The Trouble with Tribbles or Why Loan Modifications are Failing to Solve the Foreclosure Problem

Welcome Back Readers!  I put up a post the yesterday about how FHA has recently changed their policies to allow loan modifications for qualifying borrowers before they miss a payment .  This is a great policy and I sincerely hope it will help more people stay in their homes.  The problem though is that in many cases it won’t.  Loan modifications nationwide are failing to help avoid foreclosures.  Why is that?  What does it have to do with Tribbles again?  Read on after the jump to find out!

Ok, let’s start with tribbles.  For those of you who may not be geeks and have no idea what a tribble is, check out this wikipedia entry.  All educated about tribbles now?  Ok, we’ll move on.  The real trouble with tribbles isn’t that they are cute, fuzzy little pets.  It’s that they take over.  They breed too fast and can destroy a planet.  How does this compare to loan modifications?  Well, like the tribble, loan modifications seem like a good idea at first, but once you get to know them, once you see just what they underlying problems are, you realize that they are often worthless, an unworkable solution to a growing problem.

The government has put forth many solutions to the housing crisis and many felt loan modifications were the way to go.  Loan modification is defined as “a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e mortgagor and mortgagee)”.  Specifically, you go to the lender, you say “hey, I can’t pay my mortgage, please help me”.  After a lengthy paperwork process, the lender may decide to alter the terms of your loan, extending it to say, a 40 year mortgage or lowering your interest rate to a point where you can afford the payments.  Sounds great, if you can afford the payments you can afford to stay, right?

But what about areas of the country where values have declined (fortunately, not in Lancaster PA) by 40%?  How about 70% declines?  What good does it do a borrower to modify a loan so payments are affordable if they are DECADES away from regaining enough equity to break even?  Check out this story on NPR.  They talk to Thad Salter, who bought his home for $300,000.  That home is now worth $125,000.  Thad applied for modification and got it, he decided to stay for the main purpose of not “disrupting his family”.  But if you read the story, the terms of the loan modification are ridiculous.  A 40 yr mortgage at 2% interest with a ballon payment due at the end of $107,000.  He could pay for the next 40 years and STILL owe $107,000.  This is considered a success.

Now, I have no idea the circumstances of why he bought, when he bought, why the home values in his area dropped so steeply.  What I do know is this:  Most people would just walk away and let the bank foreclose given the same choice.  therein lies the problems with mortgage modifications.  They don’t solve the problem of the “underwater” homeowner.  Underwater homeowners can either choose to sink (foreclose) or  choose to swim (make payments).  Many of them will choose to sink when they are hundred of thousands of dollars underwater.

I am not saying it’s right, but it is reality.  How do you solve the problem of thousands of people owing thousands of dollars more than their homes are worth nationwide?  I don’t know of a answer, too many people in parts of the country bought the wrong house, at the wrong price, at the wrong time.    I am very happy to be fortunate enough to live and work in an area where we are not seeing that kind of devastation.  Our headline summarizing 2009 will be about a 3% drop in the average sales price in Lancaster County PA.  We are Lucky here in Lancaster County, it could be much, much worse.

This post doesn’t even begin to address the problems with the loan modification process itself, how complicated the paperwork is, how rigid the procedures are,  how less than 1% of applicants are ever approved for a modification, that’s a story for another day. 

Pay attention the next time you watch the news though.  That Tribble like purr you hear everytime you hear a politician talk about  how the government’s loan modification program should help more Americans stay in their homes shouldn’t be a comforting sound.   Loan modifications are not the answer to the growing foreclosure problems nationwide.

As always, I’d like you to be part of the conversation, so if you like what you read here please comment, forward The Lancaster Connection.com to your friends, subscribe and if you have questions, need real estate advice or want to buy or sell a home, you can call or text me at 717-371-0557, email me at Jason@JasonsHomes.com or contact me at the office at 717-490-8999! 

Your Friend in Real Estate, 

Jason Burkholder 

Weichert, Realtors – Engle & Hambright  

Search for Lancaster County Homes for sale at www.JasonsHomes.com by clicking here!  

Want to see what’s happening to home prices in your neighborhood?  Go to www.RealEstateCrystalBall.com !