In the housing crisis over a decade ago, the government stepped in with mortgage loan modification plans to mitigate the U.S. housing crisis. It looked like the federal government saved the day and that the recession would soon be gone. A Mortgage loan modification permanently changes the terms of the mortgage loan. This could be a reduction in interest rate, number of payments to repay the note, a forbearance period when no payments are required, by adding a silent second mortgage to cover the arrears, and/or by reducing the principal balance of the outstanding mortgage debt. Since the end of 2007, Non-profit Hope Now consortium estimates that 8.7 million permanent mortgage modifications have been implemented in the U.S. since the end of 2007.
What was rarely discussed, is the recidivism rate. Over half the mortgage loans modified between 2008 and 2012 were delinquent, in default or foreclosed by the end of the first quarter of 2013. Over 3 million loans guaranteed by the Federal Housing Administration (FHA) had also been modified between 2008 and 2013. A 2014 report found that these modified mortgages had likewise performed poorly, with re-defaults in approximately 57% of these modified loans. Research revealed many of the loan being modified between 2010 and 2015 were second or third repeated modifications, and those repeatedly modified mortgages performed worse than the one-time modified mortgages.
The mortgage modification programs in even the largest of lenders is huge, and has allowed the banks to avoid foreclosing for years. Unfortunately, the homeowners are still struggling to pay their mortgage payments and the notes are still delinquent. This leaves a large pool of loans still at risk of foreclosure, and a large pool of REO properties to potentially glut the real estate market, dragging down home values. That can affect both buyers and sellers of homes, but also those seeking to refinance based on previously established market value.
In the OCC’s recent report for the first quarter of 2019, 21% of the most recently modified loans had re-defaulted within six months. That number is still well above normal delinquency rates and certainly reflective of a growing risk in mortgage loan modifications.
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