Foreclosure Relief: Good for Banks, Lousy for Borrowers

foreclosed houseHome sales are hitting new lows, the number of homeowners behind on their mortgages is again climbing, as is the number of foreclosures. Housing market misery is widespread -- but particularly intense for the troubled homeowners relying on the Home Affordable Modification Program (HAMP), the federal foreclosure relief program.

Criticized both by those who argue for more aid and those who think the lackluster program only delays a needed bank reckoning, HAMP stumbles along, more often simply prolonging the pain of foreclosure than providing a solution. The dismal new housing numbers -- sales of existing homes are 27% lower than a year ago, new-home sales have fallen even more -- underline just how little demand there is for all the properties that banks are foreclosing on.

Real Estate Mortuary's Waiting Room

In extending the process, foreclosure relief in many cases simply stretches out borrowers' slow bleed of resources. By keeping borrowers in limbo while letting lenders delay repossessing houses they can't sell, foreclosure aid is now benefiting borrowers less than the lenders who created the mortgage mess. For lenders, mortgage modification is the waiting room in the mortuary, a convenient place to hold borrowers while the banks deal with the overflow of houses already repossessed.

Of some 3 million homeowners behind on their mortgages, only about half are eligible for HAMP. Most of the rest, ironically, don't qualify because their income is too low to handle even a modified mortgage. For those that do qualify, HAMP offers little immediate respite: Homeowners have to immediately start making payments on a trial modification plan.

Some 1.3 million borrowers have gotten the trial modifications, which last for at least three or four months (though many banks have stretched this out for longer). But 600,000 of those have already dropped out, unable to make payments in the trial stage. Another quarter-million are in modification limbo, sending checks to the bank as they wait to know if they'll get permanent adjustments. (Detailed numbers are available in the modification program's monthly reports, here.)

What Happens After Gaining Relief Is Worse

If the wait for a modification is trying, though, what happens to homeowners who do manage to get relief is worse. Most borrowers behind on their mortgages are already overburdened with other debts. After the mortgage reduction, the typical modification recipient, despite an average $513 drop in monthly payments, has to devote 63.5% of his or her income to mortgage payments, other debt, and taxes.

It's not clear how many will default a second time. Treasury officials recently had to withdraw the government's numbers on mortgage modification success rates after they were shown to seriously understate re-defaults. One independent estimate from Barclay's Bank is that 60% of homeowners granted loan modifications will eventually default again.

So does HAMP really benefit anyone but the few borrowers who are able to run the foreclosure aid gauntlet, climb out from under their debts against tough odds and get back to making regular payments on their (still-underwater) mortgages? It does. If HAMP fails to make much of a dent in homeowners' troubles, it does mitigate a real problem for the banks: There are many more houses in foreclosure than today's market can absorb.

"Strategic Non-Foreclosure"

One of the foreclosure cascade's not-so-hidden secrets is that the banks and investors who hold millions of busted mortgages are in no hurry to kick debtors out of their homes. The markets hardest hit by the foreclosure crisis are already stuck with an enormous and growing inventory of repossessed houses, now estimated by Lender Processing Services, which tracks foreclosures, at 1 million to 1.2 million bank-owned homes nationwide.

Banks have steadily slowed down the foreclosure process: The average homeowner in foreclosure now is an amazing 461 days behind in his payments. (You can see that last stat in this report, on page 13). Barry Ritholtz of financial blog The Big Picture calls banks' reluctance to take over houses "strategic non-foreclosure." Taking a leisurely path to repossession lets lenders avoid the costs of maintaining properties they can't sell in a market that remains in free fall in much of the country.

However, there's a limit: Lenders must eventually make good on the threat of repossession or face an epidemic of homeowners who stay in their houses without making payments. Many houses have been in foreclosure for so long that the banks have little choice but to act, and repossessions are rising.

Mortgage modification lets banks put a brake on the process, keeping up the pressure on borrowers (most of whom will eventually be foreclosed on anyway) without adding to the banks' inventory of foreclosed properties. As they sit in this antechamber, instead of simply writing off their mortgages, the strapped borrowers, given the gift of reduced payments, are likely to squeeze out whatever they can manage in a last effort to keep their homes. It's a study in what Rortybomb's Mike Konczal trenchantly calls the credit "sweatbox" -- under the guise of foreclosure aid.

