ING Direct USA’s CEO on Why Loan Modification Isn’t Working

Readers of this blog know that I am not a fan of mortgage loan modification. That said, it’s not my intent to rehash that discussion. Rather, I want to discuss this editorial I read in today’s Wall Street Journal by Arkadi Kuhlmann, CEO of ING Direct USA, titled Why Mortgage Modification Isn’t Working.

Since the [loan modification] program began, more than three million homeowners have become eligible for assistance. In turn, mortgage servicers have reached out to these borrowers, initiating the modification process. Roughly 760,000 homeowners have received loan modifications on a trial basis. But just 31,000 modifications have been made permanent.

That’s a success rate of just 1%. This means that up to 99% of eligible homeowners struggling with their mortgage payments have been unable thus far to modify their loans.

Here’s his explanation for the ‘limited success’:

A big reason for HAMP’s limited success is that the government is suffocating banks with counterproductive accounting rules. Under current law, if a bank modifies a mortgage it must record the write-down as an expense on its books. For example, if a homeowner’s monthly mortgage payment is reduced by $400 per month for 24 months, the bank has to report that it “lost” $9,600 ($400 times 24 months).

The bank, though, didn’t lose any money—it’s still scheduled to receive the totality of the loan principal, just less interest.

I don’t understand why the entire loan modification is included as an expense. That seems a little harsh to me. I can definitely see how this would impact a bank’s desire to work with the borrowers.

The last sentence of the above quote seems to be badly worded. The bank does lose some money but the amount depends on the terms of the loan and how much modification was done.

Moving forward, one of the commenters on the article, Theodore Beckley, suggested going back to underwriting standards:

• 20 % minimum down payment on any purchase.

• Monthly payments no more than 25 % of taxable income.

• Total Income verified and notarized.

• No 2nd mortgage for down payment.

• No more than 80% of buyer’s principal for a mortgage loan.

• No loan if receiving Low Income Energy Assistance Program (Leap) or Food Stamps.

• Eliminate adjustable rate mortgages.

• Eliminate interest only payments.

• Subsidies and tax benefits not figured in meeting above requirements.

I like all of these ideas but I will say that my wife and I purchased our home with only a 5% down payment. BUT…we did at least buy a house we could afford and I believe we are in better financial shape now because of it.

I really like the one about food stamps. If someone can’t afford food without assistance, then they shouldn’t be buying a house. It’s just common sense.

The other comments on the article are worth reading too.

15 thoughts on “ING Direct USA’s CEO on Why Loan Modification Isn’t Working”

  1. I’m going to have to disagree with the statement about food stamps. I fail to see where that has anything to do with buying a house.

    If a person lives in a rental house and manages to make all of his/her rent payments on time and saves up enough money for a down payment on a house, and their DTI is within guidelines, what difference does the food stamps make?

    Over the years I’ve owned a couple houses and my mortgage payment was always less than what my rent had been. So the act of buying a home could, in theory, drop a person’s monthly expenses low enough that they could get off the food stamps.

  2. Loan modifications are not working for many, many reasons. One obvious one which I did not see mentioned anywhere is that any houses with second mortgages must have the second lien holder sign off before a borrower can get a loan modification.

    The other big reason, which was mentioned but only briefly, is that many times the mortgage has been securitized and it can be difficult to track down who holds the note, much less get the people who bought the MBS to agree to the modification.

    And finally, let’s not forget all the people who took on loans that were so extravagant that they cannot pay the loans even with an interest rate modification. These are the Option-ARM folks who are so screwed it’s unbelievable. The foreclosure is inevitable so they might as well default now and hope to live in there house for as long as possible since banks don’t want to take the write down either way.

  3. #1) Not sure how someone on food stamps would be able to save 20% for the down-payment. So that whole argument is mute. If someone on food stamps is able to save up that down-payment, then they should be able to purchase the house. Whether they should be on Food Stamps in the first place is what we should be questioning, though.

    #2) Yep, Option-ARM people are toast. Going back to the earlier posting about whether it’s moral to walk away from a mortgage: most people with Option-ARMs can’t afford their house, period. They just don’t know it yet. I’d lump them into the ‘broke’ category and it would be fine if they walk away from that obligation.

    Now, if they have Option-ARMs and can afford to make the normal interest payments (not let the loan ammortize negatively), and they walk away, then they are deadbeats.

    JLP) These banks make me sick. First they ask for bailouts, now they don’t want to repay the lost TARP money. And now, they are saying that they don’t want to eat a measly $9k loss on their ‘books’ temporarily — to turn a ‘toxic asset’ back into gold? Don’t they see that this will only help improve valuations on their assets (outstanding loans) on the mark-to-market side of the ledger?

