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The Mortgage Crisis or Credit Crisis as many are more accurately describing it has left millions of Americans (and Earthlings worldwide for that matter) in or at the brink of foreclosure. Banks and Government have launched an ongoing set of increasingly aggressive programs to solve this terrible problem.
Not all the help is coming from the Government either. One association of banks which call themselves the Hope Now Alliance assures they have helped keep over 2 million troubled borrowers in their homes by changing the terms of their loans.
Similarly the Government is proud to say they have surpassed their short term goal of 500,000 trial loan modifications nearly a month before schedule. If you hear the sales spiel for these loan modifications it sounds like mortgage paradise; reduced interest rates to zero, whole chunks of the principal balance wiped out and it goes on and on. To be fair some borrowers have enjoyed these excellent deals . What is also true is that many loan modifications simply moved payments to the end of the loan which provided a kick the can down the road solution. Regulators report that half of these loan modifications are defaulting six months later.
The trouble with loan modifications is that it is not easy to qualify to them. The paperwork is enough to drive you crazy and the red tape is so slow you want to scream, especially when foreclosure proceedings continue despite your loan modification is being in process.
Why are loan modifications so slow?
Well there are many answers to this question. We are going to look at three basic answers to this question.
1) Mortgages are not always owned by the bank or institution you bought them from. Banks often simply work as middle men, servicing mortgages for investors. They sell the product, collect payments and answer any questions. IndyMac for instance manages 650,000 loans but only owns 7% of them. The other 93% is owned by a variety of investors ranging from private individuals to pension funds.
This means that when banks don’t own a loan they must ask the investors that own them if they are willing to modify the loan. It is easy to imagine how much paperwork and time dealing with the borrower, getting their details, studying each specific case, then finding the real owner of the loan and asking them if they mind losing some money on their loan is going to take.
2) Banks aren’t designed to modify loans but to sell them. Banks make money by selling loans and mortgages. Modifying them is, as we mentioned above, a slow and time consuming process that doesn’t make money. The government has started to fund the loan modification process which has helped to speed things up, but banks still have to redesign themselves to deal appropriately with the millions of borrowers in trouble.
3) Foreclosures are often a better deal for the lenders. Loan modifications are a hard bullet to bite for lenders. You are asking them to accept a certain loss if they modify the loan by reducing interest rates or “forgiving” a chunk of the balance when they can also take their chances with a foreclosure which might actually make them a profit. In some cases loan modifications are profitable for both the lender and the borrower and in those cases paperwork does seem to go faster.
Last 3 posts by Andrew
- Is Strategic Foreclosing The Best Loan Modification For You - November 19th, 2009
- Loan Modifications: 3 Reasons They Are So Slow - November 17th, 2009
- Loan Modifications: The Loan Workout Formula To Accelerate Your Modification - November 15th, 2009
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