Back in February the federal government and 49 state attorneys general announced the nation’s five largest mortgage servicers, Ally Financial/GMAC, Bank of America, Citi, JP Morgan Chase, and Wells Fargo, agreed to provide $25 billion to help borrowers who lost their homes to foreclosure and were victims of improper loan servicing and foreclosure practices.
This settlement brought nearly $318 million dollars to Massachusetts borrowers to assist them with principal reduction, loan modifications, and transitional assistance. Massachusetts Attorney General Martha Coakley unveiled a new program in April of this year, called HomeCorps, to help homeowners facing foreclosure. The program is funded by a portion of the National Mortgage Settlement and includes an initiative that offers distressed borrowers assistance with loan modifications.
Although this program is undoubtedly the most successful program we have seen, the banks still aren’t granting as many loan modifications as borrowers expected. Instead, lenders are counting short sales toward their modification requirement, which means most of the settlement money allocated for Massachusetts is not going toward loan modifications for borrowers struggling to pay their mortgages.
According to a report from the U.S. Office of the Comptroller of the Currency, banks implemented only 1,563 loan modifications in the second quarter of 2012 in Massachusetts and no principal reductions. In a release earlier this month, Coakley reported that principal reductions and loan modifications for Massachusetts homeowners jumped up significantly according to the Office of Mortgage Settlement Oversight report. The latest report shows that Massachusetts homeowners have received $266,387,945 in total relief through the end of September according to numbers provided by the five major banks. However, more than 40% of this relief went to short sales.
Banks are opting for short sales rather than loan modifications for a few reasons.
Banks don’t have the have the resources to perform so many loan modifications. Banks will opt to allow a short sale on an underwater home also because they can avoid the legal costs of foreclosure, and they can recoup more of the money owed to them. Short sale homes consistently sell for at least 25% more than foreclosures. In many cases banks offer cash incentives for homeowners behind on their payments to do a short sale. Banks do this as a way of discouraging people from squatting in homes they are no longer paying for. The bank can then put the homes up for sale. Short sale homes are in better condition than foreclosed homes and banks can sell them for a higher price.
Distressed borrowers often look to doing a loan modification as a way to avoid foreclosure, but statistics show about half of loan modifications do more to delay foreclosure than avoid it. Re-default rates after granting loan modifications have remained consistent over the past five quarters according to the OCC report. Up to 9% of loans were 60 or more days delinquent three months after modification, up to 17% were 60 or more days delinquent six months after modification, and 25% were 60 or more days delinquent twelve months after modification. The reason is that a loan modification does not solve the main problem of the homeowner not being able to afford the home in the first place. A loan modification does not change the fact that a home is still worth less than what is owed on it. And often the savings from the loan modification isn’t enough to stay in the home.
Next year, relief that the Mortgage Settlement has provided to struggling homeowners may no longer be effective. Coakley and 41 other attorneys general sent a letter on November 20 to U.S. House and Senate leaders urging them to extend the 2007 Mortgage Relief Act, which is set to expire December 31st of this year. The letter states that if the Mortgage Relief Act is not extended, the Mortgage Settlement will no longer be effective in helping struggling homeowners. Under the Mortgage Relief Act, debt forgiven after foreclosure, short sale, or a loan modification can be excluded from the homeowner’s taxable income. But if the Mortgage Relief Act is not extended, the letter states, it would “result in $1.3 billion in tax increases on the very families who can least afford it.”
