Northern California Home owners grab new Loan Modification

Many North state Chico Home owners in an effort to modify mortgages are heading into overdrive in a bid to make sure that having received trial loan modifications can have that workout made “permanent.” Very few , if any, to date have been able to qualify for a permanent  loan modification.

So far, most criticism on the Home Affordable Mortgage Program, i.e., HAMP, has centered on why so few borrowers with trial modifications are converting into permanent modifications. The common refrain from loan servicers is that they haven’t been able to get paperwork from borrowers to help finalize the loan modification — important because servicers get paid for each mod, and need to prove that borrowers actually face hardship.

But at ForeclosureRadar’s blog, Sean O’Toole raises a different, potentially more problematic issue: “Permanent” loan modifications last for only five years. He posits that reason for the low uptake of the loan modification program:

Maybe borrowers have figured out that this program is really only another exotic mortgage like one they fell prey to when they bought or refinanced the house that resulted in their current predicament. HAMP and the administration’s newly announced campaign isn’t digging borrowers out of a hole. It’s only digging them a new one, and delaying the inevitable.

To be sure, the five-year period tries to give borrowers a lifeline—a chance to get their life back on track. In five years, the thinking behind the plan goes, more borrowers may be financially whole again, able to make their mortgage payments, or, if housing prices have stabilized, some may be able to refinance or sell their homes.

But what about those borrowers who have loans modified who aren’t ever going to be able to afford their higher payments, which is what they’ll have to pay after the five-year modification expires? Are loan mods just creating a new batch of loan resets and delaying the inevitable foreclosure for borrowers who bought too much home, or who were sold a loan that they didn’t understand and couldn’t afford? Mr. O’Toole is blunt in his criticism:

The new hole offered by HAMP is all the downside with none of the upside.

The downside: exotic re-financing, by which they make payments affordable today, but leave homeowners in the same boat down the road when payments ratchet back up after 5 years.

The bonus downside: there is no reasonable expectation that home values will appreciate anywhere near enough to get these loans above water before the 5 years is up, or before the homeowner runs into a real life event like job loss, divorce or job relocation — leaving them stuck in an upside down prison of debt.

The column in today’s NYT by Floyd Norris raises the same prospect, while offering a little more leeway to the administration. While he writes that it’s “conceivable that this process is doing more to drag out the foreclosure crisis than to alleviate it,” he adds:

“[P]erhaps we should not be too critical of anybody involved in the modification effort, either the administration or those trying to arrange modifications. The mess was made years ago, when bad loans were made and the ready availability of credit was driving house values to unsustainable levels. Cleaning it up is not going to be a pleasant experience for anyone.”