Tuesday, January 13, 2009

Help for homeowners not working out

I was on NPR's News & Notes on Monday, discussing for the umpteenth time the economic malaise: the highest number of jobs lost in a single year since 1945, little hope in sight for those still looking for jobs, and a deal by one of the country's largest banks to allow judges to modify home mortgages rather than see the homes fall into foreclosure.

For the most part I could have recited the same conversation from months ago: things went from bad to worse and there isn't much hope in sight for a quick turnaround. But the Citibank mortgage deal, and some other data about what happens to many homeowners who have gotten help with their mortgages in the past year, were striking and interesting. Here's why:

Citibank and most other banks had resisted judges having the authority to modify mortgages for the obvious reason: if a homeowner falls behind on payments and the bank forecloses, at least the bank has a chance to take the house back and resell it -- possibly (though not likely) recovering at least all the principal it lent. But if a judge can modify the terms of the loan, the bank might stand to lose some of what it put up without ever getting the chance to see what the house might fetch on the open market and it almost certainly loses some or all of the interest revenue it expected from that loan.

You can see why a bank would be loathe to leave the fate of its mortgage business in the hands of any court. By agreeing, it could be argued that Citi and probably many other banks to follow, are accepting the grim reality that they don't have a chance to break even on many of their mortgage loans anyway (big surprise there) and are resigned to leave it in the hands of judges who might not have viewed their lending practices with particular reverence.

But here's where it gets tricky: there's new evidence that whatever workarounds judges come up with might not help troubled homeowners anyway. Comptroller of the Currency John C. Dugan said last week that more than half the mortgages that had been modified in the first half of 2008 were delinquent again within six months.

Think about that: If you were in trouble on your mortgage in January and got help, it's more likely than not that by July you were behind again. Not a good sign for Citibank, the judges about to perform legal surgery on its mortgages or the homeowners looking for a helping hand.

There could be any number of reasons for this but I'll give you my favorite one: too many people just bought too much house, and too many banks approved those people for loans bigger than they ever should have gotten. If you only make $40 grand a year, no amount of loan modification will help you keep a $300,000 home.

The bad news continues...


Butterrfly said...

"more than half the mortgages that had been modified in the first half of 2008 were delinquent again within six months".... that's really a very troubling statistic... and really not good news for our economy. :-(

Mary said...

Sh*t*bank takes another hit...

I think banks and everyone has learned a very valuable lesson... Don't stretch your hands where pockets can't reach! Or don't lend to people who stretch their hands where their pockets can't reach.

Product Junkie Diva said...

Yes I think what you said at the end is perfect- too many people purchased too much house and banks approved it. That was a huge problem.

lolly said...

One detail I think needs to be noted too. Banks not only loaned people money on houses they could not afford, they pushed, coerced and convinced borrowers to take on more debt then they could handle. And they made it trendy for people with modest incomes to make lavish purchases. In so many cases, borrowers trusted the banks advice and now are in trouble.