Are Loan Modifications a Waste for Servicers?
Walking the halls at SourceMedia's recent Mortgage Servicing Conference in Dallas I struck up a conversation with a Realtor from California whose business had been put on hold because his specialty was foreclosure sales. He wasn't about to lay off any workers (he still had plenty of deals in the pipeline) but he was starting to get a bit antsy. He also raised a valid point, one I'm certain readers have been pondering for months: Why don't we just do away with all this consumer forbearance, foreclose on delinquent homeowners, and let the chips fall where they may?
If this happened, foreclosures would rise from their already-heightened pace, home values would fall even more and eventually we'd reach a bottom. Once a floor is established, then and only then would home values once again begin to rise. At least that's how he saw the situation.
Of course, for people who are gainfully employed it's easy to say those types of things. It's easy to say: "Tough luck. Go live with your parents." (If you have parents that are still living.)
These are unprecedented times we're living in. The idea of forbearance for homeowners reminds me of the early days of the S&L crisis, two decades ago when thrift executives were begging for capital forbearance, lobbying elected officials and regulators to go easy on their institutions, arguing that the tough times were temporary, and given time they would survive. Well, guess what? Those struggling S&L operators weren't given much slack and in time they were thrown on the scrap heap of dying depositories.
The idea of forbearance for consumers rubs some in the industry the wrong way, including that California Realtor I chatted with. But forbearance - or maybe I should say an attempt at forbearance - is what we're seeing now. Will it work - and here's an even bigger question: What ultimately will be the cost be to taxpayers and the industry at large?
Thanks to government studies, we already know that about half of all modified loans (mortgages that were reworked last year) already have gone south again or are likely to. If you're an optimist you might argue that this means that loan modification plans have helped half of all mortgagors. Half is better than zero. A valid point, I guess.
But the truth is this: we won't know for five years, really, if all these loan modification efforts are worth it. It takes time to rewrite loans and it takes time and patience on the part of both the borrower and servicer. The key to working out any loan will be the employment situation of the customer, namely can they stay gainfully employed? Can they give up the credit cards for good and swing the new payment? I've said it before and I'll say it again - if you want to turn around the mortgage and housing markets give someone a job. If people are gainfully employed or feel good about their career prospects they'll buy a house or refinance.
So, should we as a nation grant forbearance to certain delinquent homeowners? It some cases, yes, but separating the worthy from the unworthy may not be so simple. There's plenty of Americans who took out loans who (as we all painfully know) should never have received credit in the first place. Who put that person in a mortgage? Answer: someone in the lending industry (retail LO, broker, Wall Street firm) and that's the chief and only reason I can think of that answers the question why we should grant forbearance. Some mortgagors clearly were hosed. (Remember the Ameriquest settlement?)
I suspect that the worst of the worst borrowers (those who should never have qualified in the first place) already have lost their homes and cannot be helped. For those who are left (and struggling), the industry should probably extend a hand of kindness, or at least try. But somewhere along the line tough decisions will need to be made - and that includes foreclosure. Moratoriums can't last forever. Can they?
Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.Muolo@SourceMedia.com.