To the surprise of CNNMoney.com’s Tami Luhby, the market is doing something more efficiently than a government program. While this isn’t news to many, at CNN, it’s a revelation.
It seems “banks are doing nearly twice as many modifications under their own foreclosure prevention initiatives than under the Obama administration's signature Home Affordable Modification Program, known as HAMP,” Luhbi wrote in her Aug. 30 article. Banks made 644,000 “proprietary permanent modifications” in the first half of 2010, almost twice the 332,000 under HAMP.
Loan modifications are an alternative to foreclosures, in which the debtors usually receive “interest rate and principal reductions.” The HAMP program, according to Luhby, “lowers monthly payments to 31% of pre-tax income.”
Luhby’s surprise stems from her assertion that:
“Banks have long come under fire not doing enough to help troubled homeowners, particularly when the mortgage crisis started spinning out of control in 2007. Many loan servicers initially addressed the problem by tacking on the missed payments, which only increased strapped homeowners' monthly burden.”
So banks were at fault for operating on the creditor-debtor model that has existed almost since there’s been money: a creditor provides a loan expecting repayment plus (reasonable) interest; a debtor repays according to a set schedule, and failure to pay brings penalties or foreclosure.
However, market conditions changed and banks have changed with them. As Luhby wrote, “Banks have realized that foreclosing on home after home after home may not be in anyone's best interest – least of all their own.”
But banks aren’t off CNN’s hook, since they still are trying to get the most favorable terms for the business that they can. “Before homeowners rejoice, they should take a close look at the terms of their bank modification offers, consumer advocates say. Many may not be as good as HAMP, which lowers monthly payments to 31% of pre-tax income.”
Luhby had no trouble finding mortgagee to complain about a proprietary modification. Ida Ward, an Atlanta middle school teacher, had her monthly payment cut nearly in half in a HAMP trial modification. When she received her permanent modification from Chase, the reduction was about half as much as under HAMP.
“‘These banks should be ashamed of the terms that they are giving to borrowers,’ said Ward, who said she had no choice but to accept the offer. ‘The loan modification process is flawed and deceptive to borrowers.’”
No mention in the article of the “flawed and deceptive” loan origination process that put borrowers in homes they couldn’t afford, or the shame of borrowers who can’t meet the terms they agreed to when they contracted with the bank.