Modifications,Short Sales,Deeds in Lieu,WriteDowns

Mortgage Modifications Slow in September

Posted on Wednesday, October 27, 2010

Even as banks, borrowers and regulators battle over how much faulty documentation by lenders should impede foreclosures, fresh evidence came Monday that the housing market remained very wobbly.

Only 28,000 defaulting borrowers received permanent loan modifications in September, the Treasury Department said. That was the lowest number since last fall when the program to help struggling homeowners stay in their homes was just getting started.
Would-be sellers also had a tough go of it recently on two fronts. Home sales continued to fall sharply from 2009 levels and prices started to drop again after a period of equilibrium, according to separate reports from the National Association of Realtors and CoreLogic, a housing data company.
The three sets of monthly data indicate a period of continued stress for the housing market, which in recent weeks has also had to contend with the short-term effects of a freeze on foreclosures. Lenders were forced to impose the freezes as they began to try to straighten out various errors, oversights and shortcuts in the processing of foreclosures.
“Housing is no longer in free fall, but that’s the best you can say about it,” the economist Joel L. Naroff said.
About 4.4 million households are in severe default, although formal foreclosure proceedings have in many cases not yet begun.
The data from the government’s signature effort to help homeowners get new mortgages — formally called the Making Home Affordable Program — shows a program whose effects are, at least for the moment, dwindling.
Fewer than 500,000 households have gotten modifications through the Treasury program, which offers incentives to lenders to participate. An additional 700,000 or so homeowners enrolled in modification programs but did not emerge with a new loan.
In September, 35,000 borrowers enrolled in the program. They will need to make the trial payments before being granted permanent status.
The program was “oversold as a silver bullet,” said Edward Delgado, a former executive with Wells Fargo Home Mortgage. “It helped some owners, but the numbers pale in comparison to those facing foreclosure.”
In its modification report, the government stressed the good news that only 11 percent of those who had received permanent modifications later defaulted.
Most of these borrowers remain heavily in debt, however, paying more than 63 percent of their monthly gross income for their house, car, alimony and installment loans. Some analysts believe the redefault rate will increase sharply over time.
Paul S. Willen, a senior economist at the Federal Reserve Bank of Boston, said Monday that the series of government programs aimed at helping borrowers avoid foreclosure amount to “three years of failed policy.”
Mr. Willen, speaking in Virginia at a housing policy conference organized by the Federal Reserve and the Federal Deposit Insurance Corporation, said it was unlikely that banks could be persuaded to modify loans voluntarily.
Banks, he said, continue to pursue foreclosures in most cases because they regard modifications as expensive and ineffective. Mr. Willen sees two possible solutions: Require banks to modify loans, basically imposing the cost on them; or pay banks to modify loans, imposing the cost on taxpayers.
“We know how to prevent foreclosures,” Mr. Willen said. “We just need to be prepared to spend the money.”
Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, suggested that banks should be allowed to foreclose more easily in cases where they could show that they had offered to reduce the monthly payment. Ms. Bair said that such a legal “safe harbor” could encourage banks to offer modifications.
“We know from experience that reducing the monthly payment through modification raises the chance that the borrower will make good on the loan,” Ms. Bair said at the conference in Virginia. “We also know that in too many instances, servicers have not made meaningful efforts to restructure loans for borrowers who have documented that they are in economic distress.”
Ben S. Bernanke, chairman of the Fed, said in a speech at the conference that preliminary results from the Fed’s scrutiny of the way banks handle foreclosures will be available next month.
“We take violations of proper procedure seriously,” Mr. Bernanke said.
The housing market stabilized in late 2009 and early 2010, in part because of government intervention, but that era seems to be ending, the data released on Monday indicate. Sales weakened over the summer, and prices are now beginning to fall.
Housing sales in September were 19 percent lower than in September 2009, the National Association of Realtors reported. Two months earlier, in July, sales dropped 26 percent from the previous year.
Last fall, buyers were compelled to act by the pending expiration of an $8,000 tax credit. (The credit was later extended until the spring.) September sales were 10 percent higher than August’s, the association said.
It would take 10.7 months to sell all the homes on the market now, which is about twice as long as in a normal market. The sales and inventory rates, while slightly better than they were during the summer, foreshadow a drop in prices this winter.
CoreLogic, the housing data company, said Monday that housing prices fell 1.5 percent in August from August 2009. It was the first year-over-year drop in the index in 2010.
Price declines are “geographically expanding,” with 78 out of the 100 largest metropolitan areas experiencing declines, CoreLogic said. That was up from 58 in July.

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