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Over the last few months, a group called Neighborhood Assistance Corporation Of America the hosted an event in New York City designed to bring struggling homeowners and lenders together to create some mutually beneficial agreements. Thousands of homeowners showed up and most of the nation’s biggest lenders were represented. In the end, 40% of the people who showed up had their loans modified the same day and a total of 80% will have a workable solution in their hands within the next several weeks.
These types of events are happening more and more frequently and with great results. Lenders are more willing to negotiate with struggling borrowers than ever before and millions of borrowers need a lot of help right now. The problem is that only about 4% of homeowners in need of a modification have had their needs met. Not everyone agrees with the theory that modifying loans will stabilize the housing market but it’s hard to deny that there are benefits to all of the stakeholders involved in a loan modification.
What’s in it for the homeowner? The answer to this question is obvious. Borrowers that are saddled with high interest mortgage loans are seeing their interest charges dramatically reduced because a lender would rather not foreclose on their home. Many of the homeowners leaving the event in New York reported that they walked away with interest rates as low as 2% that were fixed for the life of the loan. One borrower even reported that she received an offer that charged no interest for 2 years, followed by 2 years of 2% interest and then 3% interest for the remaining years on the loan. Homeowners getting their loans modified report that their monthly payments are being reduced by several hundred dollars a month in many cases.
What’s in it for the lender? Banks aren’t in the business of owning homes and the mountain of foreclosures are becoming a major burden to banks that are taking big losses on the properties. When a lender is deciding whether or not to modify the loans, they analyze the costs of foreclosure as an alternative. A homeowner that is underwater on their home by $75,000 can easily lead to a six-figure loss for a lender by the time the legal and administrative costs of carrying out a foreclosure are factored in. As a result, banks are modifying more aggressively because it’s cheaper to accept small amounts of interest than to take a loss.
What’s in it for taxpayers? Taxpayers have provided a financial lifeline to banks over the past few years in the form of bailouts. Larger losses being sustained by financial institutions could lead to more bank failures, more potential bailouts, and more time until the TARP money that taxpayers loaned to banks can be repaid. Most taxpayers would agree that there are more essential costs that depend on tax dollars and no one likes the thought of cutting essential spending in order to give billions of dollars to banks. The government can be a better steward of taxpayer dollars when banks are healthier, and modifications have been positive for banks.
