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Loan modifications – revamping mortgage loans to avoid the homeowner losing the property to foreclosure – were a great idea when the real estate crisis hit a couple of years back.  It’s not really debatable at this point that loan modifications are not working.  As ProPublica reporters Paul Kiel and Olga Pierce point out in last month’s article, “Govt’s Loan Mod Program Crippled by Lax Oversight and Deference to Banks,” the issue is not if loan modifications are a failure, but why this has happened.

On Monday, the highly respected credit ratings company, Fitch Ratings, issued its report (offered to subscribers only) on the whole loan modification mess and its numbers are not good.  Consider the following:

1.  The Los Angeles Times reviewed the Fitch Ratings report, reporting to its readers that Fitch Ratings Report co-author Diane Pendley believes that the Home Affordable Modification Plan (HAMP) together with the various alternative mortgage modification programs, combined, have done very, very little to help the situation.  The LA Times point to the Fitch Ratings report findings, where:

  • 60% – 70% of modifications done on risky mortgages, including subprime loans, will default once again within one year of the modification; and
  • 50% – 60% of loan modifications on prime loans, the less risky mortgages, are also expected to default.

2.  Christopher Moore of the Santa Ana Business News also dissects the implications of Monday’s Fitch Ratings Report in today’s story, “Mortgage Modifications Drop; Mod Defaults to Rise,” and finds that loan modifications have been failing for a while now, and will continue to do so for the near future.  Moore points to the following from the Fitch Report as part of his reporting:

  • mortgage servicers modified 36,500 mortgages in December 2010, down almost 60% (57%) from 86,500 in April 2009, the highest modification month thus far; and
  • based on known mortgage inventory, it will take 4 more years to plow through these troubled properties and fix things (an estimate that Moore points out was also predicted by Standard & Poor).

HAMP hasn’t worked.  These is plenty of speculation as to why modifications aren’t working, including lack of oversight and punishment by the government for failure of loan servicers to adhere to HAMP guidelines.  Additionally, some have speculated that servicers make more money when they foreclose than they do when they modify a mortgage.  Either way, something has to done to help struggling homeowners.

When considering a loan modification, these articles and the analysis within them, should be considered.  Hopefully, a modification will work for you (not every single modification has failed, of course).  Thus far, a majority haven’t.

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