What lender is dumb enough to modify a home loan and not reduce the monthly payment for the homeowner? How about almost everybody! When you are bleeding to death, the doctor doesn’t suggest an IV! The first order of business is to stop the bleeding. So, why in the world would a lender modify a delinquent homeowner loan and not reduce the monthly payment? Shockingly, and against all common sense, this was apparently the norm last year.
Today, in an interview on CNBC, Federal Housing Finance Agency (FHFA) Chairman James Lockhart, stated that last year only 16% of loan modifications completed by their agencies (which include Fannie Mae and Freddie Mac) reduced the homeowner’s monthly payment. With that statistic, is there any question why 55% of these loan modification recipients went into default within 6 months? This was a terrible case of wasted effort and wasted time, when there is no time to waste.
On top of that, Lockhart acknowledged that loan modification departments are “stretched thin” and that in order to deal with the flood of modification requests, agencies and banks will “have to do it a lot quicker.”
The good news is that someone seems to have smartened up and last quarter the number of loan modifications where the monthly payment was adjusted downward was 85%. Lockhart also thinks that the pace of modifications should pick-up “by the end of the summer 2009.” And now that almost all loan modifications are being done with an eye towards reducing the monthly payment, re-default rates should come down significantly.
In part three of my series, “It’s the Monthly Payment Stupid,” which will be posted in July, I will update you on the story of Jeff Starbling’s loan modification process. What we have learned so far, certainly verifies what Mr. Lockhart stated, namely that loan departments are stretched way too thin. If you are going through this process yourself, feel free to use the helpful steps on how to navigate the process with my Top Ten Tips on Loan Modification.