More Action Needed from Loan Servicers
Homeowners struggling through resetting ARMs and high monthly mortgage payments have become a familiar part of the American newsscape, and their empty, foreclosed-on homes have become an all-too-familiar part of the American landscape.
Analysts for the Consumer Law & Policy Blog have suggested that inadequate loan modification and refinancing practices are partially to blame for the continued foreclosure woes in the United States.
A study released by Moody's rating agency last August reported that only 1% of mortgage loans whose rates were expected to reset in 2007 had been refinanced. A November update saw slight improvement: at that point, 3% of mortgages had been refinanced.
As if those numbers don't look bleak enough, homeowners have another force working against them in 2008. With the continued slowness of the housing market, fewer homeowners have the choice of selling their houses to avoid foreclosure these days.
The frightening statistics from Moody's report go on: of the loans that reset in the first quarter of 2007, 13% were paid off after the price hike; of those that had reset by August, only 4% were completely paid.
While refinancing would solve the foreclosure-related problems of many of these borrowers, most loan servicers have not invested the time or staff necessary to serve all those in need. For struggling borrowers, this can translate to loan servicers who are impossible to get in touch with!
Perhaps even more worrying is the reported trend of offering loan modifications rather than refinanced loans.
In a loan modification, borrowers pay increased monthly payments in order to catch up on any overdue payments they might have. But nothing is done to address the long-term rate hikes or prepare borrowers for financial difficulties that might lie ahead.
Some servicers opt to offer loan modifications because they boost stats in the short term - it's a way to prevent delinquencies before the next monthly report. But in the long term, these modifications can be disastrous. Statistics from the Mortgage Bankers Association show that 40% of foreclosures involving subprime ARMs also involve a failed loan modification plan.
The MBA's study also revealed that, among subprime ARM loans, for every loan that gets refinanced, eight are modified for the short term! In the rest of the market, that ratio is three to one. Basically, this means that the loans that most need refinancing (those with adjustable rates taken by subprime borrowers) are the ones least likely to get it!
While the report released by the MBA points to overall improvements in refinancing rates for home loans, loan servicers still have a long way to go before they're helping the majority of borrowers struggling with foreclosure.