Progress Report on Modifying Mortgages

October 20, 2008, Revised November 10, 2008, November 18, 2008

"I have been giving my clients an article you wrote about a year ago advising borrowers having payment problems how to request a modification in their loan contract …Could you bring it up to date?"

Arrival of HOPE NOW

A lot has happened since that article was written. Very shortly thereafter, the HOPE NOW program promoted by Treasury Secretary Paulson began as an effort by housing counseling agencies and mortgage servicers to modify loans on a strictly voluntary basis. Since then, the first recourse of borrowers in trouble has been to call them at 1 888 995 HOPE. I have sent many people to HOPE NOW, with mixed feedback.
Declining Home Prices, "Upside-Down" Borrowers and Financial Crisis

House prices have declined further in the last year, turning more borrowers "upside down" where they owe more on their mortgage than their house is worth. This induces some borrowers to stop making payments, which increases foreclosures. But price declines also reduce the amounts that investors recover from sale of the house following a foreclosure, which should increase the attractiveness of loan modifications as an alternative.

In addition, a full-fledged financial crisis has erupted, forcing the Federal Reserve to act as the lender-of-last-resort to a series of weakened financial firms unable to meet their cash needs. The coverage of deposit insurance has been broadened and money market funds are now insured. In the works, furthermore, are plans to purchase mortgage assets from investors, to make direct equity investments in banks, and even to insure payment of principal and interest on mortgages and other assets.

An excellent study by Alan M. White provides some indications of what has happened to modifications during this tumultuous period. In a sample of sub-prime loans he examined, the mortgage payment was reduced in only about half the modifications and the balance was reduced in very few cases. In many cases, the modification consisted of adding the amounts past due ("arrearages") to the balance, which raises the payment. It is no wonder that during the annual period he examined, the number of foreclosures swamped the number of modifications.

Borrower Options

Borrowers having payment trouble have choices. The rational choices are either to seek help immediately, or to take immediate action themselves. Those who put their heads in the sand will lose their home in a foreclosure.

Those who elect to seek help can go to HOPE NOW, or try a HUD-approved counselor (see Before doing either, prepare yourself by pulling together all the data that the counselor will need; the form at can be used for this purpose. I hope to have some more options soon.

Borrowers should be wary of private loan modification companies that have sprouted like weeds in recent months. I am confident that most of them are hustlers looking to garner upfront fees, and while there are probably some good ones, I don't know yet who they are or how to distinguish them. I am working on it.

If you elect to handle the matter yourself, you must get to the servicer’s loss mitigation department, which may take some persistence. The burden of proof is on you to demonstrate and document that, for the reasons you lay out, you cannot any longer make the required payment. You must also demonstrate and document that you can make a smaller payment that you specify.

Under the new FHA program called H4H ("Hope for Homeowners"), FHA will refinance loans of borrowers having payment problems if the existing investor will write down the loan balance to 90% of current market value. HUD publishes a list of lenders participating in this program. I am not sure whether there is any benefit to a borrower contacting one of them before the firm servicing their existing loan has agreed to pay down the balance. But it can’t hurt to get that lender on your side.

Federal Help on the Horizon

Aside from the possible increased risk exposure under FHA, the Federal Government has not channeled any crisis money directly to borrowers. The new programs referred to earlier will direct $700 billion or more to financial institutions, but none to households. A strong case can be made that this is unbalanced.

The root cause of the crisis is the decline in home prices, which will continue so long as the foreclosure problem isn’t solved. Arguably, dealing directly with this problem is more effective than dealing with it indirectly. The Treasury recently put out a request for proposals on a mortgage payment insurance plan, which could be the perfect vehicle for providing direct assistance to borrowers. Stay tuned.

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