Why Lenders Don’t Want to Modify Your Mortgage
The Federal Reserve Bank of Boston just issued a new research paper entitled, “Negative Equity and Foreclosure: Theory and Evidence.”
I believe the title should have been “The Anti- Loan Modification and Principal Forgiveness Manifesto.”
Why would I say that?
Well, let’s pull a few quotes:
They start chipping away at the concept here:
“Thus, our calculations show that a principal reduction policy, which eliminatednegative equity for all borrowers, would not completely solve the foreclosure problem.”
Then, they discuss why principal forgiveness does not make financial sense for a lender:
“This implies that the maximum level of assistance for which a policy makes financial sense to the lender is 1/24th, or just over 2 percent, of the anticipated loss given foreclosure. Such a policy will obviously be extremely limited in its effectiveness.”
Since this concept wouldn’t be much help anyway, why bother?
“The problem here is that without precisely identifying at-risk borrowers, lenders can only profitably offer a tiny amount of assistance — less than 10 percent of their anticipated loss given foreclosure — and such assistance is unlikely to reduce the likelihood of foreclosure.”
They go on to create their own, “fictitious” version of The American Housing Rescue and Foreclosure Prevention Act.
“The first step in our fictitious plan provides the borrower with a new FHA-insured loan for an amount substantially below the outstanding balance of the current mortgage. The borrower promises to repay the difference between the balance of the current mortgage and the balance of the new FHA-insured mortgage at some point in the future, or in the event of sale or subsequent refinance. The key is that the borrower makes no periodic payments on this difference until the loan matures. However, interest does accrue on the difference.”
But wait, there’s more:They’ve “conveniently” eliminated the fact that the proposed legislation would have the borrower paying a portion of the forgiven loan balance to FHA, not the original lender.
And then, the final salvo:
“The second important set of conclusions follows from the first, by illustrating that policy responses need not, and probably cannot, address the negative equity problem directly. Instead, these policies should focus on lowering current mortgage payments in order to make default less attractive to the borrower. Forbearance programs that allow borrowers to delay, but not to avoid eventually repaying the mortgage in full can help at-risk borrowers without generating serious moral hazard problems, involving assistance, funded at the public’s expense, to those who do not need it.”
See? We really don’t need any new legislation because it wouldn’t work anyway.
In the end, even if this bill does eventually pass, lender participation is VOLUNTARY.
I think this paper gives us a pretty clear indication as to how likely homeowners will be able to use such a program to avoid foreclosure.
Now that the mortgage industry can point to a paper writtnen by a quasi-governmental agency, they’re building the case to show that principal forgiveness “wouldn’t work, anyway.”
In the end, the legislators get to prove that they did “something” to “address the crisis,” and the mortgage industry is able to selectively comply in a very limited amount of cases… not because they don’t want to “help homeowners keep their homes,” but rather, because so few “qualify.”
Good job, guys!
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