Another Cudgel in the Hands of Lenders

The last insult added to this mess comes from Fannie Mae, which has promulgated new rules that lock those who don't make the effort to modify their mortgages out of the Fannie-backed mortgage market for seven years. So ultimately this comes full circle, and what started as an effort to help borrowers has become another cudgel in the hands of lenders.

If we were to conceive a program to persuade borrowers to stick to their obligations and make every effort, no matter how unrealistic, to avoid foreclosure, we could hardly do better than HAMP. The program probably increases what lenders collect before they eventually foreclose -- and may let those lenders slow the process enough to prop up prices as they sell off their inventory.

In this way, it may lead to a more orderly unwinding of the busted housing market. If so, HAMP might accomplish some part of its goal -- just not the part that has to do with helping homeowners.

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RIGHT ON dclark 28. You are so right. All these commercials regarding credit scores, and fico scores are scare tactics to get you to part with your money. IT'S TIME TO START A FINANCIAL REVOLUTION. If the banks, and our government won't do what is right, lets show them. Stop paying on credit cards. They are unsecured loans, and they can't touch your home. Yeah, your damn credit will take a hit for 7 years but who cares. In that time you will start learning how to SAVE. Take your money out of the banks, or at least close your savings account, and put it in checking. That way the banks can't play with YOUR money. By keeping it in checking, it must stay there for YOUR use. Better yet, go to a Credit Union. Most are FDIC insured. SELL your damn stocks, no matter if you have gains or losses. If Wall Street wants to play, they can play with themselves. CREDIT IS CRAP, CASH IS KING.

December 08 2010 at 12:06 PM Report abuse rate up rate down Reply

As I see it, the government and banks worked hand in hand to steal the assets of tax payers and homeowners. I think the objective is for all people to live in "gubmint" housing. The communist party sure has put a dent in our way of life here in the USA, and am glad to see the banks left holding the bag. Everyone should stop paying,,,,isn't this what UNITY is all about? As long as some of the people live in fear of bad credit (created as a form of mass control), we will never get a grip on all this corruption. The backlash has been beautiful and we will all have to be forgiven if they want our money put back into the market. Currently, there are few home buyers. We the people do have the power to reinstate the constitution. All we need to do is unify. He who HAS the money has the power.

August 30 2010 at 12:03 PM Report abuse +1 rate up rate down Reply

After reading this article, I concluded that this is another way of helping banks and defrauded tax payers. I have been in the market to buy a house for almost a year. Like others, I didn’t buy when the market was booming, I couldn’t afforded. I waited until my finances were in order to do it. Now, I found out that the houses that I can afford to buy are on short-sale. The homeowners don’t want to sell because they are living in the house without paying mortage. When you find someone willing to accept your offering price, the bank doesn’t accepted. I am not offering less money, just what they are asking minus $ 5.000,00. My realtor told me that even if I had offered more, most likely the bank wouldn’t had accepted anyway. The foreclosures are another case. When someone goes to the sheriffs county to buy a house, he or she must be prepared to deal with the flippers, and the 20% down payment required by the seller. I am ok with the 20%, and even with the flippers, but attached to this type of house comes unpaid taxes, liens and the chance that the homeowner could get the house back. I am sick and tired of paying rent, but contrary to what people might be thinking this is not the buyer’s market. This is a mess created by very rich and greedy people, that us, the taxpayers are going to be paying for a long, long time.

August 30 2010 at 10:22 AM Report abuse +1 rate up rate down Reply

I have been working with my lender for the last 18 months. I did the HAMP only to be told after 4 months that I earn too much money. Then I was told don't worry you can do a loan modification. I did all that was asked and supplied the paperwork. They modified my loan alright. They added arrears(if not behind they wont work with you) and attorney fees (as they also continued the foreclosure process) of $12,000. The principle and interest payment went up $10 a month. Then they finally recomputed the taxes and insurance? That dropped in half. They said see your payment is lower. I have 24 years left on my mortgage. The loan modification was a 40 year note. When I said that I would like to just have a 30 year and that I was willing to let the rest of what they did alone in order to save my home. I was told that the terms are not negotiable that I had to sign or lose my home. I work in the Real Estate business and the amount of people that get some sort of modification is small. This was a Frddie Mac loan issued by CITI,. Hmm so if its insured and it is foreclosed on who is the real loser here? The taxpayer? A guaranteed loan , how does the lender lose? I want the government to print actual figures as to how man people actually recievd help.

