Much-hyped foreclosure prevention programs relying on voluntary loan modifications are failing to reach a significant number of troubled homeowners and are often backfiring when they do so, according to newly updated research released today by the National Association of Consumer Bankruptcy Attorneys (NACBA).
That puts pressure on President-elect Obama and Congress to clear the way for court-supervised loan modifications that will prove more beneficial for homeowners, the lawyers group asserted.
The findings released today by NACBA come on the heels of a dire new projection from Credit Suisse that over 8 million foreclosures (are now) expected over the next four years in the U.S. That level accounts for 16 percent of all mortgages — including 59 percent of all subprime mortgages and more than 11 percent of all other mortgages, including Alt-A, options ARMS and even those in the prime category. The new forecast from Credit Suisse is up sharply from the two to six million foreclosure range cited in previous estimates from industry sources.
The new data presented today from a study by Professor Alan White, Valparaiso University School of Law, found that:
• Less than 10 percent of the time do the voluntary programs result in a reduced principal loan balance with more than half of modifications capitalizing unpaid interest and fees into larger and more drawn out debt on the back end of the mortgage; and
• Only about a third (35 percent) of voluntary mortgage modifications reduce monthly payment burdens for homeowners, with nearly half (45 percent) actually saddling distressed homeowners with increased payments under the modifications.
In one case cited by the lawyers group — the Hope for Homeowners Act FHA refinancing program passed by Congress with much fanfare earlier this year on the strength of forecasts that 400,000 homeowners would be aided — there have been only 312 applications to date and no mortgage modifications whatsoever have taken place.
This is consistent with the most recent estimates from the National Association of Attorneys General that "nearly 8 out of 10 seriously delinquent homeowners are not on track for any loss mitigation outcome ... up from 7 in 10 in previous reports.
Court-supervised loan modification is urgently needed to deal with this problem. We call on the incoming Obama administration and the new Congress to adopt this solution without delay. The American home mortgage foreclosure crisis has gone from the danger zone to the full-blown crisis stage," said Henry Sommer, NACBA president.
"The number of foreclosures is growing rapidly and is reaching well beyond the subprime world to the American middle class. Despite a proliferation of voluntary programs, we are not seeing evidence of a meaningful number of sustainable loan modifications, Sommer said.
Professor White said that American homeowners are carrying $10.5 trillion in mortgage debt, a number that has risen by 250 percent in the past decade.
"While banks have written down more than half a trillion in mortgages and mortgage-related securities, homeowners have gotten little or no relief," White said. "Empirical evidence from mortgage servicer reports to investors shows that for the most part, the necessary deleveraging of homeowners is not happening."
When NACBA, NCLC, Consumer Federation of America (CFA) and the Center for Responsible Lending (CRL) called on Congress in April 2007 to move aggressively to stem the growing flood of home foreclosures, it was estimated that some 2 million homeowners were at risk of foreclosure. And, at the time, the financial services industry accused the organizations of being overly pessimistic about the likely toll of foreclosures. However, it turns out we were low-balling quite significantly the number of foreclosures, Sommer said.
As of September 2008, a full 1.2 million homeowners with subprime loans already had lost their homes to foreclosure. Another 1.7 million families with subprime loans are seriously delinquent and at risk of losing their homes in the very near future, NACB said. Credit Suisse now estimates that 8.1 million mortgages will be in foreclosure over the next four years, representing 16 percent of all mortgages. Credit Suisse finds that the problem has spread from subprime loans to Alt-A, option ARMs, and even prime loans.