Another Mortgage Mod Failure

More on the futility of mortgage modification programs from the WSJ:

A U.S. program that lets mortgage companies refinance “underwater” loans—those for more than a property is worth—if the borrower’s loan balance is cut has received fewer than 300 applications, according to the Federal Housing Administration.

Efforts by some states haven’t fared any better. Arizona and California have allocated a total of $1 billion in federal funds for a write-down program that offers to match as much as $50,000 in principal reductions by banks. Both states have barred borrowers who did a “cash-out” refinancing from being eligible for a write-down, and loan balances aren’t immediately forgiven.

Despite the financial incentives, the Arizona program has received fewer than 500 applications since its September launch. Only one borrower’s loan balance was sliced, and by just $40,000.

Daniel Indiviglio speculates that possible reasons for this dismal performance include:

  1. The banks’ stipulations for qualifying for a mortgage are too stiff. He cites the prohibition against borrowers who did a cash-out refinance.
  2. The banks aren’t advertising the program sufficiently. He thinks that if banks got the word out “… then it’s hard to believe applications wouldn’t come flooding in.”
  3. Borrowers aren’t interested. Living in a house for free for a year or more while you wait for the inevitable foreclosure and eviction isn’t such a bad deal or, alternatively, they are so far underwater that even $100,000 in debt forgiveness isn’t going to make them whole.

Let’s take a closer look and maybe consider some alternative reasons for this particular mod failure.

First, in order to qualify for this program the borrower needs to be in default and the loan must be owned by the participating bank. Note that Fannie and Freddie aren’t participating in this program so right off the bat knock out a lot of loans (we will come back to this issue in a while). Aside from that issue, qualification is pretty straight forward.

With respect to cash-out refinancing, it would seem that there needs to be some line drawn with respect to just how much someone can have abused the process and still qualify for a mod. Somehow, I don’t think it is ever going to politically fly to expend taxpayer money rescuing borrowers that used their house to finance outsized lifestyles.

Second, this program was heavily promoted in Arizona. It is no secret. Bank of America has advertised it, the state has advertised it and just about every media outlet has run features on it. It isn’t dying for lack of notoriety.

Now with respect to his third suggested reason for failure, I think he is partially onto something. Living mortgage free does have an allure even if you know it won’t last forever. Maybe more to the point, a lot of these homeowners know full well that even with a mod, they are very likely to still not be able to afford a mortgage payment. The recession savaged their disposable income and they know that sooner or later it’s back to renting. In the meantime, enjoy the extra cash.

I think it is also quite likely that there are a number of homeowners who never really wanted to be homeowners. They jumped into a market that their friends were jumping into on the premise that it was a road to free money. If they did so early enough, it was a path to just that via the cash-out refi machine. To them, home ownership was never the goal, rather they were seeking to make a profit off of a real estate investment. The investment has come a cropper and they likely see no reason to continue to ride it.

Has this most recent failure served to temper Indiviglio and the others who have been lobbying for mods? Not in the slightest, based on his concluding thoughts:

Whatever the reason, it’s pretty clear that these principal reductions aren’t moving forward. The carrots that the government has offered banks and servicers aren’t enough to motivate them to aggressively pursue this method of mortgage modification. At this point, the only possibility left for the modification strategy would be if state attorneys general manage to coerce banks and servicers into providing more principal reductions as part of the proposed foreclosure mess settlement.

If dangling a $10o K in front of people won’t induce them to apply for a modification, then apparently the next step is to force the banks to somehow do more. What exactly is left unsaid. But even then, how are you going to make the borrowers participate? If they won’t step up for this kind of money, will the borrowers then be forced or coerced into participation?

Mortgage modifications have failed in every iteration that has been introduced over the past couple of years. The banks and servicers have been routinely blamed for each failure. The data and experience is indicating that, though the banks undoubtedly deserve some blame, the borrowers by and large have little interest in being saved.

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