Borrowers Granted “Permanent” Modifications Still Carry Horse-Choking Debt Burden

by Alex Stenback on March 16, 2010

Raise your hand if you can make ends meet with debts eating up 60% of your gross monthly income?

No hands? Anyone?

OK, now look at this chart (via Calculated Risk) and make a guess as to how successful the Home Affordable Modification Program (HAMP) will be.

What it shows us is that among those granted permanent modifications, the median debt to income ratio is 59%. That is jaw-droppingly high. 

To put that into context, a 36% debt to income ratio is generally considered affordable, and if you are seeking a new loan, you’d be hard pressed to exceed 45% even with exemplary credit and would need some, as we say in the trade, “compensating factors.”

I think we can safely assume that many of these permanent modifications (being touted as success stories, mind you) are probably still sinking ships.  We wish the borrowers the best of luck of course.

What’s more telling is that these numbers are indicate something else:  That the real problem is that too many households are simply awash in debt, and “fixing” the mortgage can be a very far cry from fixing the finances of a given household.

{ 3 comments… read them below or add one }

Laura Morton March 21, 2010 at 7:34 pm

What really make these numbers pop is when you use the net income. This is your “take home” pay.
Eventually, the homeowner has to realized that being upside down is bad. Make a business decision and walk away. As it is now he’s throwing good money after bad.


Lloyd Braun May 8, 2010 at 5:25 pm

After the mod, the homeowner is still faced with the decision “what do we make payments on – the house or our consumer debt?” With ratios of 31 and 60 it’s tough to swing both.
And is it really the lender’s responsibility to modify the mortgage to the degree the homeowner can afford all their consumption debt?

John Murphy May 18, 2010 at 8:10 am

Thanks for pointing this out Alex. It’s my opinion that for the most part, these loan modifications are designed for the benefit of the bank/investor and not the homeowner. You point out, as have others, that the home owner is still saddled with the debt. I’ve run in to situations where companies like BofA would encourage sellers to modify their loan on a home that has dropped 40% in value? What would be the point of that other than it allows the bank to continue to show a loan current on their books and the would not have to recognize the loss and hold back capital reserves. The banker and Realtors pitched housing as an investment not too long ago. Well, if it’s an investment. It’s gone bad. It probably makes sense for people to walk at that point. If that’s something they are considering, they should consult with a tax accountant as well as an attorney to understand the various ramifications…nothing is free.

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