Loan modifications help keep homes
TEXT OF INTERVIEW
Bill Radke: The government has tried to help borrowers lower their mortgage payments and stay in their homes. Banks have been modifying mortgages, too. And there's news that those bank modifications are beginning to work. The report comes from a group of state regulators called the State Foreclosure Prevention Working Group. Mark Pearce is part of that group.
Mark, welcome to Marketplace.
Mark Pearce: Thanks for having me Bill.
Radke: You found that home owners who had their mortgages modified last year are faring better than people who did that the year before. Why is that?
Pearce: Well, we think that primary reason that that is happening is that loan modifications that are being offered to home owners are much better than they were two years ago. Most of them are now significantly reducing the monthly payments that the borrowers have to make. Ninety percent of them are now reducing mortgage payments, and 80 percent of them are actually reducing them by more than 10 percent.
Radke: Banks weren't so willing to do that in 2008?
Pearce: That's exactly right. One of the early learnings in the foreclosure crisis was that what banks were calling "loan modifications" were really just band-aids that kind of extended the payments and didn't really provide meaningful relief to home owners. But once they began offering significant relief, it turned out a lot of people actually could stay in their homes and avoid foreclosure.
Radke: Well, I want to talk about how much help banks are and are not giving home owners in a moment. First I want to know, if modifications are helping, how much do you think is going to help stop the foreclosure bleeding?
Pearce: You know, it's still, unfortunately, the minority of home owners that are able to get a loan modification. Really one of the primary reasons for that is most home owners aren't in the process of talking to their mortgage company. Six out of 10 home owners aren't working with their mortgage company at all.
Radke: Yeah, I saw that. Why aren't they picking up the phone for help?
Pearce: Sometimes they do pick up the phone. And the question is what happens when they do. This has been a very confusing and complex process, and so a lot of home owners have shut down and don't know who to call and don't know what to provide. There's the underlying problem that home owners in distress don't always open the mail. They put it in the "bad news" drawer and wait until it's too late.
Radke: Yes. A lot of us have a bad news drawer these days. Here's what I don't get: You found that the people who are able to get back to making their payments are the ones who have their principal reduced. But most banks aren't doing that. Most loan modifications lower the monthly payment, but they add service charges -- and in the end, they increase the loan amount. And you know, you can certainly understand why banks don't want to give away money, but how is this going to prevent enough foreclosures to be of any real help to the housing market?
Pearce: Well certainly, the reduction in payments has been a big help. But as you point out, even in those cases, something like 70 percent of those loans are increasing the amount that the borrower owes. And in markets like Arizona and California that have had huge price declines, we think that mortgage companies ought to be a little bit more aggressive in using principal reduction to make more loan modifications that will avoid foreclosures.
Radke: We haven't reached the point where forgiving some of those loan balances is worth it for banks?
Pearce: Well, some of them have done it, but we still see some reluctance in the marketplace. You know, one of the things that we have found all along in this crisis is that the tools that are being used are a bit slow to be implemented to adjust to market conditions. So our hope is that maybe principal reduction can become a little bit more widespread in some markets.
Radke: Mark Pearce is a bank regulator in North Carolina and he's part of the Foreclosure Prevention Working Group that's given us that new report. Mark, thank you.
Pearce: Thanks for having me Bill.