Why Loan Modifications Aren't Working
Craig Covert
June 26, 2010
About Craig Covert
Craig W. Covert is the Co-Founder and Editor in Chief of InvestorDirector.com Magazine. Having completed over 200 real estate transactions in the past seven years as a real estate investor, loan broker and hard money lender, Craig is now focused on consumer advocacy and growing the InvestorDirector.com community.
If it is not already plainly obvious, banks are more willing to take a home back through foreclosure than they are willing to rewrite a homeowner’s loan and keep them paying every month with a new, affordable interest rate. Without getting too detailed, there are reasons why banks prefer to shut the door in the face of delinquent homeowners. One reason is that banks do not “lend” money out of their existing assets when they create a mortgage for a consumer’s home purchase. The money for a home loan comes from the Federal Reserve Bank and is printed out of thin air and wired to commercial mainstream banks it sponsors. For every dollar a commercial bank holds in its reserves from depositors, roughly nine times that amount can be used for consumer loans, including mortgages. This is called fractional reserve lending; though it should be called fractional reserve “printing”.
Commercial banks like Chase, Wells Fargo, Bank of America, etc. are simply marketing arms for the Federal Reserve itself. These banks get to create mortgages with this no cost “funny money” and collect interest on it. That’s a pretty good position to be in, wouldn’t you say? Banks invariably waste time and money on human resources and attorneys by helping troubled homeowners with loan modifications; which explains why banks prefer to foreclose on them instead. It’s quicker, easier, and more profitable for a bank to take a home and sell it after foreclosure than it is to assist homeowners who are struggling to pay their monthly mortgage note.
It needs to be remembered that the US government has elected to help banks, using every American taxpayer as the “vessel” to do so. Remember the taxpayer assisted bank bailout? Behind the scenes, the bailout has grown in strength, but in a much more discreet way this time, going by the name of HAMP; intentionally limiting the amount of troubled homeowners who are eligible to receive a permanent modified home loan. The Obama Administration’s Home Affordable Modification Program (HAMP) is smoke in mirrors, designed to keep banks in the green while homeowners try to corral an ever-elusive, finalized, concrete home loan that they can afford. Less than 5% of struggling homeowners will get a HAMP modified home loan and here’s why:
HAMP guidelines apply to a strong economy and low unemployment.
A modified loan’s monthly payment must not exceed 31% of a family’s monthly income. The Congressional Oversight Panel who evaluated the HAMP program concluded this past October that “It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now”. Fifteen percent unemployment was unheard of when current troubled homeowners acquired their now unaffordable home loans. While an out-of-work person can, theoretically, get a loan modification under HAMP by proving eligibility for at least nine months of unemployment benefits, the program isn’t set up to handle someone without steady income, a situation that many homeowners face today.
The HAMP program places little emphasis on reducing the overall amount a person owes on their home.
It should be noted that home prices were driven up by liberal lending guidelines in an unregulated banking industry. Banks encouraged borrowing and consumers obliged, dissolving the supply of available housing units and driving prices through the roof. When banks stopped lending so liberally in 2007, consumers got stuck with mortgages that reflected a much higher property value created in the mortgage “boom” years. The few homeowners who have received permanent modifications through HAMP have watched their homes sink deeper underwater. According to FOXBusiness.com, “only 0.01% of mortgage modifications under the program got principal reductions. That means only 120 of the nearly 121,000 troubled loans have gotten the reductions that would best ensure the people stay in their homes”.
A probation period was set up to disguise the loophole for banks.
The first three months of a mortgage modification are a probation period for homeowners. While the probation period set forth by HAMP appears to be a time where homeowners can prove to their mortgage servicers they can handle the new loan terms, the probation period is really an escape clause for banks who can opt out of helping a distressed homeowner. Very few homeowners are making it out of their trial period because the banks are using a homeowner’s trial period to play games. The trial period is only supposed to last three months, but mortgage servicers are extending the period for over a year in some cases before kicking homeowners out of the program, even if they’ve met HAMP guidelines and made all their trial payments.
There is nobody patrolling the banks.
In a December 2009 article, Time Magazine reported that less than 1% of probationary loan modifications become permanent; 0.3% to be more precise. This is because there is little government oversight. Looking at the story above, which is only one of millions of sickening stories with similar outcomes, you can see why the program is a failure. On March 12th, 2010, the Treasury Department issued a statement saying that 90,000 borrowers had been dropped or kicked out of the program. The total amount of borrowers in trial modification plans as of March 2010 was 835,194. Wells Fargo, our nation’s second largest mortgage servicer said it “canceled agreements with 19,000 borrowers in trial plans” as it “stepped up efforts to make final decisions on trials where customers have made all required payments.” Translation: because we can do what we want due to the loopholes within HAMP, and because it’s more profitable to turn a blind eye to the problem, we will continue to collect people’s homes on top of all the interest they paid us over the years; it’s much more profitable that way; besides, what we are doing is not illegal. The trial period is our loophole where we can make excuses for not having to modify a homeowner’s loan; though the government did a fine job in making homeowners think that the trial period was their stage to demonstrate they could handle a modified loan’s payments if we elected to finalize it.
If there was a system of checks and balances in place, or if the government was truly on the side of the American homeowner, then these statistics would be quite different:
- Bank of America, our nation’s largest mortgage provider, has modified 22,303 mortgages through March 2010. This is only 2.1% of the 1,020,000 delinquent home mortgages they service.
- JP Morgan Chase has modified 20,450 mortgages; just 4.6% of the 437,323 distressed homeowners they face.
Was the HAMP plan designed to fail? You be the judge; but as you ponder this likelihood, consider the safety of our airline industry. The government works cohesively with the airlines to limit catastrophes involving some of the most technologically advanced machines in the world, and as a result, both entities have a nearly perfect track record over the past 10 years (and throughout history if you consider how few crashes there are as compared to all flights ever flown). Also consider that through fractional reserve banking practices, the banks put up absolutely nothing of their own for the purpose of lending to homeowners. What’s more valuable to them, a paltry $1,000 reward written into HAMP legislation for modifying a loan, or taking a distressed homeowner’s home? HAMP was intentionally crafted by political scientists to be obsolete, yet to satisfy enough homeowners to say “it worked”. It’s a politician’s attempt to put on a friendly face while a knife is slowly penetrating into a homeowner’s heart by the bank. There are no checks and balances, which is why this program is a failure.
Craig W. Covert is the Co-Founder and Editor in Chief of http://InvestorDirector.com Magazine
