Does Foreclosure Solution Rest on Loan Modifications?

A moot question that has arisen is does foreclosure solution rest on modification of loans or is it a misconception?  The policy formulators of the country have held for a long time that one of the best ways to contain foreclosures is to opt for loan modifications.

The logic seems infallible. Since both the lenders and borrowers are affected by the cost of the mortgages it will satisfy both if the mortgage is renegotiated. The pricking thorn in the rose bush is the problem of securitization. The slicing up of loans into pieces makes it harder to get the lenders to agree to change of terms. Here comes in the necessity of government action.

The argument favouring modification is compelling but it is inaccurate. Three Federal Reserve Economists have made a recent study showing that very few of the delinquent mortgages have been modified.

The economists have browsed through jumbo sized data that peers into 60% of all the home mortgages in the country. Among the gravely delinquent loans less than 3% were modified so that their monthly payments got reduced in the year after they faced trouble. Fewer than 8% got any sort of modification. The differences between securitized and non-securitized loans were negligible. Lenders of all hues preferred to foreclose on the offending borrowers rather than give them the option of modification. In half the cases repossessions are being processed while it has been completed in a third of the mortgages surveyed.

One reason why the lenders are not keen about renegotiating is that in most cases it does not work out. Nearly half of the worked out loans lapse back to delinquency again by six months time. The banks reason that when the price of property is falling by the day – delaying foreclosure invites greater losses.

Another reason for the reluctance of the lenders is that about a third of the gravely delinquent loans are cured by itself within twelve months. These are either cleared or made current. If the lenders had renegotiated with them then unnecessarily they would have suffered loss.

The study thus shows that many are temporarily handicapped and cannot clear dues for a short period of time because of job loss or illness. The government could come forward to help these people tide over the critical time.

The high number of re-defaults goes to show that modification only postpones the inevitable and does not cure the ailment.

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