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Loan Modification Quality Matters
Loan Modification Quality Matters
posted by Tara Twomey
Yesterday new foreclosure and loss mitigation data was released by HOPE
NOW in its "Loss Mitigation National Data July 07 to November 08" and by
the OCC/OTS in their "Mortgage Metrics Report." Combined the reports
show a steadily increasing number of loan modifications and a slight
decrease in foreclosures. That's the good news. The bad news is a
large number of loans that have been modified are redefaulting. The
OCC/OTS report shows 37% of loans were 60 or more days delinquent after
six months. Here's an example to put this in real numbers. The HOPE
NOW report shows nearly 870,000 loan modification in 2008. Using the
37% redefault rate means that just over 317,000 borrowers will enter
the foreclosure pipeline again within 6 months.
The reasons that borrowers are falling back into default is the source
of much debate. Industry representatives claim that every modification
is affordable when it is made and borrowers redefault because their
circumstances change. Consumer advocates argue that servicers are not
creating long-term, affordable loan modifications.
Whose side does the data support?
Here's the rub. The data provided by industry is practically useless in
determining the quality of loan modifications. For example, OCC/OTS
defines a loan modification as a "Mortgage for which terms of the loan
are contractually changed with respect to interest rates or other terms
of the loan." HOPE NOW's definition provides: "A modification occurs
any time any term of the original loan contract is permanently altered.
This can involve a reduction in the interest rate, forgiveness of a
portion of principal or extension of the maturity date of the loan."
Under these definitions a three-month rate freeze and a life-of-loan
interest rate reduction are both counted as loan modifications.
Similarly, the capitalization of arrears, which increases the principal
balance, and principal forbearance or forgiveness both fall in the loan
modification box.
The best publicly available data that we have comes from Prof. Alan
White. His most recent analysis shows that "[o]nly 35% of modifications
in the November 2008 report reduced monthly payments below the initial
payment, while 20% left the payment the same and 45% increased the
monthly payment." Prof. White also notes that many of the modifications
being made are temporary (5 years or less) and that some include balloon
payments or other negative amortization features that will be
problematic down the road. With this quality of loan modification, it
is not surprising many borrowers have already redefaulted or that more
borrowers will redefault in the future.
Industry has focused their attention on increasing the quantity of loan
modifications, but resolving the foreclosure crisis will take more than
higher loan modification numbers. If we want to keep families in their
homes, loan modification quality matters.
M. Erik Clark
Borowitz, Lozano & Clark, LLP
100 N. Barranca Avenue, Suite 250
West Covina, CA 91791
www.BLClaw.com
Office: (626) 332-8600
Fax: (626) 332-8644
Board Certified in Consumer Bankruptcy
American Board of Certification
Loan Modification Quality
Mattersposted by Tara TwomeyYesterday new foreclosure and lossmitigation data was released by HOPENOW in its "Loss Mitigation National
Data July 07 to November 08" and bythe OCC/OTS in their "Mortgage Metrics
Report." Combined the reportsshow a steadily increasing number of loan
modifications and a slightdecrease in foreclosures. That's the good
news. The bad news is alarge number of loans that have been modified
are redefaulting. TheOCC/OTS report shows 37% of loans were 60 or more
days delinquent aftersix months. Here's an example to put this in real
numbers. The HOPENOW report shows nearly 870,000 loan modification in
2008. Using the37% redefault rate means that just over 317,000
borrowers will enterthe foreclosure pipeline again within 6
months. The reasons that borrowers are falling back into default is
the sourceof much debate. Industry representatives claim that every
modificationis affordable when it is made and borrowers redefault because
theircircumstances change. Consumer advocates argue that servicers are
notcreating long-term, affordable loan modifications.Whose side does
the data support?Here's the rub. The data provided by industry is
practically useless indetermining the quality of loan modifications.
For example, OCC/OTSdefines a loan modification as a "Mortgage for
which terms of the loanare contractually changed with respect to interest
rates or other termsof the loan." HOPE NOW's definition provides: "A
modification occursany time any term of the original loan contract is
permanently altered.This can involve a reduction in the interest rate,forgiveness of aportion of principal or extension of the maturity date of
the loan."Under these definitions a three-month rate freeze and a
life-of-loaninterest rate reduction are both counted as loan
modifications.Similarly, the capitalization of arrears, which increases the
principalbalance, and principal forbearance or forgiveness both fall in the
loanmodification box.The best publicly available data that we have
comes from Prof. AlanWhite. His most recent analysis shows that
"[o]nly 35% of modificationsin the November 2008 report reduced monthlypayments below the initialpayment, while 20% left the payment the same and
45% increased themonthly payment." Prof. White also notes that many of
the modificationsbeing made are temporary (5 years or less) and that some
include balloonpayments or other negative amortization features that will
beproblematic down the road. With this quality of loan modification,
itis not surprising many borrowers have already redefaulted or that
moreborrowers will redefault in the future.Industry has focusedtheir attention on increasing the quantity of loanmodifications, but
resolving the foreclosure crisis will take more thanhigher loan modification
numbers. If we want to keep families in theirhomes, loan modification
quality matters.
M.
Erik ClarkBorowitz, Lozano & Clark, LLP100 N. Barranca Avenue, Suite
250West Covina, CA 91791www.BLClaw.comOffice:
(626) 332-8600Fax: (626) 332-8644Board Certified in Consumer Bankruptcy
American Board of
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