Where is the Help for the Homeowners?

Earlier this month, during a panel discussion with OTS Director John Reich, Federal Reserve Board Vice Chairman Donald Kohn, FDIC Chairman Sheila Bair, and Federal Housing Finance Agency Director James Lockhart, the Comptroller of the Currency John C. Dugan said "that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months."

He went on to say that “After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,”

A key question, Mr. Dugan said, is why is the number of re-defaults so high? “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”

Let's discuss this, shall we?

Question 1 - Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers?

Answer: YES! When providing modifications for the homeowners the banks do not make their decisions based on what the homeowner can afford, but instead their decisions seem to be based on the amount owed on the loan. Most banks are unwilling to budge for the homeowner and will even close the file after making a modification offer, if the homeowner takes to long (as little as 72 hours) to make a decision.

Question 2: Is it because consumers replaced lower mortgage payments with increased credit card debt?

Answer: Very possible - especially in the cases of "teaser" rate loans. We find that the providers of these loans qualified the borrower only at the beginning interest rate and failed to qualify the borrower at the "real" rate.

This failure often make the unsophisticated borrower feel that they have more latitude in terms of disposable income and who subsequently made purchases based on today's monthly payment totals instead of making purchases based on the adjusting loan balance.

Question 3: Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments?

Answer: The failure of the mortgage providers to properly look at the applicant's paperwork is a big part of this problem. The stated income program was at first one of the greatest lending programs I have ever seen in my 20 year real estate career. This program allowed self employed people finally get a chance to purchase a home without having to explain why there 1040's only showed little or no income (line 36).

The problem with programs like these is that everybody decided to use it to get their client a loan (and rightfully so). However, when it was credit driven, meaning your score had to be above a certain level, everything was running smoother. Then one day, the mortgage provider relaxed their guidelines and reduced the requirements.

All of a sudden EVERYBODY was getting a home loan or refinancing their existing home. It was like the Wild, Wild West out in Real Estate land! The folks who wouldn't normally qualify for a loan are now homeowners! This in itself is not bad, but unfortunately the mortgage providers should have underwritten these loans better.

Question 4 - Or is it a combination of these and other factors?”

Answer: There is another factor I want to bring forward. Loan's with one hundred percent (100%) financing. It was okay for this program to have been released. But shouldn't the mortgage providers insist that anyone who accepted this loan must first go to some sort of financial responsibility class?

I know, hindsight is One Hundred percent (100%)! However, they should at least have made sure first time buyers or people with credit scores under 650 attended this type of class.

Now that we've answered these questions I want to make an observation.

Why are we talking about loan modifications in terms of failure?

Shouldn't we instead be questioning the banks about why they are not doing more to help the homeowners in distress?

Didn't the banks get a bailout package?

Why isn't anyone we asking them to share the bailout package with the homeowners in distress?

In my next submission, I'm going to talk about the Bank Bail-Out Plan & the possible affects it may have on homeowners!