Approximately 40 percent of homeowners who obtained loan modifications under the Obama administration’s foreclosed home prevention program have been redefaulting, according to Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation.
She further explained that this is one of the reasons why lenders have not been stepping up their efforts in modifying distressed loans despite pressure from federal agencies, state governments, lawmakers and housing advocates.
She said that banks are concerned about additional losses if they hire staff and improve systems to modify loans only to have these same loans go back to default and foreclosure.
However, the biggest obstacle to loan modification for banks, according to Bair, is the refusal of investors who bought the home loans to approve loan modification applications. Bair affirmed that investors would gain more from the loans if the banks foreclose on them rather than modify them to lower monthly payments.
The mortgage securities investors most hesitant to support loan modifications are the ones who bought the AAA-rated portions of the mortgage securities. These AAA contracts were structured in such a way that investors receive payments even if some loans in the securities package become delinquent.
Bair also affirmed the role of the high unemployment rate in the continued rise in foreclosures. She added that while foreclosures in the past year and in the early months of this year can largely be blamed on highly risky loans structured by banks, most foreclosures now are caused by the employment situation, which cannot be controlled by banks or financial regulators.
The FDIC chair said there should be a way by which homeowners who lost their jobs can keep their homes while they are looking for their next jobs. A protocol that would enable them to keep making their monthly payments at a temporarily reduced rate would be helpful.
Additionally, Bair commented on the foreclosure prevention fraud problem that has not gone away despite federal and state campaigns against fraud. There are still a lot of homeowners who pay around $4,000 to $5,000 to have their home loans modified only to discover that their loans are not qualified under any modification scheme.
Unfortunately, Bair explained, there are home loans that cannot be modified. Banks have to accept only loan modification applications that can realistically be restored to current status and that can be realistically be repaid by homeowners who have steady jobs and sources of income.
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