Crisis Savior: Mortgage Loan Modifications
- By:
- Catherine Brock | October 11, 2008
Now that IndyMac Bank, Fannie Mae, and Freddie Mac have all failed, the federal government appears to be in the driver's seat to fix the foreclosure problem. Many argue that the answer lies in rolling out strategic loan modifications to at-risk borrowers.
If the mortgage crisis were a Disney movie, federal officials could just wait for the fairy godmother to appear with her magic wand in hand. Unfortunately, reality dictates a different approach. Now that the Federal Housing Finance Agency has taken over Fannie Mae and Freddie Mac, the clock is ticking for the Feds to whip up their own crisis savior.
Since the housing crisis began, the federal government has encouraged lenders to be flexible in helping borrowers avoid foreclosure. Loan modifications and payment plans have been two of the most talked about solutions. Either, or both, can be strategically employed to minimize lenders' losses while helping borrowers stay in their homes.
A loan modification is basically a modified refinance-the lender reworks the terms of the loan to fit the borrower's ability to pay. Actions taken to alter the loan can include reducing the interest rate, lengthening the pay-off term and writing off a portion of the debt balance. Payment plans, sometimes called loss mitigation loans, allow borrowers to pay back past-due amounts over a period of time.
Back when the mortgage industry was heating up, lenders were far less likely to offer these solutions. If a borrower couldn't obtain a refinanced mortgage from another lender, foreclosure was the expected outcome.
Recent numbers indicate that mortgage lenders are finally accepting the need for desperate action. In the second quarter of 2008, lenders modified more than 110,000 first mortgages, some 40,000 more than in the prior quarter. Use of payment plans also increased. The step-up of these aggressive methods is a good sign but, so far, it hasn't been enough to slow down the rate of foreclosures.
A new industry dynamic may have opened the door to a broader-based loan workout program. The failure of Fannie Mae and Freddie Mac put more than half of all U.S. mortgages under the thumb of the Federal Housing Finance Agency. This gives the feds an ideal opportunity to follow their own advice about modifying loans and extending payment plans to borrowers.
The Federal Housing Finance Agency will undoubtedly be watching the FDIC for pointers. That's because the FDIC has already begun offering aggressive loan modifications on mortgages formerly held by the failed IndyMac Bank. If the FDIC program proves successful, it's possible that the Federal Housing Finance Agency will follow suit. It may be the best way to limit the burden placed on taxpayers, while helping borrowers keep their homes.
The next administration has the job of mapping out the least painful solution to the foreclosure problem and the Fannie and Freddie debacle. There'll be no magic wand involved, but hopefully, a happy ending will result.
If the mortgage crisis were a Disney movie, federal officials could just wait for the fairy godmother to appear with her magic wand in hand. Unfortunately, reality dictates a different approach. Now that the Federal Housing Finance Agency has taken over Fannie Mae and Freddie Mac, the clock is ticking for the Feds to whip up their own crisis savior.
New climate in lending
Since the housing crisis began, the federal government has encouraged lenders to be flexible in helping borrowers avoid foreclosure. Loan modifications and payment plans have been two of the most talked about solutions. Either, or both, can be strategically employed to minimize lenders' losses while helping borrowers stay in their homes.
A loan modification is basically a modified refinance-the lender reworks the terms of the loan to fit the borrower's ability to pay. Actions taken to alter the loan can include reducing the interest rate, lengthening the pay-off term and writing off a portion of the debt balance. Payment plans, sometimes called loss mitigation loans, allow borrowers to pay back past-due amounts over a period of time.
Back when the mortgage industry was heating up, lenders were far less likely to offer these solutions. If a borrower couldn't obtain a refinanced mortgage from another lender, foreclosure was the expected outcome.
Recent numbers indicate that mortgage lenders are finally accepting the need for desperate action. In the second quarter of 2008, lenders modified more than 110,000 first mortgages, some 40,000 more than in the prior quarter. Use of payment plans also increased. The step-up of these aggressive methods is a good sign but, so far, it hasn't been enough to slow down the rate of foreclosures.
Setting the example
A new industry dynamic may have opened the door to a broader-based loan workout program. The failure of Fannie Mae and Freddie Mac put more than half of all U.S. mortgages under the thumb of the Federal Housing Finance Agency. This gives the feds an ideal opportunity to follow their own advice about modifying loans and extending payment plans to borrowers.
The Federal Housing Finance Agency will undoubtedly be watching the FDIC for pointers. That's because the FDIC has already begun offering aggressive loan modifications on mortgages formerly held by the failed IndyMac Bank. If the FDIC program proves successful, it's possible that the Federal Housing Finance Agency will follow suit. It may be the best way to limit the burden placed on taxpayers, while helping borrowers keep their homes.
The next administration has the job of mapping out the least painful solution to the foreclosure problem and the Fannie and Freddie debacle. There'll be no magic wand involved, but hopefully, a happy ending will result.
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