Home > Foreclosure alternatives > KCM Blog: Modifications Not the Answer to Foreclosure Crisis

KCM Blog: Modifications Not the Answer to Foreclosure Crisis


The Federal Government is realizing that loan modifications won't stem the tide of foreclosures


Today’s post is courtesy of Steve Harney and the KCM crew from their KCM Blog.

Even the government now realizes that there is no way to prevent a large number of distressed properties (foreclosures and short sales) from entering the housing market. The impact will be continued downward pressure on all home prices. Distressed properties sell at discounted values: foreclosures at 65% of full value and short sales at 85% of full value.

As more of these properties sell, they will make up larger and larger percentages of overall sales. That will cause appraisals on every housing sale to fall.

And there is no doubt the government can do little to prevent this. Originally, the administration had hoped to prevent between 3 and 4 million homeowners from losing their homes through foreclosure. But they have helped less than 500,000 so far. And, of those they did help, many have already defaulted.

According to Housing Wire.com:

Of the roughly 16,000 mortgage modifications done on Freddie Mac loans in the second quarter of 2009, 42% had fallen back into delinquency 12 months after the workout, according to the third quarter financial supplement from the government-sponsored entity.

According to Freddie, the redefaulted modifications are either in 90-plus day delinquency, foreclosure or REO.

… Later modifications done on Freddie Mac loans are performing better. Of the 9,000 modifications completed in the third quarter of 2009, 29% had redefaulted 12 months after the workout.

Things have improved because only 3 out of 10 redefault? That is not very reassuring. We are beginning to see a change in what the administration is saying on this issue. CNN Money.com commented on this issue this week:

Last week Phyllis Caldwell, head of the Treasury Department’s Homeownership Preservation Office, told a congressional panel that “an important part of ensuring longer-term stability in the market is to enable properties to be resold to families who can afford to purchase them.”

And White House Press Secretary Robert Gibbs last month told reporters that without sales of homes in distressed areas the “recovery in the housing market stops. It’s frozen.”

“That obviously can have — we believe and others believe — a very negative and detrimental impact to our economic recovery efforts and the housing markets in states that have been hardest hit,” Gibbs said.

…The shift in rhetoric signals the Obama administration is recognizing that its loan modification program is foundering, experts said. Also, it is acknowledging that banks must address their swelling ranks of delinquent loans.

Bottom Line

The first line of defense to this oncoming wave of foreclosures was the modification process. It now seems that these programs will not stem the tide. If you want to sell any time in the next 18 months, now may be the time.

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