As lenders slow-play loan modifications, delinquent borrowers enjoy free housing
Lenders slowly process loan modifications, mostly to avoid approving them. While they wait, most loanowners enjoy a free ride.
Should we be concerned about the speed at which lenders process loan modification applications? After all, most borrowers who apply for a loan modification stop making payments during the process. They apply because they can’t afford the payment in the houses they occupy, so they quit paying while lenders consider their applications. From a borrower’s perspective, waiting may create uncertainty, but they gain the benefit of free housing for as long as it takes.
Reporter: Christine Layton July 30, 2014
Financially struggling homeowners are facing long delays after turning to the foreclosure prevention program from the Obama administration for assistance, according to a new report from the Special Inspector General for the Troubled Asset Relief Program overseeing the initiative.
“Without a timely review of their eligibility to even get a HAMP trial modification, struggling homeowners left in limbo hoping to get help from TARP’s HAMP program may not pursue other foreclosure alternatives and, with options narrowing over time, may be at risk for foreclosure,” the report said.
What other foreclosure alternatives? If they can’t afford their homes, they have to leave. They can attempt a short sale, which will be denied if they have any assets, or they can wait for a foreclosure and enjoy the free ride. The only alternative that allows them to keep their home, at least for a while, is a loan modification.
On Wednesday, the analysis found that the number of homeowners waiting for approval for the Home Affordable Modification Program (HAMP) has nearly doubled in the six months ending on May 31. The volume of unprocessed applications also climbed from 133,600 to 221,500. This trend is leaving homeowners in limbo and increasing the chance they will go into foreclosure. Many homeowners are waiting up to one year for a response after submitting an application.
If the economy is improving and “struggling borrowers” are doing better, why this sudden surge in loan modification applications?
The loan modification process reminds me of the Publishers Clearinghouse Sweepstakes. You can enter the contest without buying their magazines, but they will resend you the paperwork with another query to buy a magazine. After about a dozen mail ins, if you still haven’t bought a magazine, they will begrudgingly enter you in the sweepstakes. They make people fill out endless paperwork over and over again because they don’t want to enter people into the sweepstakes who don’t buy magazines.
The same is true for loan modifications. They make people fill out endless paperwork because banks don’t want to give the loan modification. Why would they? Particularly if they can get borrowers to keep making partial payments, they will string those borrowers along to the degree possible. As far as the bank is concerned, these borrowers are the living dead, so squeezing a few extra payments out of debt zombies is gravy to them.
Further, if lenders did start giving out loan modifications, everyone would want one. Who wants to pay back their full mortgage balance under onerous terms when banks are giving borrowers better deals? IMO, the main reason we are seeing an increase in loan modification applications is due to the moral hazard of the program’s existence.
The HAMP program lowers monthly mortgage payments for borrowers in default on their mortgage or close to default, typically through temporary interest rate reductions.
HAMP loan modifications, unlike their private-label counterparts, are amortizing loans with a reduced interest rate. HAMP loan modifications are permanent entitlements, enabling people who foolishly overborrowed to stay in homes they can’t afford, inflating rents and prices for everyone else.
Lenders are responsible for reviewing applications and determining which homeowners qualify for a modification.
Homeowners are first approved for a trial payment period to demonstrate they can handle the new lower payment. Once this stage is passed after about three months, homeowners must be approved for a “permanent” modification of five years. The unprocessed applications mentioned in this report refer to applications that have not been granted or denied a trial period.
The report also singled out Select Portfolio Servicing and JPMorgan Chase as the least effective at keeping up with the demand from homeowners. The report showed that the companies made a decision on less than 50% of the applications received in the six-month period, with JPMorgan processing about 35% of the applications each month and SPS processing about 42%.
CitiMortgage, meanwhile, took the longest to process applications, followed by JPMorgan and SPS. At its current pace, Citi would take one year to process the applications it already has, and up to two years if new requests are added. While it has improved its processing speed, Ocwen has the largest number of unprocessed applications at 61,000.
This should come as no surprise because lenders do not want to approve loan modifications; they would rather the borrower pay at the contracted rate. Loan modifications are not an entitlement, and lenders don’t want to make it one.
Earlier this month, the watchdog came to a $320 million settlement with SunTrust Mortgage to resolve allegations it misled HAMP applicants and failed to promptly process applications.
In the five years the program has been in existence, servicers have granted 1.4 million permanent mortgage modifications and rejected more than 5.5 million applications.
What happens to the 5.5 million and counting loan modifications that are denied? The vast majority of those borrowers missed several payments, and now their credit scores are trashed. If they don’t continue to struggle to make the contracted payment on their original loan, they will end up losing their houses, and they will be renters for several years thereafter while they work to improve their credit scores. How much of the diminished demand we see today is caused by this credit score destruction?
The free ride
Why didn’t renters receive any free housing benefits during the Great Recession and beyond? Have you ever stopped to contemplate that question? If granting aid to people who can’t make housing payments is the compassionate thing to do, why was this compassion only extended to homeowners? No renter anywhere was given any assistance whatsoever to help with the ravages of the Great Recession, yet loanowners were given a plethora of assistance programs, and in many cases, years of free housing.
If a renter stopped paying their rent, they were evicted without mercy. If a loanowners stopped making mortgage payments, they were allowed to squat in houses they weren’t paying for, often for many years — and it’s still ongoing. Whenever the financial media treats us to a story about loanowners in woe, we should stop to remember that renters faced the same problems, the same hardships, yet nothing was done for them.
Loanowners applying for loan modifications get a free ride. If the process takes a long time, it merely extends their free housing benefits. Don’t forget that fact.