  4. Has anyone considered that the ultimate goal wasn’t to help homeowners but to completely disable the banking system so that a government takeover was the only option?

    I wouldn’t put it past this group.

  5. The banks got to “write up” the values of the homes and/or mortgages and/or MBS on their books when times were rocking. In some cases, I’ve been told, they also got to amortize out the loans and book *future* assumed interest payments as profit *now*.

    Now those interest payments are going to la-la land. Sounds like a “loss” to me.

    (And obviously, if principal reduction is taking place in the mod, then that’s a loss to be absorbed, too.)

    So yes, as I see it, banks should be booking these mod “losses” incurred on the way down … the same way they got to book the “gains” on the way up. Yen and yang.

    Of course, I’d ALSO rather there be no gov’t sponsored mod programs at all, nor any homebuyer tax credits, nor any mortgage-interest deductions. I’d rather that banks and bondholders eat their losses and go under, when conditions warrant. I’d rather that careless homeowners lose their homes and have their credit trashed.

    (And yes, I’m a homeowner. Been one for 15 years.)

    To be blunt: Foreclosure is the solution here — not the problem. It’s just that our financial system, as currently aligned, cannot withstand a non-gov’t-price-propped reality.

  6. Very well put, Michael.

    You’d be correct about banks booking future interest payments now–that’s what WaMu was doing, and is exactly why they are no longer around.

    Adding to your “foreclosure is the solution” statement, declining prices overall is a good thing. For homes to be truly affordable we don’t need lower interest rates; we need lower prices! People look at declining housing prices like it’s such a bad thing. You wouldn’t look at any other consumer good like that, but people like to think that houses are different. I say they are not, they are just a place to live and nothing more.

  7. One of the biggest reasons that loan modification doesn’t work is that a majority of the loans are securitized and not held by banks. Modifying the terms would be a violation of contract law and would discourage investors in future deals. The banks may own securities but they may be one of several investors with claims on a given pool of mortgages. It’s virtually impossible to modify the majority of the loans and we are seeing that in the low numbers of loans modified to date.

  8. Well, as I understand, the banks sure should report a loss after such a loan modification. That is a classical asset impairment – the expected cash flow from the asset (loan) has decreased.
    Just imagine they didn’t – so the bank investor wouldn’t see the presence of such a bad loans.

  9. Great comments. Michael did a great job of showing why the banks aren’t playing ball with the program.

    I think this situation shows how undercapitalized the banks really are. If not for the FASB altering the mark-to-market rules, many of the big banks would be toast.

    As far as government intervention, they now control over 90% of the home market. Fannie and Freddie are now 90% of the market (maybe more), and the Fed is practically the only buyer of Mortgage Backed Securities (MBS) right now. The Macs require an additional $400 Billion from the government as it stands now. I expect more bailouts as the year progresses. This won’t end well for housing.

  10. You write that you do not think that lenders should loan to people that recieve food stamps or ILEAP through federal assistance program then you are wanting lenders to violate Regualtion B. Please pass this along to Theodore Beckley.

    The Equal Credit Opportunity Act (ECOA) of 1974, which is implemented by the Board’s Regulation B, applies to all creditors. The statute requires financial institutions and other firms engaged in the extension of credit to ‘‘make credit equally available to all creditworthy customers without regard to sex or marital status.’’ Moreover, the statute makes it unlawful for ‘‘any creditor to discriminate against any applicant with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.’’ In keeping with the broad reach of the prohibition, the regulation covers creditor activities before, during, and after the extension of credit.

    violations of the Act or this regulation also constitute violations of other federal laws. Liability for punitive damages can apply only to nongovernmental entities and is limited to $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions. Sections 706(c) provides for equitable and declaratory relief and section 706(d) authorizes the awarding of costs and reasonable attorney’s fees to an aggrieved applicant in a successful action.

  11. It’s not difficult to track down who holds the note on a “securitized” mortgage. We know who owns at least 70% of them — Fannie Mae (I mean the US Gvt)

  12. Loan modification through ING Direct has to be the most difficult. They are my mortgage holder and are making it virtually impossible to modify the loan. I became very ill and couldn’t continue working full time. I have tried to modify my loan with ING, while waiting for disability to begin, they asked me to try to get unemployment benefits to pay my mortgage! I am exasperated with ING, and the house is now heading into foreclosure since they refuse to talk to 3rd parties or participate in the government’s load modification program.

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