Trouble in Loan Modifcation Paradise

by Alex Stenback on July 28, 2009

The Wall Street Journal Today reports that the much ballyhooed loan modification program announced in February has had dissapointing results – with only 200,000 of the then-advertised 3 -4 million homeowners getting loan modifications, most of which are so new that the long term success cannot be estimated:

Some homeowners are being told they must be behind on their payments to receive help, which runs counter to the aim of the program. In other cases, delays are so long that borrowers who are current on their payments when they ask for a loan modification are delinquent by the time they receive one. There is also confusion about who qualifies.

In a related aside, you know all of those sub-prime loans that were originated without escrow accounts for taxes and insurance?  Those are proving very tough to modify successfully, according to American Banker:

During the boom, loans were often set up without an escrow account for property taxes and insurance, which traditionally are collected monthly by the servicer along with principal and interest. Leaving taxes and insurance out of the monthly bill made the mortgages look more affordable to borrowers (who often got hit later with a large annual or semiannual tax bill).

Today, many of these subprime borrowers are trying to get loan modifications. But servicers generally require that an escrow account be created as a condition of rewriting loan terms. This is one reason that so many borrowers who get modifications redefault, observers said.

“The payment after a loan modification may end up being higher than it was before because of taxes and insurance,” said Kim Gawronski, senior director of operations at First American Real Estate Tax Service. “Leaving out the taxes and insurance to get a borrower into a cheaper loan was one of the less-discussed subprime practices and is emerging as an impediment to mods.”

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