Are Loan Modifications Working?
Heres some news which really doesn't surprise me. Earlier this year and under pressure from the government, mortgage lenders made more than 200,000 loan modifications to delinquent homeowners. The modifications came in one of three forms, or a combination:
- Interest rate reduction
- Loan term extension
- Principal forgiveness
But despite the modifications, as of October 1, more than half of the homeowners that received assistance were already two months behind on their modified monthly payments.
This late-pay statistic was a focal point on Capitol Hill yesterday as the government admitted delinquencies 'were larger than [they] thought they'd be'. Loan modifications are proving inadequate at slowing foreclosures and yesterday's session opened the door to more effective foreclosure prevention measures. Recent statistics indicate 1 of every 10 homeowners is in default.
However, of all of the statistics published, there was one of particular interest.
Based on its loan modifications to-date, the FDIC has found that modified borrowers default far less when new monthly payments are less than 38 percent of monthly household income. This is important because Freddie Mac guidelines for ordinary mortgage applicants currently cap that rate at 45 percent.
If the 38 percent figure holds up long-term, it may lead mortgage lenders to permenantly reduce maximum debt-to-income allowances. Already, mortgage insurers have taken this step so it's not out of the question for lenders. Tighter guidelines mean fewer mortgage approvals.
If you're unsure of whether now is a good time to buy a home, consider that mortgage rates are low, mortgage guidelines are tightening, and foreclosure prevention efforts reduce the supply of available homes.
Prices may not have bottomed, but the market is giving everyone a lot of reasons to consider buying now.