Apparently the Federal Reserve Bank of Boston conducted a study and found that lenders are hesitant to modify loans because it means losing money. Lets see, if I were promised $10 for something last week, would I run out today and ask for $5 for the same thing? Of course lenders would lose money on loan modifications and they would not cut their profits if they did not have to! It really does not take a study to see that lenders would try to delay or avoid loan modifications if they could.
One of the authors of the study says that the $75 billion Obama mortgage plan would have been more effective if the money was given to borrowers rather than lenders. That is probably true. The Obama mortgage plan touted that they would help 3 to 4 million borrowers who are delinquent through modifications. If you spread $75 billion out to 3 million borrowers each person would get $25,000. In some areas that money could probably pay off someone’s entire mortgage debt. Of course this would be too obvious of a government handout and probably would be even less popular than the current ill conceived plan. Who would not be pissed off if their financially delinquent neighbors just got a check for $25,000 for the sake of being delinquent?
The current plan gives incentives to servicers and lenders to modify loans, but that incentive is relatively small compared to an interest cut or principal cut on a big loan. Also, if servicers really wanted to ramp up on loan modifications they would need to hire a lot more staff, and it is not profitable to do so. Additionally, if a borrower is still paying their debt then there is really no incentive for a lender to change the rates voluntarily. This new study also echos past data that a large percentage of those who get modification redefault very quickly. As I have said before, this whole mortgage bailout is simply prolonging the mess because it sort of give banks a lifeline to delay the processing of bad loans, and borrowers who have no capacity to pay back their loans simply delay their ability to repair their credit. I am glad that now there is fairly concrete evidence that supports my conclusion.
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1 comment so far ↓
Hi
The problem will all of these sorts of schemes is twofold:
1. It encourages (or at least doesn’t discourage) delinquent behavior of both banks and debtors.
2. The fairness issue – those that have been sensible are not helped.
The only reason to ignore these issues and continue is if there is a clear and substantial economic benefit to doing so (something that might indirectly benefit the majority through either higher house prices or improved emplyment prospects for example). I think you make the valid point that it is not clear that this benefit exists.
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