To this point, much of the public discussion about why various loan modification efforts have languished has been about a combination of “overwhelmed banks” that are too dumb to do what’s good for them and the problems with un-scrambling the egg that is our securitized mortgage finance system, where your home loan has not one, but many owners.
But the biggest reason these loan modification efforts fail to reach critical mass may be much simpler and, as you might guess, it all comes down to the bottom line.
Enter James Surowiecki, writing for the New Yorker, who draws from a recent study by the Boston Fed [pdf] to help explain all this:
“…the biggest problem may be that the programs are based on a faulty assumption: that modifying mortgages makes everyone—borrowers and lenders alike—better off. The idea is that since renegotiating a mortgage saves banks the hassle of foreclosing on a house, watching it sit empty, selling it at a bargain-basement price, and so on, renegotiation makes economic sense for lenders.Give lenders a nudge to start acting sensibly, and you can stop foreclosures at a relatively small cost.
It’s a comforting idea. Unfortunately, it isn’t true. In fact, according to a recent paper by economists at the Boston Fed, foreclosing is often more profitable for lenders than renegotiating is. There are two reasons for this. First, about thirty per cent of delinquent borrowers “self-cure”—after missing a payment or two, they get back on track without any help from the bank. Second, between thirty and forty-five per cent of people who do have their mortgages modified end up defaulting eventually anyway. In both cases, modification leaves the bank worse off. Reluctance to modify mortgages isn’t always a matter of obstinacy or ineptitude. It’s a matter of profit: banks are doing what makes sense for their bottom line.”
To date, the various loan modification programs have helped something like 200,000 homeowners modify their loan terms – a number that has been dwarfed by the number of new foreclosures, unfortunately.
Not Home Yet [Surowiecki/New Yorker]