By Moe Bedard
It’s getting to be rather old news indicating that notices of default have hit record highs. Most everyone is aware of the fact that we are in a housing crisis. However, few people claim that lenders offering loan modifications are to blame for elongating the housing crisis. President Obama has sponsored loan modification programs and promotes refinance programs as a solution to the crisis. Could the President and the Banking Industry be wrong? Sean O’Toole of Foreclosure Radar seems to think so and his argument is rather persuasive.
From the North County Times:
Stalled foreclosures, the result of government intervention and bank attempts to modify loans, are “only delaying the problem,” O’Toole said. In March, there were 67,005 homes across the state scheduled to be foreclosed upon. But banks seized only 10,040 foreclosures, according to Foreclosure Radar.
As a result, there are tens of thousands —- maybe hundreds of thousands —- of foreclosures across the state poised to hit the market but have yet to, also known as “shadow inventory.”
Considering the facts contained in the recent OCC and OTS Mortgage Metrics report I can say that I somewhat agree with Mr. O’Toole. Fore example, I would agree that loan modifications are presently stalling the foreclosure recovery, but only because the quality of loan modifications given by the banks are so poor.
Most modifications offered maintain the same monthly payment, increase the monthly payment or decrease the monthly payment by less than 10%. If banks would provide greater discounts then I’m sure we’d see a lower re-default rate on properties and, hence, there would be fewer foreclosures.
{ 6 comments… read them below or add one }
I completely agree. Banks are completely capable of making modifications that benefit both themselves and the consumer in the LONG RUN. These mods that do not reduce monthly payment significantly or help people get current without raising it are basically just putting a band-aid on a gaping wound. The same consumer will eventually default on the mod and cause the cycle to begin all over again. So basically, all that the bank is doing is delaying the inevitable. It has me under the impression that banks are only doing this to appease the new program and not to the benefit of the consumer. And in the end, by not benefiting the consumer, all the bank is doing is guaranteeing themselves a bunch of empty, condemned, and foreclosed houses and no one with good credit left to buy them.
Hi Moe,
Thanks for the mention. I really don’t think we’ll see loan mods make a significant difference in the foreclosure numbers until we see mods with substantial principal balance reductions. The banks seem to believe that prices will return once the “foreclosure crisis” is over, and that payment only mods will carry them through until then. This fails to grasp the reality that prices never should have reached the levels they did in 05-07 and would not have if it wasn’t for option ARM’s and other loose loans. Hopefully we’ll all get to this realization sooner than later so that we can start focusing on the real problem in this economy — 20% of US, and 30% of CA households with a mortgage are underwater. Hard to see consumer confidence rising until we clear out the toxic debt on >homeowners< balance sheets.
Thanks again,
Sean
http://www.ForeclosureRadar.com/
Sean,
My thoughts are the only way to stem the tide of foreclosures is to offer principle reductions.I really do not see principle reductions happening anytime soon, but will be more common at the end of 2009-2010. That will be the ONLY way to keep millions of homeowners from fleeing their underwater homes.
Keep up the good work!
Marecela, you hit the nail right on the head!
You are correct! The banks need to take their lumps like the rest of us, suck it up, and start dropping principal. They will lose that money anyway taking the property through foreclosure. This way, they are actually being somewhat human by helping the taxpayers who already funded their ‘bailout’. They should drop principle to current value, change rates to allow the loans to service, then the market will start to recover.
exactly…all of you are right…im sure there are a lot of homes still out there with only days left before there foreclosed on…Banks have got to come to the realization principle reduction and interest rate reduction is the only way…what they have been doing thus far is not working…commonsense tells you the type of reductions listed above will…if banks would even consider revamping the orginal note with a 5 year lower payment, then the remaining years adjusted as needed…it would give the homeowner time to get their affairs in order…hopefully this will result in less foreclosures…
The banks seem to have consumers going around in circles for months faxing and sending the same information so many times that in the end the consumer runs out of money and losses their home. They should have let these banks go under and start with new employees that would understand finances instead of the greedy with non finance/accounting degrees.
I don’t see things getting better in California. Every day in my area their is two or three new homes that go empty and become vandalized.