The busy world of loan modifications is starting to generate its own terminology. A “refault” now describes the situation where a homeowner in default on the mortgage applies for, and gets, a loan modification only to go back into default a short time thereafter. Studies on loan modifications done in the first half of 2008 have shown that fifty percent of those who were successful in do-it-yourself loan modifications fell behind on their payments soon after their loans are modified.
The main reason for these refaults is that the focus on these loan modifications was centered on the mortgage only, without regard for the homeowner’s income levels, other debt obligations, and ability to make payments on a regular basis. That narrow focus came from both homeowners and the lenders, possibly for different reasons.
It’s no secret that borrowers have been saying for some time that their lenders and the companies that administer their loans, known as “servicers,” are difficult to reach and, when they are lucky enough to make a connection, are unresponsive to their needs. Many have said that they didn’t receive any response at all. After months of frustration, being left on hold, and generally poor treatment many of the do-it-yourselfers were so happy, or so worn out, that upon finally getting to the negotiation stage of the process, they let the banks set the terms of the modification without much in the way of negotiation at all. Michael Hiltzek recently wrote in the Loa Angeles Times that, “…banks are so desperate to minimize their declared losses that the terms they offer borrowers aren’t generous enough to save the loan.” Even if the homeowners knew payments were still too high, they were getting modified and possibly stopping a foreclosure so they signed on the dotted line.
The other side of the issue was the lender’s reliance on dated employment information pulled from original applications and/or the acceptance (again) of stated income on the loan modification application. Like the homeowners, loan modifications were providing lenders with a way to avoid a foreclosure and the costs of taking back additional properties. An article written March 24th, 2009 by Bloomberg reporter Jody Shenn quoted Sean Dobson, chief executive officer of Amherst Securities Group, LP, an Austin, Texas firm that focuses on home debt. He said, “Most modifications are a sham done in the servicers’ self-interest, and they do nothing to benefit the homeowner…”
As refaults started coming back to the lenders there was a realization that verification of the homeowner’s income and its ratio to debt payments would have to play a bigger role, making loan modifications more difficult to obtain. The evolution toward tighter loan modifications had begun but refaults continued to flow back to the lenders as earlier loan modifications continued to blow up.
Meanwhile, loan modifications which combined attorney experience with negotiations that took the homeowner’s total financial picture into consideration, while still seeing refaults, perform much better over the long term. It is that focus that might be the answer to the problem. It could be that putting the emphasis on making mortgages manageable over the long term, as opposed to short term expediency, could be the key to success in reducing the refault rate, especially for the do-it-yourselfers.
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