Modifications are Making it More Difficult and Pushing Borrowers into Foreclosures Again
It is ironical that modifications have increased the amount of monthly payments and thus causing borrowers to be pushed into the arms of foreclosure again. With great hope the homeowners (their numbers running into tens of thousands) across the country have been asking their lenders to modify their loans. But instead of getting relief they are now finding themselves more than what they used to prior to the modification.
The debts have become larger thanks to adding up of late fees, unpaid tax arrears and other charges. These have been tagged on to the principal causing a payment that was at one time difficult into impossibility. This is why many mortgages that have been renegotiated are slipping back into default and delinquency.
It is not yet time to say whether this tendency will continue or not. The Obama government has taken measures involving $75 billion to enable reduction of monthly payments for those struggling with mortgages. Three month trial periods have been chalked out and at present 360,165 mortgages are participating in this trial run. But the shortcoming of the scheme is that it is concentrating on reduction of interest rates and not on the principal. Without bringing down the principal the measure will not be effective.
From 1st January this year till 31st March monthly, payments spiked on 27% of the mortgages. Mortgage amounts remained unchanged for 27.5% as per the findings of banking regulators. Many of the mortgages that had been modified again fell delinquent – the proportion ranging from 25% to 40%. A big reason was that many borrowers lost their jobs or incurred additional debts on other heads apart from housing according to CreditSights – a firm researching in finance.
Alan White of Valparaiso University of Law said, “Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again). "(The lenders) focus on today and not on the future.” Even the plan by the new government is more concerned about short term gains of today rather than long term benefits of tomorrow.
Most of the borrowers who have managed to modify their mortgages have seen their principal balance increase as per the findings of CredtSights. This year 660,000 mortgages have been modified. It calculates to 90% of the modifications have resulted in the principal becoming larger than what it was previously.
