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.