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Tuesday 07 July 2009
by: Jenifer B. McKim | Visit article original
@ The
Boston Globe
An eviction team waits outside a foreclosed house before removing belongings
left behind. (Photo: Getty Images)
Study cites lack of profit in aiding the distressed.
Mortgage lenders don't try to rework most home loans held by borrowers
facing foreclosure because it would probably mean losing money, a study
released yesterday by the Federal Reserve Bank of Boston concludes.
The Boston Fed's findings suggest the Obama administration's major
effort to solve the foreclosure crisis by giving the lending industry $75
billion to rewrite delinquent loans to more affordable levels is not likely
to work.
One of the study's coauthors, Boston Fed senior economist Paul S. Willen,
said the government would be better off giving the money directly to
struggling borrowers to help them with their payments, rather than to
lenders that are averse to working out the troubled loans.
"Loan modification is not profitable for lenders,'' Willen said. "If it
were profitable, they would go out and hire staff.''
US Representative Barney Frank, head of the House Financial Services
Committee, said the study results may provide answers about why so few
struggling homeowners have been able to get help.
Frank, a Newton Democrat, said he is holding a hearing Thursday on his
proposal to provide government loans to homeowners who have lost their jobs
and can't qualify for loan modifications and other help because they don't
have income.
"The problem is worse than we thought,'' Frank said. "The failure to do
these modifications means the whole situation stays bad longer.''
The Fed's study found that only 3 percent of seriously delinquent
borrowers - those more than 60 days behind - had their loans modified to
lower monthly payments; about 5.5 percent received loan modifications that
did not result in lower payments.
The study focused on 665,410 loans that were originated between 2005 and
2007 and subsequently became seriously delinquent. It also followed about
150,000 borrowers for six months after they received help, through the end
of 2008.
The lenders may have compelling reasons not to find new borrowers to
help, according to the study. For example, up to 45 percent of borrowers who
did receive some kind of help on their loans ended up in arrears again, the
study found. Conversely, about 30 percent of delinquent borrowers are able
to fix their problems without help from their lenders.
"A lot of people you give assistance to would default either way or
won't default either way,'' Willen said. "They are trying to maximize
profits, and at this point maximizing profits does not mean modifying
loans.''
Officials from Hope Now, the private-sector alliance of mortgage
servicers and investors, were unavailable for comment yesterday.
US Treasury officials declined to comment on the Fed study, but noted in
a statement that more than 240,000 homeowners have received loan
modifications this year under the president's program. Moreover, federal
regulators said the pace of loan modifications has been increasing steadily
since last year.
Given the findings, Dean Baker, codirector of the Center for Economic
and Policy Research in Washington, D.C., said Willen's suggestion to give
money to borrowers rather than lenders makes sense.
The number of foreclosure proceedings increased to 844,389 during the
first quarter of 2009, up 73 percent from the first quarter of 2008,
according to the Office of the Comptroller of the Currency.
"You have more money going to the banks and the servicers than you do to
the homeowners,'' he said. "It would make more sense to just give money to
the borrowers.''
The $75 billion Obama administration plan, announced in February,
provides incentives to motivate companies that service mortgages to make
loans more affordable, including $1,000 bonuses for each modified loan and
an additional "pay for success'' fee of $1,000 a year for three years if
borrowers stay current on their new terms.
Willen said the success bonus could have the unintended effect of
steering loan servicers away from those who need help the most, and toward
only those borrowers most likely to recover on their own anyway. He said
that if modifications increase, it won't be by much. "My guess is they are
going to help people who are OK, and they are not going to help people who
are deep trouble,'' he said.
Alan White, a professor at Valparaiso University School of Law in
Indiana, said lenders could cut down on the number of borrowers who end up
defaulting again by giving them more help in the first place. He said too
many modified loans don't result in low enough payments. Also, he said,
there may be fewer borrowers who can get out of trouble on their own because
of continuing difficulties in the economy.
"The servicers are making assumptions that are much too
anti-modification,'' White said. "The servicers have the authority'' to help
borrowers, "they just don't want to use it.''
The study, coauthored by Manuel Adelino and Kristopher Gerardi, also
rebuts a widely held suspicion that the holdup in modifying loans is because
of investors who control them through mortgage-backed securities. The Fed
found no difference in the rate of aid between investor-controlled loans and
those that lenders own directly.
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