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Loan modifications are failing — thanks to the banks, er, the government!

Whenever I talk with homesellers who are in dire straits – without sufficient equity to sell and/or in immediate risk of falling behind on payments – the first thing I advise them to do is consult with their lender(s) to try to structure a loan modification.  I encourage them to be honest with their lien holder(s) and let them know, point blank, that they are no longer able to keep up with payments and that, without the bank’s help, foreclosure could eventually become a reality.  Only after homeowners explore all of their options will I even take a short sale listing.

Recent news, however, may cause me to reconsider my approach.

According to USA Today, only 9% of eligible homeowners have gotten a trial mortgage modification under the Federal plan, part of the $75B housing recovery plan that was announced last March.

According to the report, B of A has only modified 4% of eligible mortgages.  JP Morgan Chase has modified 20% and Wells Fargo just 6%.  Good effort, guys.

Unfortunately, the program only applies to homeowners who are 60 or more days delinquent.  I say unfortunately, because it seems intuitive to find a way to help homeowners BEFORE they get in deep trouble, when the first signs of problems are arising.  I realize there’s room for manipulation by unscrupulous homeowners, but documentation requirements and historical payment patterns could be used to validate ‘need’ from ‘exaggeration.’

In response to the low success rate of the current program, the government is going to get involved and ‘require ramped-up effort’ from all lenders.  That should help.  The government has done such an excellent job so far of helping homeowners in trouble keep their homes.

Let’s be straight here.  Banks have no interest to anyone but their shareholders and no amount of government cajoling will change their motivations.  Even when lending institutions are offered financial incentives to modify practices, they’ve proven to be quiet adept at finding loopholes to maximize their gain.  Indeed, we can’t hold the banks at fault.  We need to accept their behavior as free-market capitalism in action.  I just wish the wise decisionmakers that are formulating federal policies would catch on to that fact BEFORE they enact policies that do nothing more than throw taxpayer money at the problem.


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