Does Mortgage Modification Simply Delay Default?
A Loan Modification Can Make House Payments More Affordable
May 30, 2009
The Obama administration has offered a $75-billion dollar financial package to encourage mortgage lenders to help homeowners that are struggling with house payments and underwater with negative equity. A recent Fitch Ratings study of both jumbo loans and subprime mortgages found that mortgage modification helps initially, but the majority of people will default on the new agreement within less than 12 months.
Does Mortgage Modification Really Help with House Payments?
The Fitch Ratings study projected that between 55% and 65% of loan modifications will be 60 days delinquent within less than a year. The incidence of default increases further for higher risk borrowers, including those with high debt-to-income ratios and bankrupts. Delinquency rates on mortgage modifications were anticipated to be as high as 65% to 75% for this category of borrower.
Why Might Loan Modifications Fail?
Rising unemployment, falling disposable income and deceptive practices by borrowers were seen as the main reasons for unsuccessful mortgage modifications. Diane Pendley, the managing director of Fitch Ratings, stated: "Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not, reducing the house payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses."
Reliable Payers Anger Over Mortgage Modifications
Borrowers underwater with negative equity can now benefit from preferential interest rates and an extension to the term of their loan. The Fitch Ratings study found that there was anger amongst homeowners that had continued to make punctual house payments, yet weren't receiving any government assistance. The study found that evidence was available that showed that some borrowers were choosing to default in order to benefit from these better rates.
The Fitch Ratings study provides an insight into the overall effectiveness of mortgage modification. Whilst making house payments is a large monthly commitment, financial difficulties can and do come in many forms. A loan modification is only part of the solution; those struggling with credit card payments and student loans should seek assistance from a qualified credit counselor.
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Sources
Reckard, Scott. (May 27, 2009). "Many modified mortgages will default again, Fitch Ratings projects". Los Angeles Times.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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