A new report from bank regulators shows that lenders are starting to lower the principal amounts due on home mortgages for some struggling borrowers, a practice known as a loan modification. Banks are betting that by taking the hit now they can improve their chances of being repaid. Over the next few years banks and other lenders will be wading through endless of loan modification applications. The approval rate of loan modifications in the second quarter of 2009 was 10%, which is a 7% jump from the first quarter, based on a Office of the Comptroller of the Currency Report.
Lenders now have the cash to justify loan modifications because of their balance sheets have strengthened with an influx of government cash. The Obama administration announced plans to help underwater homeowners in March. The plans include financial incentives for lenders that modify loans. However, the plan involved handing over billions of dollars to troubled banks with very few strings attached. Ultimately it has taken until now for the lenders to use the government hand-out as an incentive to modify loans. Obama's critics cite that banks should have never underwritten home loan on a stated income basis, and that many home buyers should have known that the homes were beyond their means. Obama's plan has been very controversial, because many see it as using tax dollars to unjustifiably help these two irresponsible parties.
Around a half million mortgage modifications are on record in the second quarter of this year, and 10% of those involved reducing the principal. Even with this help, some homeowners are beyond help. This is often a sign that the loan was irresponsibly approved and processed. A whopping 28% of the mortgages modified in the first quarter of 2008 were in default again within three months. Also, of the loans modified in the second quarter of 2008, 56% were in default again after 12 months.
The most common procedures in loan modifications have been to either reduce interest rates or extend the term of the home mortgage. These methods help homeowners without requiring lenders to lower the principal owed. The last resort for any bank is to write off a portion of the loan altogether, but this is happening in about ten percent of cases. Banks first try to modify mortgages by lowering the interest rate for qualifying borrowers. If that doesn't lower the payment enough then the bank may extend the term of the loan, which will lower the monthly payment even more.
Despite of the mortgage modification efforts of banks, foreclosures still continue to rise. In a report last week, an estimated 12% of U.S. homes with mortgages will be foreclosed on over the next couple of years. The report said that mortgage modification efforts are not expected to significantly ease the problem, mostly because so many homeowners default again. Because of the rate of defaults after a loan modification, many say that federal involvement is just slowing the inevitable. When all is said and done, all of the irresponsible lending and borrowing would have fixed itself quicker without federal resources.
San Diego Mortgage Group has over 58 years of California Mortgage Experience. For your next California Home Loan or Mortgage Refinance, call San Diego Mortgage Group.
Click the XML Icon Above to Receive Mortgage Articles Via RSS!
