One in Three Modifications Result in Lower Payment: Report
Despite increased efforts to prevent foreclosures, only 35 percent of voluntary mortgage modifications reduced monthly payments; 20 percent of modifications had no effect either way on the payment amount and nearly half of all modifications -- 45 percent -- resulted in an increased monthly payment, according to research reported Thursday by Valparaiso law professor Alan White. Not even 50 percent of loans modified in January were current in payments on Nov. 25, according to his data. White's original report, published online in August, studied a sample of securitized subprime mortgage pools. His gathered his data from various sources like the HOPE NOW coalition of mortgage servicers and counselors, the Mortgage Bankers Association and the working group of state banking and consumer credit regulators working on the foreclosure crisis. The data released Thursday was published as an update to that report, with an expanded study of more than 3.5 million subprime and alt-A mortgages, which had all been securitized. According to White's most recent data, the amount of mortgage debt carried by American homeowners has spiked 250 percent during the past decade to $10.5 trillion dollars. "While banks have written down more than half a trillion [dollars] in mortgages and mortgage-related securities, homeowners have gotten little or no relief," White wrote. "A broad range of economists from Nouriel Roubini to Ben Bernanke to Martin Feldstein have recognized the need to deleverage the American homeowner. The excess mortgage debt is depressing home prices and consumer spending, and acting as a drag on the broader economy." Although servicers might have the best of intentions to deleverage through modifications, many such modifications are merely temporary. White cited the Federal Deposit Insurance Corp.'s modification template for IndyMac Federal Bank as one such example of temporary modifications encouraged through adjusting interest rate and amortization term -- for only five years -- with rate and payment increases after then. Servicers also use balloon payments and other forms of deferrals in order to reduce payments temporary without actually reducing total debt. These are all forms of "deferred payment shocks ... of the sort that caused the foreclosure crisis," White wrote. White also noted that significant numbers of loans are seriously delinquent but not in modification or foreclosure processes. His data showed there were more than 120,000 loans more than 120 days past due but not in foreclosure, compared with about 21,000 modifications and 300,000 in foreclosure or bankruptcy. He attributed this phenomenon to the ability of servicers to either restructure or foreclose on all the delinquent loans, but made no mention of foreclosure moratoria efforts sweeping the nation. the government-sponsored entities and large financial institutions have implemented in recent months stays on the foreclosure process during which severely delinquent loans may not enter foreclosure proceedings, effectively slowing the entire process. The GSEs put a moratoria in place for borrower-occupied homes that will not enter eviction or foreclosure proceedings until after the new year. It was an action put in place to allow time for the streamlined modification process (SMP) announced in November to go into effect on Dec. 15. Fannie Mae (FNM) and Freddie Mac (FRE) announced Thursday the SMP officially went into effect Monday and will replace several time-consuming steps in the traditional modification process with faster procedures and standard eligibility requirements, Freddie said in a press statement. The program will allow mortgage and escrow payments to be cut to 38 percent or less of an eligible borrower’s gross monthly income by either reducing mortgage rates, extending the mortgage term up to 40 years, or forbearing on a part of the principal amount until the loan matures or is paid off, at which time the borrower will be required to make a balloon payment. This last method shows another example of a situation in which total debt is not reduced, but payments are simply delayed. It's unclear at this time what sort of success rate the SMP will have. Rallying support for deleverage The National Association of Consumer Bankruptcy Attorneys (NACBA) released a separate press statement Thursday with research conducted in supplementation to White's paper. The consumer group studied various efforts to reduce foreclosures, primarily through loan modifications. When studying the Hope for Homeowners program -- part of an act passed in July and put into effect Oct. 1 -- the NACBA noted that, despite the "strength of forecasts that 400,000 homeowners would be aided -- there have been only 312 applications to date -- and no mortgage modifications whatsoever have taken place." "The number of foreclosures is growing rapidly and is reaching well beyond the subprime world to the American middle class," said NACBA president Henry Sommer. "Despite a proliferation of voluntary programs, we are not seeing evidence of a meaningful number of sustainable loan modifications." White's paper, "Deleveraging American Homeowners," can be downloaded from papers.ssrn.com. Write to Diana Golobay at email@example.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.