Report: Loan Mods May Not Be The Solution

s to modify loans may be an inadequate response to the foreclosure crisis, as a [u][link=]recent report[/link][/u] from the Boston Federal Reserve suggests that unemployment – not unfavorable mortgage terms – is the driving force behind mortgage defaults. The report's authors – Boston Fed economists Christopher Foote and Paul Willen, Atlanta Fed economist Kristopher Gerardi and University of Geneva professor Lorenz Goette – conclude that mortgage affordability, which is commonly linked to debt-to-income (DTI) ratios, is not a good indicator of default. Focusing on a borrower's DTI has been the centerpiece of several loan modification initiatives, namely the Federal Deposit Insurance Corp.'s Mod in a Box, the government-sponsored enterprises' Streamlined Modification Program and the Treasury Department's Making Home Affordable plan. "What really matters in the default decision is the mortgage payment relative to the borrower's income in the present and future, not the borrower's income in the past," the researchers write. Loan modifications en masses may be in the best interest of society as a whole, the report says, but they are not necessarily in the lender's best interest, regardless of whether that lender is a securities investor or a portfolio lender. "It is true that lenders may lose a great deal of money with each individual foreclosure, but the loan modifications might have negative [net present value] if they are sometimes extended to people who are likely to pay on time anyway," the report says. "And the benefits of modifications are uncertain if borrowers have lost their jobs." The researchers argue that a better component of a government-led foreclosure prevention plan might involve the government loaning or granting borrowers money to replace a portion of their lost income for a set period of time (e.g., one or two years). In cases of more severe financial setbacks, government policy may help homeowners transition to rentership via short sales, the authors say. SOURCE: Bosto


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