How the Loss Mitigation Industry Has Failed the Homeowner
Has the loss mitigation industry failed the homeowner who’s trying to prevent foreclosure? There was an excellent article in the Wall Street Journal on a related topic: Some Consumers Say Wall Street Failed Them. It talks about how the burden of risk and responsibility has been shifted to the consumer, while Wall Street manages to make (take) money at every turn.
The same could be said about the mortgage industry. The article included mention of an Illinois woman who borrowed $10,000 from her 401(k) to try to prevent foreclosure, only to end up losing it. She said, “I’m still paying for that [401(k) loan] and don’t even have the house to show for it.”
Many homeowners who are trying to prevent foreclosure who have access to funds (like an IRA or 401(k)), often end up breaking the piggy bank to get their heads back above water.
The problem is, this is usually just a short-term fix, doing nothing to address underlying weakness in their financials. Moves like this have a tendency to kick the can down the road a little while, only forestalling the inevitable loss of the home. I strongly advise most clients to look at retirement funds, “loans” from relatives or any large cash infusion as absolutely LAST resorts for this reason, among others.
The same could also be said of many loan modifications. Homeowners- and legislators- seem to think that all you have to do is perform streamlined loan modifications to a host of borrowers and everything will work out fine.
The fact they seem to forget, or conveniently sweep under the rug, is that half of all loan modifications become delinquent again in 24 months or less. Furthermore, that timeline distribution seems to be shifting to the short end of the scale. Today, more homeowners are becoming delinquent even faster than before, even though it’s easier now to get a loan modification than any other time in our history.
The missing link to a sustainable foreclosure is the in-depth, line by line analysis of a homeowner’s financials. You have to unearth every possible advantage in order to prevent foreclosure long-term. You also have to identify as many behavior changes as possible, looking for those that will yield the greatest changes in monthly cash flow.
As I’ve said before, it ain’t about the cable. Cutting cable and similar changes don’t yield a high enough benefit-to-cost ratio, and they’re usually unsustainable.
Not only is the mortgage industry ill-equipped and too short-staffed to adequately prevent foreclosure, it’s really not their responsibility. And their real job is to collect a debt, which is why any discoveries of assets or possible changes would likely be soaked up by the debt collector, leaving the borrower just as weak as they were before they spoke to the “housing counselor.”
And this is not the kind of analysis that’s best performed by the homeowners, on their own. If they knew how to do it, they’d have already done so, and likely wouldn’t be looking to prevent foreclosure. And, it’s difficult to see the forest OR the trees when you’re under fire like most delinquent borrowers.
But it’s work like this that needs to be done, and it needs to be done by professionals, preferably who have done it numerous times, maybe even faced a financial crisis of their own- and managed to come back from it. If we’re going to continue to our quest for “economies of scale” in addressing the mortgage problem, we’ll continue to prevent foreclosure on just a temporary basis.
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