So, it sounds like government is stepping in with a program that will allow upside down homeowners to refinance their mortgage. This should, at least in theory, help some struggling homeowners in Arizona. You see, they can now refinance their interest payment to today's historically low rate, even if they are WAY upside down, and lower their payment.
Read the Arizona Republic article discussing the program changes here.
So, what does it really mean? I have to agree with my colleague Kevin Kaufman (quoted in the article), in saying that I am skeptical that it will actually help. Based on what I see in my day to day practice, loan modifications are a gateway drug to short sales and foreclosures. This is why I personally believe that this program change (while full of good intentions, and helpful to some homeowners in the long run), will result in more short sales and more foreclosures.
First a word about why modifications don't work from the lender's point of view. Brent White's theory is that they don't work, because the lenders don't want them to. If they were easy - who wouldn't want one? And yet, statistically as many as 80% of upside down home owners will never do anything about their situation. Why? Because it's not easy to enter into a modification.
The other point I question is the whole competition for these loans:
Second a word on why modifications don't work from a seller's point of view. Because they are a TEMPORARY relief. The biggest burden facing an upside down homeowner is the large payment. Second biggest is the large negative principal. Once they have trouble making the payment, the logic goes "Why NOT just deal with the whole thing and get it over with?" This is what I mean by loan modifications being the gateway drug to short sales and foreclosures. Once the homeowner gets their head out of the sand, and starts to move in the direction of actually doing something about their situation, they are very likely to go all the way with a permanent solution that will hurt more now, but be better for their long term financial standing. Modification is the logical first step - "What if I get good terms?" But, once the terms of modification, and the long term implications become known ... the homeowner has less of a barrier to keep going all the way, and disposing of the upside down house permanently, and moving on for good.
So, yes, I think this is a needed change, but I also think that it will mean a lot more short sales and foreclosures. And I don't mean that as a bad thing, necessarily.
Read the Arizona Republic article discussing the program changes here.
So, what does it really mean? I have to agree with my colleague Kevin Kaufman (quoted in the article), in saying that I am skeptical that it will actually help. Based on what I see in my day to day practice, loan modifications are a gateway drug to short sales and foreclosures. This is why I personally believe that this program change (while full of good intentions, and helpful to some homeowners in the long run), will result in more short sales and more foreclosures.
First a word about why modifications don't work from the lender's point of view. Brent White's theory is that they don't work, because the lenders don't want them to. If they were easy - who wouldn't want one? And yet, statistically as many as 80% of upside down home owners will never do anything about their situation. Why? Because it's not easy to enter into a modification.
The other point I question is the whole competition for these loans:
"Some lenders, frankly, just refuse to refinance," he [Obama] said Monday. "So, these changes are going to encourage other lenders to compete for that business by offering better terms and rates, and eligible homeowners are going to be able to shop around."So ... let me get this straight - servicers are going to trip over each to service an upside down loan, that is already showing signs of trouble, with a seller who is documenting hardship, and that is much more likely to fall apart and require additional loss mitigation work? I know, I know ... the loss is the investors, theirs is the program, they probably guarantee that the mitigation work will be paid for, but STILL - this isn't the servicers primary business - I strongly doubt that they will be aggressively competing for it! What they REALLY want is financially strong, paying customers.
Second a word on why modifications don't work from a seller's point of view. Because they are a TEMPORARY relief. The biggest burden facing an upside down homeowner is the large payment. Second biggest is the large negative principal. Once they have trouble making the payment, the logic goes "Why NOT just deal with the whole thing and get it over with?" This is what I mean by loan modifications being the gateway drug to short sales and foreclosures. Once the homeowner gets their head out of the sand, and starts to move in the direction of actually doing something about their situation, they are very likely to go all the way with a permanent solution that will hurt more now, but be better for their long term financial standing. Modification is the logical first step - "What if I get good terms?" But, once the terms of modification, and the long term implications become known ... the homeowner has less of a barrier to keep going all the way, and disposing of the upside down house permanently, and moving on for good.
So, yes, I think this is a needed change, but I also think that it will mean a lot more short sales and foreclosures. And I don't mean that as a bad thing, necessarily.
