The Boston Fed looked at foreclosures and loan modifications and kinda explains why banks modify so few loans and why government efforts to increase loan modifications may not be very effective.
However, we point out that renegotiation exposes lenders to two types of risks that are often overlooked by market observers and that can dramatically increase its cost. The first is “self-cure risk,” which refers to the situation in which a lender renegotiates with a delinquent borrower who does not need assistance. This group of borrowers is non-trivial according to our data, as we find that approximately 30 percent of seriously delinquent borrowers “cure” in our data without receiving a modification.
The second cost comes from borrowers who default again after receiving a loan modification. We refer to this group as “redefaulters,” and our results show that a large fraction (between 30 and 45 percent) of borrowers who receive modifications, end up back in serious delinquency within six months. For this group, the lender has simply postponed foreclosure, and, if the housing market continues to decline, the lender will recover even less in foreclosure in the future.
{ 2 comments… read them below or add one }
EquiDebt 07.10.09 at 10:49 am
John - truly where the rubber meets the road is how the Master Servicing Agreements (MSA’s) and Pooling Servicing Agreements (PSA’s) are worded for Loss Mitigation / Workout procedures.
Since roughly 85%+- of all residential mortgages are NOT owned by the Servicer that collects payments, it is these contracts that dictates what can and cannot be done. As a former Secondary markets executive, I have read these agreements over the years. Since there was not sufficient forethought on the matter (hindsight being 20/20) - most of the language limits what the Servicing entity can do and it also limits what the owner can do because they need to protect shareholder value and protect erosion of ROI as much as possible.
Many are “handcuffed” in contract law issues. They can only do what the contracts allow because of the fear of breach resulting in a lawsuit. Several of these suits are pending and any outcome (which could take years to work-out) will shape the future for loss mitigation on residential mortgages.
What needs to be done is a tangible solution that benefits the “lender” and the homeowner. What this is really coming down to is the homeowner needs an “incentive to stay” because a modified payment to a mortgage that is severely negative equity is the equivalent of “mortgage slavery” & a “tax deductible rental” - it is delaying the inevitable - which of course is an exit of the property through short-sale or Foreclosure - further eroding RE values.
Innovation with a proper risk/reward ratio is the key. I believe getting the lenders to use an instrument such as the “HEFI(c)” (Home Equity Fractional Interest) Agreement is a tangible “win/win” solution.
My firm is having dialogue with several servicers/lenders/hedge funds etc that will hopefully see the benefit of modifying through a principal reduction and in exchange the Lender uses a HEFI (c) Agreement to share in the equity & appreciation of the property. The Homeowner gets a “real” modification and the Lender gets a tangible asset in the HEFI (c) and a performing loan that should be able to be re-sold in the secondary market for Par+.
I encourage any discussions on this with anyone that is interested and can connect me with Lenders that would be open to the idea of a HEFI (c).
http://blog.mortgagemediationgroup.com/
Sincerely,
John Blanks, President
EquiDebt Solutions, LLC
jblanks@tcmmg.com
602-430-7401
Burt Carlson 07.13.09 at 12:18 pm
Assuming the homeowner wants to stay in the home the best solution for keeping people in their homes when they are upside down is a loan modification program including equity sharing down the road. The government only got it half right with Making Home Affordable but failed miserably with Hope for Homeowners and other efforts. Why the government, lenders, servicers, investors, etc cannot get together on this issue even accounting for the contracts and so forth amazes me. We all know what the problem is and most of us know what the solution should be.