Modifications: is it really the Magic Pill?

I want to begin by saying that modifications have saved hundreds of thousands of families from being forced from their homes. We should be thankful the process exists. If anyone is having trouble with their mortgage and thinks they may be eligible for a loan modification, call 888-995-HOPE or go to http://makinghomeaffordable.gov/.

That being said, we must realize that there is no modification program that can handle the foreclosure challenge this country is currently facing.

Yesterday, we discussed the difficulties families have ‘self curing’ their mortgage payments once they fall behind. We documented how over 99% of the homeowners who fall 90 days behind never catch up.

When they realize they can’t bring the payments up to date, the seller is faced with one of three options.

1. They receive a loan modification from the bank.
2. The house goes to foreclosure.
3. The bank agrees to a ‘short sale’ where the bank agrees to accept a selling price which is less than the amount currently owed on the mortgage.

Today, I want to look at the modification process and discuss whether it is the ‘magic pill’ for what is ailing the housing market.

Even the administration’s reports are painting a grim picture. Below is a chart created with data from the Making Home Affordable’s most recent report:

As we can see the number of people looking for help is four times greater than the number of people actually receiving even a trial modification. And many believe that less than half of the trial modifications will turn into permanent modifications. That means that well over two million homeowners cannot make their payments and will not receive a modification.  If a family does not get a modification, and over two million won’t, they are faced with only two options: foreclosure or ‘short sale’.

Though some are reporting that foreclosures are peaking at this time, we must realize that this is just the calm before the storm.

Tomorrow, we will discuss the foreclosure option in more detail.