Loan Modification Low Numbers, Why?

This is the question administration consultants and officials are asking themselves. After using every trick in the book and more to “encourage”, “bribe” and “bully” servicers in providing loan modifications, loan modification conversion rates are still terribly low.

Ineligible Applicants.

Some have reasoned that the reason loan modification conversion rates are so slow is that many borrowers are simply ineligible under the current loan modification program, also called Home Affordable Modification Program (HAMP). HAMP does condition acceptance into the program, homeowners must be able to afford the modified payments, the cost of housing must not exceed 31% of the households income and the NPV test (Net Present Value) must be passed among other requirements before a loan modification is granted permanently.

Wrong Crisis.

A parallel argument is that the HAMP program is simply targeting the wrong problem. The issue, in the opinion of those that voice this argument, not a mortgage crisis, but a credit or unemployment crisis. It must be granted that with many homeowners their mortgage is the least of their worries or at least only one of many.

This argument seems to be validated by the fact that more and more troubled homeowners have prime loans with excellent interest rates and conditions but are struggling with their mortgages because they are unemployed. Modifying the mortgage payments will not help these homeowners which in most cases aren’t eligible for a modification anyway.

Greedy Servicers.

Some have pointed out that in many cases loan modifications simply don’t make sense for servicers because they cost more than they are worth, at least for servicers. Servicers, often banks, manage mortgages for lenders. They don’t supply the cash but deal with customer service, collect payments and pass them on to the lender or lenders of the mortgage.

Loan Modifications are too expensive.

A similar line of reasoning points to high cost of modifying a loan. Lowering the interest of a loan or reducing the principal can cost lenders tens of thousands of dollars with the added risk that borrowers can re-default despite the money invested in the loan modification. From a business standpoint if can seem logical for banks to say no thanks to government incentives which are often inadequate and cash in on a foreclosure.

If any of these explanations are true of if they all contribute to the program is hard to say. What does seem clear is that we are dealing with a complex crisis that will not be defeated with any one silver bullet. A combination of economic and social measures will be required to fight the housing, credit and unemployment crisis the U.S and world as a whole faces.