AFSCME 3357-HOF'S BLOG

Mortgage Modifications Aren't Working

Professor Alan White of Valparaiso University is publishing a new study in the Connecticut Law Review analyzing a cross section of voluntary mortgage modifications arising from the recent and current mortgage crisis. This study is amazingly current, with at least some of the modifications being originated in November 2008. His conclusion is that the type of modifications being tendered by lenders at present are woefully inadequate to stem foreclosures, and they are counterproductive to the lenders' interest in reducing foreclosure-related losses. Some of his conclusions:

1. Modifications are not reducing principal debt, they are increasing it. Almost no modifications include significant cancellation of either past due interest or principal, and many modifications involve capitalizing unpaid interest and fees and reamortizing the loan. This occurred in 68% of loan modifications. The average capitalized amount added to loans was $10,800, on average mortgage debt of about $210,000. Some principal was canceled, and reported as a partial loss, for about 10% of modifications. However, two servicers (out of 43), Litton Loan Servicing and Ocwen Loan Servicing, accounted for nearly all of these principal reductions. Only 8% of loans reflected some write-off of unpaid interest.

2. Servicers are incurring huge losses for investors by foreclosing. The average foreclosure loss on a first mortgage in November 2008 was $145,000 or about 55% of the average amount due. Loss severities increased steadily throughout 2007 and 2008 and are expected to worsen in 2009. In these circumstances, rational investors should accept mortgage principal reductions corresponding to home value declines of 20% or so, were it not for the various obstacles to servicers' restructuring of mortgage loans.

3. Voluntary mortgage modifications are not consistently reducing monthly payment burdens. Only 35% of modifications in the November 2008 report reduced monthly payments below the initial payment, while 20% left the payment the same and 45% increased the monthly payment.

What I am seeing in my practice with UAW workers is that most of them aren't being offered mortgage modifications. People are begging for short sell authorization and not getting it. On the other hand, many others are living in their homes for months after giving up paying the mortgage. I'm seeing some signs that servicers may be hiding problem loans from investors. Clearly there's still a lot of dysfunction remaining in the mortgage markets. The chief culprit appears to be securitization.