Loan Modifications Can Stop Foreclosures
Below is a great opinion article from The Wall Street Journal. As I will continue to say, we need to stop foreclosures in order to stabilize the housing market.
The article states that the evidence shows that such modifications don’t work. For one thing, many of the servicers who control the mortgage loans claim they are not legally permitted to agree to voluntary modifications. And even when they are legally permitted to agree, their financial incentives are stacked in the direction of foreclosure.
As a result, the much-vaunted federal “Hope for Homeowners” program launched in October has been only a limited success. The program is supposed to facilitate new mortgages for homeowners if lenders agree to reduce the amount of money owed on a home to 90% of its assessed value. The program went into effect with the goal of helping hundreds of thousands of homeowners. To date, it has processed less than 400 applications.
My thoughts are that it is not in a banks best interest to foreclose. Why not put a portion of the balance into forbearance if you don’t want to do the Hope for Homeowners loan which reduces the principle balance. I understand why banks don’t want to do this program because the government shares in the equity but if you put a large portion of the balance into forbearance they can make out. For example, say the borrower who fell behind has a $300,000 mortgage but the property is only worth $150,000. Put $150,000 into forbearance that doesn’t have to be repaid until you sell your home or recover the value to refinance. They could give you an interest rate of 0%-3% on the balance in forbearance as long as you prove you can afford the home at that amount. If a bank let’s the property go into foreclosure they will get less than $150,000 for their offers, have to pay a realtor 4-6% to sell it, keep up the property, pay back taxes, etc, etc. Isn’t this a win, win?