Tuesday, July 7, 2009

Why Lenders Don't Want to Modify Loans

The Federal Reserve Bank of Boston just published an abstract ominously entitled Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization. As frightening as the title is, the results are worse.

The authors analyzed 665,410 loans originated between 2005 and 2007 that were over 60 days delinquent. Here are the results:

3% received modifications that resulted in lower monthly payments;
5.5% received modifications, but these did not result in lower monthly payments;
30% were able to fix their delinquency issues without any help from the lenders; and
45% of the approximately 150,000 borrowers who received some kind of aid ended up in arrears again.

The bottom line, according to Boston Fed senior economist Paul S. Willen, is that “loan modification is not profitable for lenders....A lot of people you give assistance to would default either way or won’t default either way. They (the banks) are trying to maximize profits, and at this point maximizing profits does not mean modifying loans.’’

So what's the solution? According to Willen, the feds should give the money directly to the borrower. “You have more money going to the banks and the servicers than you do to the homeowners,’’ he said. “It would make more sense to just give money to the borrowers.’’

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