If you’ve been struggling with your lender to get a Home Affordable Loan Modification, the fact that a measly 5% of ‘eligible’ homeowners (170,000 to be exact) have actually entered into a long term modification plan with their lender won’t come as surprise.
It’s likely that your effort has drug on for months or, worse, you’ve been denied one or more times
just to be told to reapply.
Why is this?
Well, as it turns out and we’ve reported before, there are actually 7 major flaws with HAMP that put its success in jeopardy and act as disincentives to lenders and servicers. Some of the flaws can be dealt with, but several cannot.
Why Servicers Won’t Modify Your Mortgage
The first 6 of the 7 flaws act as disincentives for lenders and servicers and are the primary reason they drag their feet or deny your application.
- There is no financial incentive for a servicer to modify a mortgage in many cases. What most people don’t understand is that once you stop paying your payments, your lender’s motivation quickly shifts from trying to make a profit to minimizing their losses. So, even though HAMP offers financial incentives for them to modify your mortgage, they’ll often lose less on your property if they foreclose they they would by modifying it and accepting the incentive. It’s not that banks necessarily make money on a foreclosure (although they do in some cases), they just lose less.
- Banks and servicers don’t have to explain why they deny a package. And if they do give a reason, they don’t have to explain how they determined you didn’t qualify. There’s nothing in HAMP that would motivate a lender to take the time and energy to explain what happened and why.
- There’s little to no enforcement from the Treasury Department and the lenders know it. So while the procedures are well established now, it’s very easy for the lenders to skate the system and feign compliance when they really have no intent to modify loans.
- Most servicers and lenders aren’t set up to handle foreclosure situations. They were organized to handle setting up loans and handling payments, not foreclosure counseling or the intensive mortgage modification process.Most servicers have made big strides in hiring people and improving their responsiveness, but they also have a long way to go and there’s no way to know how many of those new hires are actually working modifications as opposed to processing foreclosure. More than likely, servicers are hiring people to do both since the modification process doesn’t stop the foreclosure process.
- In many cases (especially in the hardest hit markets), if a servicer were to reduce your monthly payment to the point it met the 31% debt to income ratio, they would have to reduce the principal balance in order for your payments to EVER pay the loan off. And they’re just not willing to do this because they’ll lose less by foreclosing in many cases (see point 1 above).
- Servicers are unsure of what Congress and the President are going to do. With so many changes in the past and talk of more changes coming, lenders don’t know what to expect so they’re waiting for the other shoe to drop. Uncertainty doesn’t go over well with Wall Street or bankers, so they’d prefer to wait and see how things pan out before they do too much changing.
HAMP’s Achilles Heel
There are several structural problems with HAMP that either cause or intensify the 6 points above, but there’s one final reason the program is busted.
It was designed to solve a different problem than what lenders are experiencing today.
HAMP was designed to help homeowners whose payments were adjusting because of unaffordable mortgage loans. It assumed your income would be stable.
But the reason for a growing number of defaults in recent days has been unemployment rather than recasting loans. And if you have unstable or no income, lenders have no way to figure out a modification.
See our article about Guaranteed Forbearance for Unemployed Borrowers for one proposal. And also our article on President Obama Considering National Foreclosure Ban.
Inspiration for this article taken from: Mortgage-Modification Program Has Major Flaws by Alain Sherter
April 8th, 2010 at 7:34 am
hate to say i told you so. but i told you so.these people are not getting enough money from the government to make up for the loss what they need to do is give us the money towards our mortgage to help with bringing the mortgage current. and make the mortgage company’s put all the late charges and other fees at the end of the loan and pass some laws that wont allow them charge the fees that they do. that would help .
July 12th, 2010 at 8:22 am
Foreclosing isn’t always “cheaper” for the lender. The borrower(s) can stay in the home without paying the mortgage, go through state-mandated foreclosure mediation (if available), go all the way to judgment of strict foreclosure, THEN file the bankruptcy that Stays the foreclosure litigation. If there are two borrowers, 2 bankruptcy petitions means almost another year in the home without paying the mortgage (or rent elsewhere). The lenders could avoid clogging the court system if they agree to put people into a reasonable payment plan now – even if they stretch it 40 years – a reduced interest rate will allow them to regain some of the loss.