President Obama’s Mortgage Modifications Destined to Fail
The loan modification program is “destined to fail” because it doesn’t confront the real problem of negative home equity that is driving foreclosures, Amherst Securities Group LP’s Laurie Goodman told Congress.
“If policies continue to kick the can down the road — working with a modification problem that does not address negative equity — delinquencies will continue to spiral with no end in sight,” Goodman said in testimony to the House Financial Services Committee today in Washington.
“The phenomenon of underwater mortgages is one of the most troubling aspects of the entire housing market collapse,” Julia Gordon, senior policy counsel at the Center for Responsible Lending, told the committee. “Homeowner equity position has emerged as a key predictor of loan modification re-default, more so than unemployment or other facts.”
Foreclosures continue to soar and the mortgage market continues to suffer.
According to estimates from the Mortgage Bankers Association, since 2007, nearly six million foreclosures have been initiated. Right now, approximately six and a half million more homes are at risk, with the homeowners either more than 30 days behind on their mortgage or with the home already in the foreclosure process.
Continued high unemployment as well as the new wave of defaults expected due to option ARM and other Alt-A mortgages will add millions more to this total.
Without significantly more intervention to stop foreclosures, by the time this crisis abates, as many as 13 million families will have lost their homes.
In addition, the spillover costs of the foreclosure crisis are massive. Beyond the homes that are at risk of foreclosure themselves, tens of millions of other homes – households where the owners have paid their mortgages on time every month – are suffering a decrease in their property values that amounts to hundreds of billions of dollars in lost wealth just because they are located close to a property in foreclosure – aside from the overall loss in property value due to the overall housing price declines.
These losses, in turn, cost states and localities enormous sums of money in lost tax revenue and increased costs for fire, police, and other services. As property values decline further, the cycle of reduced demand and reduced mortgage origination continues to spiral downward.
Toxic loan products are at the heart of the mortgage meltdown.
The housing crisis was precipitated by risky loans, not risky borrowers.
Since the problems in the subprime market became evident in early 2007, many in the mortgage industry evaded responsibility and fended off government efforts to intervene by blaming the borrowers themselves, saying that lower-income borrowers were not ready for homeownership or not able to afford it.
Yet empirical research shows that the leading cause of the problem was the characteristics of the market and mortgage products sold, rather than the characteristics of the borrowers who received those products.
Center for Responsible Lending recommends efforts in preventing foreclosures and protecting homeowners:
- Stop foreclosures while servicers evaluate eligibility for loan modifications or
other non-foreclosure options. - Make the “net present value” (NPV) model for qualifying homeowners
transparent and available to the public. - Share data with the public to ensure that all stakeholders have the opportunity to
propose evidence-based solutions to the problem. - Ensure that homeowners have adequate equity in their homes to continue with
successful homeownership by reducing principal balances on troubled loans. - Create a program to assist homeowners who have lost their jobs and do not have
nine months of guaranteed unemployment income. - Transfer servicing to entities that don’t have conflicts and automatically convert
trial modifications into permanent modifications. - Pass legislation mandating loss mitigation prior to foreclosure.
http://www.responsiblelending.org
Obama’s Mortgage Modifications to Fail, Amherst’s Goodman Says
