You've heard me talk about how distressed borrowers should get in contact with their lender to work on modifying their existing home loan. Now around a month ago I was watching a cable network money show and heard it reported that mortgage lenders were seeing more than half of the loans they agreed to modify fall back into default less than 8 months later. This week I was watching another TV finance show on TV and the report of 50% was stated similarly, however this particular report said borrowers were failing back into default within 6 months. Not a good trend. It's of course good to hear that about half of the borrowers are succeeding with their loan modifications but it's disturbing to hear of the large number of failures.

These aren't borrowers who simply  let their homes fall into foreclosure. They did the work necessary to get their loan modification approved by their lender. They obviously WANTED to stay in their home and WANTED to continue paying their mortgages. Yet they failed again. I've spoken personally with two people who have done loan modifications and both reported that the bank closely studied their financial situations. One borrower reported the lender's representative asked how much he had in his piggy bank. I asked if that was a joke and he said he thinks so, but the lender didn't laugh - and he didn't answer the question. Yikes!

Look, I'm a capitalist at heart. If you get a loan and don't make your payments, then you loose your ass(et). If a home is foreclosed on, it will be sold later, at a more appropriate price, and to a more appropriate borrower - at least theoretically.  But if a loan modification works for a borrower and the lender then who else is to say it's a bad idea? Well I will if all a loan modification is doing is postponing the inevitable for so many borrowers. Let's take a look at a theoretical example of a bank hammering a borrower. Joe The Homeowner (yes, you know his cousin) has a $2,000 a month mortgage payment. Joe had never been late on his payments until losing his job at the Claycomo plant. Joe had to sell his boat and has since used up all his cash reserves to continue making his house payment. Joe has been diligently working to get a new job but in the mean time he's fallen 2 months behind on his mortgage payments. Joe finally gets a new job but after budgeting for food, gas and other necessary expenses, Joe can now only afford a $1,600 mortgage payment. The lender agrees to modify his loan to $1,600 per month and tack on the missed payments to the end of the loan.  All seems good, right?

But what happens when Joe's new boss cuts his hours back to 35 hours a week, rather than 40? Now Joe can no longer afford the $1,600 a month mortgage payments. Look, if the lender would have reduced Joe's payments to, say, $1,500 a month (and added the difference on to the end of the loan), Joe may have been able to withstand some bumps in the road.  Now some will quickly respond that the bank is just looking out for itself and of course it is and should - it's in the business to make money and be profitable after all. But if the lender is going to require Joe to apply every available dime he has to a new loan modification, then no one should wonder why so many of the loan modifications are failing. If a borrower hits a bump in the road, of course they're not going to be able to make the payments. They're maxed completely out. Some borrowers are probably doomed anyhow, but I'll bet the success rate would be so much higher if more common sense were used during the loan modification process. I definitely believe that lenders need to give borrowers some wiggle room or they may as well just say no to many borrower's loan modification requests.

Seriously, what ever happened to the old 28/36 debt to income ratio rule? I think that probably would have kept Joe out of this situation. I'll bet many readers have no idea what the heck I'm referring to when I mention a 28/36 rule. When I got into real state that was THE formula used for qualifying borrowers and I think I'll have to work that into an upcoming post. 

 

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