Are Loan Modification Programs Successful?

Loan modification programs were meant to save the housing market, but new reports show little progress or success. Modified refinance plans and modified mortgages have both been offered to borrowers, but it appears that the loan modification programs themselves need to be modified.

According to a fresh report from the government's Office of the Comptroller of the Currency, loan modification plans are getting nowhere fast. Modified mortgages during the first half of 2008 where structured for about 200,000 borrowers who were falling behind on their payments.  Unfortunately, most of those homeowners missed at least one payment after the loan modification. That means that they're once again on the way to losing their homes to foreclosure.

Modified mortgage rescue

Doing a modified refinance is one of the best ways to rescue those who are underwater on their mortgages, particularly if they can switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. But that isn't going well either, because too many mortgages are encumbered by home equity loans or other second mortgages. Before considering loan modifications on the big primary mortgages, the investors holding liens on those smaller secondary loans must agree. Most do not, because a modified refinance costs them too much money.

Meanwhile, the FDIC launched a program for 65,000 seriously delinquent customers of the failed IndyMac mortgage company, which is now under its control. The plan concentrates on mortgages that are at the highest immediate risk for foreclosure. The FDIC modifications are designed to achieve sustainable payments at housing debt-to-income ratios of 38 percent, with the housing debt component including principal, interest, taxes, and insurance. To reach this metric for affordable payments, modifications seek to implement an effective combination of interest rate reductions, extended amortization, or reduction of principal balances. The program seems to be working for those who are participating, but the problem is that only about 10 or 12 percent of the homeowners at risk actually qualify for the loan modifications. Some homeowners haven't responded to offers for loan modification, and many who did don't meet the necessary criteria.  As a result, their applications have been rejected.

More loan modification disappointment

Those were not the only dismal reports about loan modification initiatives, however, and one of the most disappointing is one now being proposed by Congress. The $300 billion foreclosure prevention program managed by HUD and the FHA was supposed to help nearly half a million homeowners, but so far, it's only managed to solve problems for a grand total of less than 300 borrowers across the entire country. Those who have helped to administer the HUD loan modifications cite various reasons for the abject failure, pointing out that it's extremely difficult for homeowners to meet the stringent qualifications. People have to pass a thorough background check, and they also have to meet specific deadlines. Those facing foreclosure as of March 1st, for example, are eligible, whereas others are not. That program is going back to the drawing board to be revised into one that actually works.