Less than three percent of seriously delinquent mortgages (60+ days overdue) received a payment-reducing loan modification since the mortgage crisis got underway in 2007, according to a new study by the Boston Fed.
“Modifications are often thought to always involve concessions to the borrower, but many, and in some subsets most, modifications involve the capitalization of arrears into the balance of the loan, and thus lead to increased payments,” the paper said.
More borrowers received loan modifications under a broader definition, but that number still fell below eight percent of all seriously delinquent mortgages.
“These numbers are small both in absolute terms, and relative to the approximately half of the sample for whom foreclosure proceedings were initiated, and the nearly 30 percent for whom they were also completed.”
Although many seem to believe that securitization/contract frictions impede loan modifications, the study’s data suggests otherwise.
The researchers believe most loans aren’t modified for a very simple reason; mortgage lenders expect to recover more losses from a foreclosure versus a modified loan.
And while it may seem surprising that lenders would prefer foreclosure given the related expenses, issues like re-default and a decent self-cure rate (where a delinquent borrower gets back up to speed without assistance) make mods less attractive.
“In addition, a borrower who faces a high likelihood of eventually losing the home will do little or nothing to maintain the house or may even contribute to its deterioration, again reducing the expected recovery by the lender.”
So that’s why it’s so difficult to get that loan mod…