August 30 2010 at 10:13 AM Report abuse +2 rate up rate down Reply

Well there's a SHOCKER ! Banks are the reason we are in this mess to start with !

August 30 2010 at 9:39 AM Report abuse +3 rate up rate down Reply

My mortgage has flipped and the bank won't lower my payments so I've decided to sell my house on Land contract. I just want out of the state but I can't leave because of my house not selling. I put it up for sale a year ago and have had one bid on it and it was $40,000.00 lower that the payoff. I'm tired of worrying about it.

August 30 2010 at 8:14 AM Report abuse rate up rate down Reply

oh...i forgot to case yall missed it...BofA and wachovia bank in texas are now both being investigated for laundering drug money....ain't that a hoot? or should that be a snort? bwuahahahahahaha

August 30 2010 at 7:56 AM Report abuse +1 rate up rate down Reply

huh....welll dokemion....all i can tell ya is that i called my lender BEFORE i was delinquent in my notes (sept 2008) after back to back hurricanes here in central louisiana which meant i wasn't able to's now almost 2 yrs later and still no modification...hasn't been me dragging my feet, but good ole BofA...and they're still dragging their feet...had just sent them this past july, my 4th pkg of requested loan docs in less than a year (37 pages plus an additional pkg a couple of weeks later cuz they 'forgot' to ask me for some other info)!!! last friday, they called and have now requested p/l statement from jan 2010 to present...they already have a 3 month p/l statement (apr/may/june 2010), plus my total financial picture for 13 months (june 2009 thru june 2010). i was told it was necessary so that they can verify my income!!! pure b.s. in the past 2 yrs, i've sent enough paperwork to them to start a small bonfire!!!! if they're so darn willing to work w/homeowners, explain this to me

August 30 2010 at 7:53 AM Report abuse +2 rate up rate down Reply

If you have not yet received the foreclosure notice, but know that you are going to be falling behind, call your lender. Make an effort first to work things out. Remember, your lender really doesn’t want your home. If extenuating circumstances, such as an unexpected job loss, have happened, your lender will often work with you. Temporarily reduced payments, rolling what you owe back into the loan, or a short-term restructured payment plan can help you to get current with your loan. However, if you wait until you are very far behind, your lender is not going to be as willing to work with you. Keep in mind that once you have been offered a repayment option, you need to be able to make the payments.

August 30 2010 at 4:29 AM Report abuse -1 rate up rate down Reply
1 reply to Dokemion's comment

I wish this was true, have tried for 1 1/2 years to get mod thru lender, advising them that I was headed for trouble, withdrew 4 college funds, 401k, all savings,ira to stay current. Now, have nothing, will miss my first mortgage payment, called lender to ask if I should send a partial payment until I can get the rest and they told me NOT TO. Talked into an interest only 10 year arm, which I will have to refi in 6 years( yea right) so what do I do, under water by at least 100k, trying to do the right thing has crippled my kids future and my retirement. Stop paying and start PRAYING? want to stay even though it is a bad investment, but no help in sight.any ideas????

August 30 2010 at 7:22 AM Report abuse rate up rate down Reply
Benjamin Bursey

Thank you for the investigative reporting of the actual situation that homeowners face. There need to be more investigation into the practice of "foreclosure" sales. For example, These properties are re-sold at a fraction of market value, yet denying the the homeowners respectable loan modifications.This is the unreported consequence of this program. The taxpayers are the victims... the slick financial institutions are reaping an enormous profit. Apparently the legislature that wrote these rules for modifications did not believe the homeowners were in distress. I hope you will have an opportunity to look further at the actual practices of these lending institutions.

August 30 2010 at 3:39 AM Report abuse +2 rate up rate down Reply