Lenders Avoid Redoing Loans, Boston Fed Concludes
The Federal Reserve Bank of Boston released a study July 6, 2009, which suggests that the Obama administration’s $75 billion dollar plan aimed at incenting lenders to rewrite delinquent loans is not likely to work. An excellent discussion of the Boston Fed report appears in today’s Boston Globe (link to article). According to one author of the Boston Fed study, the government would be better off giving the money directly to the struggling borrowers because “loan modification is not profitable for lenders.” How much money is paid to lenders under the current plan? Well, at the very least, the federal government pays lenders a $1,000 bonus for modifying the loan and an additional “pay for success” fee of $1,000 per year for three years if borrowers stay current on their new terms.
Those who argue the money would be better spent by providing direct payments to the struggling homeowners recognize one fact of the current incentive system: it is simply not providing enough incentive for banks to modify loans. Thus, very few meaningful loan modifications are taking place. The numbers are telling. The Boston Fed study, which looked at 665,410 loans originated between 2005 and 2007 that fell into serious delinquency, found that only 3% of borrowers who were more than 60 days late in their payments had received loan modifications that lowered their monthly payments and about 5.5% of such borrowers received modifications that did not result in lower payments.
Of the countless clients I have spoken to in the past several months who would be good candidates for a loan modification, I have met only one who was successful. Several others have lost thousands of dollars to loan modification scammers who charged up-front fees and failed to accomplish what they promised. Still others are busy making daily calls to their lenders and providing endless paperwork that always seems to need “updating.”
If one thing is clear from the current state of affairs, it is that the banks truly do own Congress. The cramdown bill that would have allowed bankruptcy judges to modify first mortgages on primary residences in a Chapter 13 bankruptcy went down in flames in the Senate. Why would our elected representatives quietly hush a bill that would have provided much needed relief to homeowners? No doubt they know who butters their bread and have chosen that loyalty over the best interests of their constituents back home who are facing lay-offs, furloughs, mounting bills, and foreclosures.