New Study on Mortgage Modifications

By Alan White

I have just posted a paper on SSRN reporting on loan-level mortgage modification data from subprime mortgage servicer monthly reports. The gist is that voluntary mortgage modifications are not reducing principal debt, and are in fact increasing it, and that many modifications are not even reducing monthly payments. In addition, whether a homeowner gets a modification, and what kind they get, depends a great deal on who their servicer is.

The data in the report covers about 100,000 subprime mortgages, about 4,000 of which were modified in the last twelve months. The most common modifications are interest rate reductions to reduce the payment, interest rate freezes on ARMs, and recasting of arrears and reamortization, which increases principal debt and monthly payments.

From July 2007 to June 2008 losses on foreclosure sales have steadily increased, month after month, while the number of mortgages paid in full through refinancing and sale have dwindled to the point that foreclosure sales exceed the number of prepayments. The combined effect of all this is that subprime mortgages, which used to last only 3 to 5 years, will now take many more years before they are foreclosed or paid off, leaving homeowners with debt in excess of home values and payments in excess of their repayment ability, and needlessly prolonging the crisis.

The abstract is in the continuation of the post.

The 2007 subprime mortgage crisis resulted in home foreclosures at unprecedented levels, and calls for government action. The Bush Administration's response relied primarily on exhorting the mortgage industry to voluntarily modify the terms of existing mortgages to help struggling homeowners reduce their debt burden and bring mortgage debt in line with declining home values. Industry reports have tallied the rapid increase in voluntarily negotiated workouts, without specifying what the terms of those workouts have been.

To better understand the effectiveness of the voluntary mortgage crisis resolution plan, this paper reports detailed empirical information from a newly-created database. Loan-level information on the number and type of negotiated mortgage modifications was compiled from monthly servicer remittance reports from July 2007 through June 2008 for twenty-six mortgage loan pools.

The data show that while the number of modifications rose rapidly during the crisis, mortgage modifications in the aggregate are not reducing subprime mortgage debt. Mortgage modifications rarely if ever reduced principal debt, and in many cases increased the debt. Nor are modification agreements uniformly reducing payment burdens on households. About half of all loan modifications resulted in a reduced monthly payment, while many modifications actually increased the monthly payment. Finally, there is tremendous variation in the extent, if any, of payment relief offered by different mortgage servicers.

The combined effect of dwindling refinancing activity and modifications that do not write down mortgage debt, and in many cases do not even reduce monthly payments, is to delay, but not prevent, large numbers of foreclosures. Given the continuing accumulation of loans in the foreclosure and real-estate-owned categories, the subprime crisis will be worked out only over many years through painstakingly slow repayment, foreclosure and disposition of properties.

Comments

[James Burns, Esq.]

Under California’s Mortgage Foreclosure Act as codified in Sections 2945 et seq. of the Civil Code, all so called foreclosure specialist or consultants are prohibited from collecting an upfront fee from a consumer, even if they work with attorneys or have attorneys inside their shop. Hence, they must perform services before collecting a fee absent being a law firm where an ordinary attorney/client relationship has occurred under a normal retainer agreement.

Recently a mortgage modification shop was shut down by the California Attorney General’s office and the attorney who worked “with them” was brought into the unlawful liability since he never undertook any of the consumers as clients under an attorney/client relationship. Therefore, they were prohibited from taking an upfront fee and should have performed the services first and then tried to collect which typically is hard to do so that is the reason many are trying to ‘work with’ attorneys but both are misinformed on the law and this is probably the first of many more cases to come because it generates revenue for the state…millions in fines for getting this WRONG. This is all laid out in California Civil Code section 2945.1 subdivision (a) as it describes a foreclosure consultant and if it walks like a duck and it quacks like a duck it is a duck.

This sends a shockwave through this mass market where many think they can just be cowboys and steer consumers into the corral for a bilking. Seeking a loan modification or short sale in these tumultuous financial times should be a legal play as the clients need the attorney/client privilege when submitting their documents to the bank looking for relief. These cases are hardship driven and many consumers were would-be real estate investor who forgot the real estate club they went to that sold them 5 or 10 properties at a time were salespeople doing what salespeople do; sell you as much of a product as frequently as they can. Many of the loan broker’s working with these investment clubs probably stretched the boundaries of reality as they made a case for income under a stated loan helping someone buy 5 or more properties at the same time when they truly had the income to handle their own personal residence with no financial hiccups.

The message here is if you are looking for a foreclosure solution consider it a legal solution and hire a law firm that is focusing on these transactions to preserve your rights and protect you from having your loan documents turned against you if your broker over stated your income just to qualify you so they could get their commissions.

[home loan calculator]

I think the Mortgage Bankers Association said in a new report that mortgage lenders modified 54,000 loans and established 183,000 repayment plans in the third quarter, a period in which there were 384,000 new foreclosures.

[Chuck Wall]

Dear Sir or Madam,

Can you tell me if those of us who are paying their (I think that is about 90% of folks who owe mortgages) can band together to fill a class action suit against the US Government. It appears to me that "Mortgage modification by judges" is limited to citizens who are not paying their mortgages. Where is the help for those of us who are paying their mortgages. There must certainly be a law firm out there who is willing to form a class action suit for those of us who are paying their mortgages. Where is the equal treatment under the law?

Respectfully,

Chuck Wall