Loan Modifications May Not Be the Answer

This may not be the most politically correct piece that I’ll write but that’s never been my goal here on OC Voice. So here goes….

One of my clients sent me a link to an article published online on CNBC about ‘Mortgage Re-Defaults Rising with No Sign of Slowing’. The article states that, “…after 6 months, nearly 37 percent of mortgage loans modified in the first quarter were 60 or more days delinquent,” and goes on to say that, “after three months, 19 percent were 60 or more days delinquent or in the process of foreclosure.”

There is no question that watching a family lose their home is beyond heartbreaking. The article did point out a small piece of good news in this fiasco – 9 out of 10 home loans are current.

The article has me thinking about a few things. Why does someone default?

The rates on the adjustables are actually lower in recent months than they were a year ago. In addition to that, some of the Interest Only notes have yet to adjust at all. Payments in many cases are the same, or even less than they were one year ago.

I’ve seen that in some instances, people frankly are not interested in paying $500,000 for a home that is now worth $375,000 and decide to walk away from the property. Does a loan modification make sense for those owners?

Lending restrictions were way too lenient up until recently. Some folks were approved for loans that they never would have qualified for under the strict requirements of today’s lending standards. Does a loan modification make sense for those owners?

Temporarily reducing the interest rate, tacking on the arrears to the back-end of the loan may provide immediate relief but is it only delaying the inevitable? Do loan modifications like this make sense?

Maybe it’s time to be honest and say that current levels of home ownership are higher than they’ve ever been, and just maybe, that isn’t a good thing. It’s not good for the homeowners that aren’t really qualified, and it’s not good for the housing market.

Maybe it’s time to really help those homeowners get out from underneath the homes that they cannot sell for what they owe. Maybe it’s time to let this market run it’s course without trying to fix it with band-aides and superglue. Maybe it’s time to get a really efficient and effective short sale process to assist these distressed homeowners.

Bailout plans that focus on loan modifications and saving the homes may not necessarily be the answer. As I’ve said before, where is a Bailout plan that really deals with the heart of the crisis? Where is a plan that is effectively dealing with the real issues on Mainstreet? I’m waiting…and not patiently.