In its April 10, 2008 press release, HOPE NOW claimed that the program, by facilitating voluntary workouts by servicers, has enabled 1.2 million homeowners to stay in their homes. The release touts this statistic, as well as the high proportion of subprime loan workouts comprised by loan modifications, as evidence of the industry's commitment and ability to prevent foreclosures. However, a closer look at the HOPE NOW data reveals that, notwithstanding efforts by servicers, the current crisis in the housing market simply dwarfs the mortgage industry's response to it. [1]
• The number of seriously delinquent loans is rising. The number of seriously delinquent loans and new foreclosures in Jan/Feb 2008 was over 2.1 million, an increase of 8 percent over the previous quarter and 55 percent from a year earlier. [2]
• Almost 18 percent of subprime loans were seriously delinquent or started foreclosure in Jan/Feb 2008. In the first two months of 2008, 17.5 percent of subprime loans were 60 days or more delinquent or had started foreclosure, up from 15.9 percent in the last quarter of 2007 and 10.7 percent in the first quarter of 2007.
• The number of foreclosures continues to soar. HOPE NOW projects that more than 2 million loans are estimated to enter foreclosure in 2008, an increase of 38 percent over 2007. [3] It estimates that completed foreclosures will climb 57 percent from 2007 to 2008. [4]
• The number of loan modifications is dwarfed by the number of endangered homes. Though 1.8 million loans were delinquent by 60 days or more during the first two months of 2008 and 346,000 went into foreclosure, for a total of 2.1 million loans, only 114,000 received loan modifications. While loan modifications have increased to about 37 percent of all loan workouts, more than three times as many borrowers entered foreclosure as received loan modifications during this period.
Furthermore, the HOPE NOW data still provides no information on the types of modifications being pursued and whether those modifications are leading to long-term, sustainable solutions. As recently acknowledged by the vice chair of Washington Mutual, who helps run the HOPE NOW program, many of the homeowners who have sought assistance "will not receive long-term relief and could ultimately face higher total costs." [5] Federal Reserve Chairman Bernanke recently stated that loan modifications involving reductions of principal balance "have been quite rare" and noted that, because of the negative equity situation of so many borrowers, principal reductions would be a more effective way to prevent foreclosure. [6]
The HOPE NOW report provides strong evidence that the magnitude of the current foreclosure crisis is overwhelming servicers' ability and/or willingness to provide assistance to troubled homeowners. Loan servicing companies fear lawsuits by affected groups of investors, face financial incentives to foreclose rather than modify or accept short refinances, are often understaffed, and face the problem of holders of "piggyback" second mortgages vetoing modifications. These factors have tied the hands of servicers and made it impossible to modify or refinance more loans, even where doing so is clearly in the best interest of the investors as a whole. [7]
What is abundantly clear is that Congressional action is needed to enable bankruptcy courts to require loan modifications. By mitigating the factors mentioned above—which restrict the number of voluntary modifications possible—this legislation would be in the interest of borrowers and investors alike. [8]
[1] All statistics are based on data through February 2008 released by HOPE NOW. See http://www.hopenow.com/media/press_releases/pdf/February_Data.pdf
[2] Seriously delinquent loans include 60+ days delinquent loans and foreclosure starts.
[3] HOPE NOW estimated 2008 foreclosure starts of 2,077,000 compared to 1,504,000 in 2007.
[4] HOPE NOW projects 801,000 completed foreclosure sales in 2008, versus 509,000 in 2007.
[5] David Cho and Renae Merle, Merits of New Mortgage Aid Are Debate – Critics Say Treasury Plan Won't Bring Long-Term Relief, The Washington Post (Mar. 4, 2008) (citing remarks of Bill Longbrake, senior policy adviser for the Financial Services Roundtable and vice chair of Washington Mutual).
[6] See http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm
[7] See Foreclosure crisis requires court-supervised modifications, p. 2
[8] See http://www.responsiblelending.org/issues/mortgage/prevent-600000-foreclosures.html.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.