Why Can’t We Treat Foreclosures Like Fires & Floods?
Loan modifications are just about impossible, say lenders — except when there’s a fire, flood or tornado. Then home mortgages are suddenly as flexible as taffy. Lenders in such situations magically discover an immediate ability to revise loan terms, defer payments, postpone foreclosures, forgive late fees and end negative reports to credit bureaus.
For its part, the lending industry says it’s great at disaster relief.
“The truth is,” said John Robbins, chairman of the Mortgage Bankers Association in 2007, “we’re good at cleaning up. We had a lot of practice after what Katrina and Rita did to the Gulf Coast. We prevented widespread foreclosures for more than 18 months by providing forbearance for many homeowners.”
In fact, there’s actually a National Housing Locator System for disaster victims — a system, says HUD, designed “to deliver housing assistance by rapidly locating rental housing and available government-owned single family homes for sale during an emergency.”
Little Change
But instead of fires and floods, we now face a national financial disaster of massive proportions caused in large measure by toxic loan products and reduced underwriting standards. Why are the actions which are so right and so obvious when homes burn in California or flood along the Gulf Coast so wrong when loans reset? What, exactly, is the practical difference between a home lost to fire and a home lost to toxic financing? Are not the losses in either case substantial?
A 2007 survey from Moody’s Investor Service tells us that few loans are now being modified.
“Despite much industry dialog and heavy press attention on the topic of loan modifications as a mitigation technique to avoid foreclosure and reduce losses on defaulted loans, the survey results suggest that on average subprime servicers have only recently begun to materially increase the number of modifications as it relates to interest rate resets. Specifically, the survey showed that most servicers had only modified approximately 1% of their serviced loans that experienced a reset in the months of January, April and July 2007.”
By November 2009 not much had changed. The federal government was reporting that 31,382 loans had been modified under its Making Home Affordable program while an additional 697,026 loans were in trial modifications.
Meanwhile, according to RealtyTrac, 306,627 homeowners nationwide were facing foreclosure in November 2009, up 18% from a year earlier.
“State by state, the economic costs from the subprime debacle are shockingly high,” says Senator Charles E. Schumer (D-NY). “From New York to California, we are headed for billions in lost wealth, property values, and tax revenues. The current tidal wave of foreclosures will soon turn into a tsunami of losses and debt for families and communities.”
“Lenders have shown that they are entirely capable of dealing with large numbers of troubled loans in times of crisis and disaster,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the largest marketplace for foreclosure properties. “The need now is to institute such programs on a national basis, to recognize that the mortgage meltdown is both substantial and worthy of the same concern that lenders display when visible disasters lead the nightly news.”
One approach might be mass modifications.
“Renegotiating terms loan by loan is too costly and time consuming,” says Sheila C. Bair is the chairman of the Federal Deposit Insurance Corporation, writing in The New York Times.
“Subprime servicers should take a more standardized approach: restructure all 2/28 and 3/27 subprime hybrid loans for owner-occupied homes in cases where the borrower has been making timely payments but can’t afford the reset payments. Convert these to fixed-rate loans at the starter rate.”
Bair’s idea is innovative, but it would impact mortgage investors more than any other group. By the time the matter got untangled in court, millions of additional homes would be lost to foreclosure.
Three Steps
Is there a solution? There certainly is not an answer which will save every deserving borrower, but there is a way to keep investors whole while saving a large number of homes.
How? Take three steps: First, require lenders to offer every toxic ARM borrower the opportunity to refinance. Second, ban the imposition of prepayment penalties for those who refinance ARMs. Third, make the modification process cost free to assure that borrowers are not overcharged.
An opportunity to refinance is not the same as a commitment to refinance. The Make Homes Affordable program requires income verification and the completion of a three-month trial period. That’s not unreasonable — and it’s certainly better than foreclosure.
————————
Published originally by RealtyTrac.com during November 2007, edited and updated, and posted with permission.
© Copyright 