Loan Delinquencies Fall As Banks Get Serious With Loan Modifications

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Last week’s big news in loan modifications was that HAMP, Obama’s administration’s program to get troubled (i.e. 60 days behind their payments) loans back in line with “aggressive” modifications made its first target of 50,000 trial loans before November. That is what the government hoped anyway.

The big news this week could be that foreclosures seem to be slowing down as well as loan delinquencies fall from peak. That is an interesting way of saying that things aren’t as bad as when they were at their worst. But, hey, when you are in a world credit crisis you have to make the most of good news.

Why are things getting better? Is the Government’s program proving its worth?

You will get a whole lot of opinions on that. Let’s try and hang on to a few important facts to get some perspective on the whole issue.

- A target few thought possible was achieved through sweat, blood and tears.

- Foreclosures are no longer only coming from subprime mortgages that need the help of HAMP to lower interest rates but are increasingly coming from prime mortgages with good interest rates. This is because the current crisis is not only a mortgage interest crisis but a credit crisis. People have over borrowed not only on their homes but on their cars, their credit cards and when they lose their high paying jobs they are in trouble and of course mortgage payments are right at the top of the loans they are trying to pay back.

- Banks are starting to work hard to meet the targets set by the administration. One example is the First Federal Bank of California a subsidiary of FirstFed Financial Corp has modified more than 1.4 billion dollars worth of home mortgages, averting 3,000 mortgages from foreclosure. In fact this relatively small local bank is doing very well when compared to banks nationally. The great results in loan modifications at First Federal Bank of California are strongly linked to good results in other related areas like loan delinquencies which have also declined significantly from previous peak levels. For instance loans that were 30 to 59 days behind payments were 55 percent lower than in January.

How did First Federal Bank of California pull this off?

I don’t know. They will happily say it is there interest in their client’s real needs that allow them to provide realistic modifications to their loans which provides sustainable loan payments for borrowers. What can’t be argued is that this bank is meeting and exceeding government’s expectations.

One of the factors that might be contributing towards this is that smaller banks can modify and fine tune their management faster and more efficiently. Smaller can be better in business and banks have complained about the difficulty of changing the cogs of their corporations to provide fast loan modifications.

What is amazing is that after 6 months we know the government is on target (at least their first target) but we’re not sure if it is aiming for the right target, subprime mortgages.