Loan Modifications - A Broken Record

From CNNMoney.com - "When mortgage rescues go bad":

Good news: Lenders are ramping up their attempts to help troubled home borrowers.

Now for the bad: Most of the mortgage fixes being deployed are destined to fail.

Hope Now, the coalition put together to fight foreclosures, boasts that it has helped 3 million families stay in their homes since the housing crisis began in July 2007.

But a recent report issued by the U.S. Comptroller of the Currency (OCC) found that 53% of borrowers who had their mortgages modified in the first half of 2008 were already at least two months delinquent again. The report covered 60% of the outstanding primary mortgages.

Your loan and what's being done:

Lenders and servicers take two approaches to working out mortgage problems: repayment plans and mortgage modifications. Repayment plans allow borrowers some time to make up missed payments. Modifications actually rewrite the terms of loans by freezing or lowering interest rates, extending the life of the loan, or reducing the amount owed.

Mortgage modifications are meant to be more effective. The problem, Van Zalingen said, is that they too often fail to reduce a borrower's monthly house payment.

The lenders often don't change the interest rates but merely freeze them at a high, unaffordable level, and then add missed payments into the balance, which increases it, according to Van Zalingen.

The better approach?

Modifications that include interest rate reductions that result in lower payments perform much better. A recent Credit Suisse study reported redefault rates of only 15% for this kind of modification.

Insanity:

Chris and Cherita Barnes got a mortgage modification from their servicer, Ocwen Financial Corp., in March 2008.

But they're already behind again. The loan workout froze the 8.75% interest rate on their adjustable rate loan, but added their missed payments, interest and late fees back into the mortgage balance, raising it to $354,000 from $329,000.

The Barnes' new monthly bill came to $3,167, up from $2,890. That was better than it would have been had their interest rate continued to reset higher but it still pushed their mortgage payments, including taxes and insurance, to about 53% of their income.

You think!

Modifications that don't involve some kind of principal reduction or somehow lower payments substantially "just don't work very well," said Mark Zandi, chief economist for Moody's Economy.com. But, he added, many lenders have recently gotten much more aggressive when it comes to loan modifications.

This, like seemingly every other other economic issue right now is insane. The incompetence is insane. The logic is insane. Whether or not you agree with loan modifications, they're being done. If they're going to be done, what in the world is everyone wasting their time doing them for if the monthly payment is not going to be made substantially more affordable for the distressed owner? Isn't it obvious that if they're struggling now, odds are, in these difficult economic times, that they're going to continue to face hardships for the foreseeable future? According to the article, the nickels and dimes being saved on the front-end are merely being balled up on the back. Perhaps they should change the name of this process from loan modifications to loan reorganizations.

Principle reductions, rate reductions, that's a loan modification that has a chance to work. Again, whether you agree with these types of "bailout" programs or not, they're going to be done and if they're going to be done it seems to me that it would make sense to do it right instead of peddling false hopes and prolonging the inevitable.