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|One of the most comprehensive and large scale efforts to encourage successful loan workouts is the Ohio Compact to Preserve Homeownership. The Compact, signed by the governor in April 2008, establishes an agreement between the state and nine subprime mortgage loan servicers to use "good faith" efforts to keep families in their homes. The Compact is based on the following six principles:
Chris Callis Photography, courtesy of Common Ground
|In a measure to increase the pace of loan workouts and prevent foreclosures for troubled borrowers, state officials in Massachusetts have organized workshops to bring lenders and borrowers together and provide opportunities for individual, face-to-face counseling sessions. These workshops, targeted for areas with high rates of foreclosure, grew out of concerns expressed by housing counselors and borrowers that lenders and servicers were not easily accessible when they sought assistance.
It is worth noting that while loan modifications may help many families, they are not a panacea. Since many predatory lending practices provided mortgages without requiring verification of the borrowers' income, many families got home mortgages they could not afford in the first place and would be unable to afford with any reasonable level of loan modification.
According to the Office of Comptroller of the Currency, families that received loan modifications have experienced high rates of re-default -- suggesting that loan modification merely delays foreclosure. A policy alternative in some cases could be to use intensive, short-term aid to keep families in their homes. (See resource box at left for more on the impact of modifications.)
Additionally, policies that aim to ease the process of loan modifications or mortgage refinance to keep families in their homes must be carefully crafted to ensure they are feasible for borrowers, lenders, and servicers. This may entail offering a package of programs to help with temporary financial crises, unaffordable mortgage terms, and negative equity that impedes refinance -- all while considering sound underwriting standards and servicers' obligations to investors. Assistance through the federal Making Home Affordable program includes loan modifications, refinance, and, more recently, emergency assistance loans. Between April 2009 and January 2011, nearly 1.5 million trial modifications were started under the Home Affordable Modification Program (HAMP). Permanent modifications, however, have faced more challenges. The program may benefit from a critical analysis of the impediments to stronger participation. Click here to leave this site and learn more about Making Home Affordable.
|Loan Modifications and Redefault Risk: An Examination of Short-term Impact|
While loan modification can be a useful foreclosure prevention tool, some researchers have found high redefault rates within a short period of time following modification. A March 2009 working paper issued by the Center for Community Capital at the University of North Carolina at Chapel Hill helps to uncover why this may be the case by analyzing the impact of different types of loan modifications on redefault risk.
Authors of the report Robert Quercia, Lei Ding, and Janneke Ratcliffe, draw from a national sample of nearly 10,000 modified mortgage loans, including those that were already past due and those that remained current but at imminent risk of default.
The most common modifications found in the sample included interest rate reductions in which the principal remained the same or increased slightly (53 percent), and traditional modifications, in which delinquent payments, unpaid interest, and fees are added to the unpaid principal (39 percent) -- an intervention which typically leads to higher monthly payments. Not surprisingly, findings indicate that the risk of redefault is substantially reduced when mortgage payments are reduced enough to be affordable to borrowers, through extending the loan term, reducing the interest rate, and particularly when accompanied by a reduction in the principal.
Additionally, the authors find that early intervention yields better results. Borrowers who were current on their payments were much less likely to redefault than borrowers who received modifications after missing one or more payments.
View the full report here [PDF].
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Collaborate with lenders and servicers to obtain better terms for existing borrowers
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Offer a range of suitable refinancing products and emergency loans
Counseling, Mediation and Legal Assistance
Linking homeowners with both outside experts and neutral third parties can help families understand their options and reach a resolution that avoids foreclosure and its related costs for families, communities, and mortgage servicers.
Extending the Foreclosure Timeline
Extending the process of home foreclosure through a temporary moratorium on foreclosure or by increasing the notice period required before a foreclosure may take place may allow homeowners additional time to reduce the financial damage of foreclosure.
Reduce the Risk of Foreclosures in the Future
Foreclosure risks are often identifiable and preventable many years in advance. Governments can counter these risks through targeted outreach, regulations to prohibit the riskiest loans, and enhanced consumer awareness to help families make better mortgage decisions.
Click here for more resources on preventing foreclosure.