market uncertainty and ever-shifting housing market conditions—that's sounding to my ears like a recipe for program failure.

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1/9/2013 7:32:18 PM