Well the inevitable has happened! Homeowners who received home loan modifications in the past several years are beginning to default on their modified loans at an alarming rate. In fact the pattern of homeowners going from default to modification then back into default is becoming so prevalent that society has seen fit to give it the snazzy catchphrase “Redefaulting”. So, the topic up for discussion today (class) is why are modifications failing, and what options do homeowners who are redefaulting still have at their disposal?
As of April 30, 2013 more than 300,000 homeowners who were approved for HAMP (Home Affordable Modification Program) permanent modifications were three months behind on the mortgage payments, technically placing them back in default. Tack on another 88,000 homeowners who are one to two months behind on their permanently modified mortgages, and it’s easy to see that redefaulting is becoming a major problem.
While 400,000 homeowners may seem like a drop in the bucket when you consider the size of our great nation, if you take into consideration the fact that there are only about 900,000 active permanent HAMP modifications its becomes apparent that the program as a whole is quite a failure.
So what is causing the fall out with HAMP modifications? Well, without delving too deep into speculation (as we don’t have really conclusive data at this point), I believe there are two major issues that are causing modifications to fail:
1. Most modifications failed to address the fact that properties we’re terribly over-encumbered.
2. Step rate modifications are are beginning to adjust.
The first issue I mentioned above is what we like to call the “band-aid over a bullet wound” scenario. Modifications without principal reductions (without reducing the principal balance of the mortgage down to the fair market value of the property, that is) merely lowered the interest rate of the mortgage to a point where the homeowner should be able to afford the monthly payment. What we have seen is that whether homeowners were “fudging” their numbers to qualify for the modification, or circumstances have changed (with regards to their other debts), they simply cannot afford to make the modified payment and are heading back into foreclosure. Another common occurrence is that many homeowners are just tired of making payments on a house that will take decades to recover lost equity; and are just walking away from the property.
The second issue mentioned above is directly related to the data we have on hand, and the experience we had back in the modification days. The vast majority of Americans who never interacted with modifications aren’t aware of the many different types of “permanent” modifications given out. Two of the more common types are the “step-rate” modification and the “three or five year” modification. The former is a modification in which the interest rate is reduced substantially in the first few years under the mod, and then each subsequent year the interest rises modestly until it reaches the original (unmodified) interest rate. A “3 or 5 year” mod is similar to a step-rate mod in that it reduces the interest rate for a short period of time (either 3 or 5 years), but differs in that it doesn’t slowly adjust upward, it just jumps at the end of the term. The data that has been released shows that 46% of HAMP modifications granted in 2009 are redefaulting, while only 38% of HAMP modifications granted in 2010 are following suit. This sliding scale correlates perfectly with the two types of modifications mentioned above, as those modifications granted in 2009 have adjusted upward and those granted in 2010 are beginning to adjust as well. The adjustment of the interest rate pushes the mortgage payment back into unaffordable territory and homeowners wind up redefaulting.
So, what are the options for a homeowner looking at redefaulting? While there is the slight possibility of receiving a second modification, unfortunately second mods are generally through the private sector and as a result they offer little to no real help. There is always the option of simply walking away from the property and allowing it foreclose, but that should really be the last resort as it is devastating to your credit and frankly quite humiliating as it is a very public affair. The most logical solution, for a homeowner who can no longer afford their property, truly is a short sale. Through a short sale a homeowner can sell their property, even if it is underwater with negative equity, wipe out their debt, escape with their credit intact, and quite often receive a cash incentive from their servicer!
If you or someone you know is facing foreclosure, whether it is the first time or the second, give us a call for some free guidance at 888-550-4440.
And if you happen to work for the government, please stop pushing aid that is clearly too little and too late to really help!
-JJM
John is the Vice President here at JohnHart, and as such is responsible for managing and directing the firm towards obtaining its ultimate goals.
He is also one of our main contributors on the Blog. (please see his profile page on the main site for more information.)
