Loan modifications not always helping homeowners

Filed in archive mortgage news on May 26, 2009

It's clear that the Obama administration wants to see fewer housing foreclosures. That makes sense: Housing foreclosures help no one. The banks certainly don't want these homes back. Foreclosures devastate families. And they weaken neighborhoods.

Problem is, a key tenant of the administration's plans to keep people in their homes doesn't appear to be working.

A recent story in the Wall Street Journal, looks at the success of loan modifications. These are an important part of the federal government's efforts to halt foreclosures. Basically, they involve mortgage lenders working closely with struggling homeowners - those who are having trouble making their monthly mortgage payments or who have already missed several - to work out new payment plans so that no one is kicked out of their homes.

The Journal story, though, says that these modifications aren't quite working.

The paper cites a Fitch Ratings report that points out that subprime loans that have been modified are turning bad again at high rates, even with a change in loan terms.

According to the Fitch Report, from 65 percent to 75 percent of modified subprime mortgage loans will fall delinquent by 60 days or more within a year of the loan modification.

Yes, this is depressing. But does it mean that the government should scrap its modification efforts? I don't think so. Even if the higher number holds true - that 75 percent figure - that still means that 25 percent of failing mortgages did not go into delinquency again.

That may seem like a small percentage, but to the families represented by that 25 percent figure, the loan-modification program will seem like a lifesaver.

No family wants to lose its home. If there's even a sliver of hope that loan modifications can keep them from falling into foreclosure, we have to embrace the idea behind them. Yes, loan modifications are not a cure-all for the country's foreclosure problem. But they are one important part of the solution.