Loan Modifications Need a Bailout
Loan Modifications have attempted to be the silver bullet solution for distressed home owners late in their payments, hopeful of renegotiating with their mortgage companies or banks. That’s plural since the vast majority of homeowners have both a first and second mortgage, compounding the success strategies. Avoiding foreclosure is the core value. However, Loan Mod’s have a batting average of 1%, as noted today in the Wall Street Journal, cited in many other publications as well. Since the beginning of the Home Affordable Modification Program, 3 million homes have been eligible, and 760,000 have been granted trial modifications, yet only 31,000 have been converted to permanent modification. That leaves 99% of the market unable to participate, given current regulations as to how these programs must be followed.
Not just another federal program with good intentions, the task is somewhat difficult when the qualification process still requires a job in good standing and acceptable credit scores. Unemployment very likely played a role in missed payments and a sliding financial situation to begin with, so that qualification is difficult at best if not simply loading the pipeline with another delinquent mortgage within months. In fact, approximately 64% of the Mod’s granted are back in foreclosure 6 months later, and 20% never even make the first payment.
So, what’s the solution? It can’t be treated generically, but the trend is for these properties to end up in a Short Sale, a better outcome for Sellers in many ways. Foreclosures create at least a 250 point drop in credit score and disqualify the owners for a future mortgage for up to 7 years, whereas a Short Sale is a fraction of each. Former owners may actually reapply for a mortgage within 2 years.
In Colorado, we expect to see a 2010 Foreclosure volume very nearly equal to 2009 at roughly 25,000 homes. The wisdom of these 3 different pathways, Loan Modification, Short Sale, or Foreclosure is unique to each client. Timing is critical, creating the extra need for a seasoned agent with training and experience in this specialty.