Active loan modifications down by half in Colorado

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The number of homeowners in Colorado in active trial modifications – the first step in the federal government’s $75 billion plan to keep people out of foreclosure – has dropped by almost half since the beginning of the year, shows an InsideRealEstateNews.com analysis.

In May, the latest numbers available, there were 6,423 homeowners in Colorado participating in active trials under the Home Affordable Modification Program, or HAMP, part of the Obama Administration’s Making Home Affordable Program. That is a 45 percent drop from the 11,708 homeowners participating in HAMP in January and a 28 percent drop from the 8,932 in active trials in April. The number of people in the active trial program has dropped every month this year in Colorado. New rules have hammered the number of people allowed into the programs, but ultimately should mean more homeowners will stay in it. Nationwide, the programs have been plagued by a huge percentage of people being bounced from the program because they could not afford even loan rates as low as 2 percent, because they did not have the income to qualify for even vastly reduced mortgages.

Permanent Mods Rise

The number of homeowners in the Permanent Modification part of HAMP, rose 13.8 percent from May to 4,960 from 4,356. However, that was the lowest month-to-month percentage increase this year. The number of homeowners receiving permanent loan modifications has risen 176 percent since January when 1,797 had received permanent modifications in Colorado.

“I don’t see it working,other than about 25 percent of the time,” said Jack O’Connor, the broker owner of RE/MAX Professionals.

He said many consumers, who have lost their jobs or are grossly under-employed and can’t take advantage of the the super-low mortgage payments offered through the government-backed program.

“Lenders are trying to do the program, as it is the mandate from the federal government, but it is just not a clean enough process to work for a lot of people,” he said.

This spring, the government basically instructed loan servicers – the ones that collect the monthly loan payments – to pre-screen homeowners before they enter the trial program to increase the odds that the homeowner will qualify for a permanent loan modification.

Much more common than loan modifications are short sales, in which the lender agrees to sell the home for less than the mortgage amount, O’Connor said.

Short sales increasing

“Short sales are now increasing and the consumer is more aware their are other options than just a loan modification,” O’Connor said. “And for homes below $250,000, there has been appreciation. So I’m seeing small deficiencies (the difference between the loan amount and the sales price) than in the past. I’m seeing deficiencies of $5,00 or $6,000 and $7,000 – the the $30,000 or $50,000 of a couple of years ago.”

Zachary Urban, spokesman for the Adams County Housing Authority, said that the “most critical aspect” of the drop in trial modifications is the rules change that requires lenders to be more selective in letting consumers into the program.

“”That has punctured the bubble, if you will, of home modifications,” Urban said. And that is a good thing, he said.

“We saw this rise in trial modifications and it was just not sustainable,” Urban said. “I think with the drop in trial modifications, we are also going to see a drop in recidivism rate – in other words, the drop out rate is going to drop. The quality will go up, as the quantity goes down.”

While it may seem like bad news to homeowners who would love to lock in rates as low as 2 percent, it often is not in the best interest of the homeowner, he said.

“The way we look at it is why give more money to the mortgage company when it is a losing proposition? The consumer needs to see that there are options.”

Urban agrees with O’Connor is that there will be a wave of short sales.

‘I think we are going to see a huge spike in short sales,” Urban said. “The rules for short sales are now more efficient, and investors are more willing to accept them. I am seeing a huge appetite for short sales by investors. And by investors, I am talking about mortgage-backed securities. In the past, the investors in these securities were unwilling to accept short sales, but now they are much more willing to pull the trigger on them. The way I look at it, the biggest hurdle in the entire short-sale process was with the investors of the mortgage-backed securities.

Employment key

Shannon Peer, director of counseling at the non-profit Brothers Redevelopment in Edgewater, said loan modifications work best for homeowners who are under-employed, and not unemployed.

For example, if someone had been making $75,000 and is now only making $55,000, the loan modification might be just what the doctor ordered. But if the person loses their job and has no income – or is just collecting unemployment – they most likely won’t qualify for HAMP, he said.

Also, some people will be seeing the so-called “alt-A” adjustable rate mortgages that they took re-set to higher rates in the next year or two, and if they can remain employed, even at lower wages, they could benefit from the government loan modifications.

“And what we are increasingly seeing is the private sector stepping in and offering their own proprietary loan programs outside of HAMP and the Making Home Affordable Program,” Peer said. Some people who are booted out of the government-backed programs, might be thrown a lifeline from the growing number of bank programs, he said. O’Connor said that big lenders such as Bank of America and Wells Fargo are starting to offer pilot programs in some states, which they could expand if they are successful.

And Urban said that even if the majority of people had been bounced from the permanent loan modification programs, that does not mean they are failures.

“I think you need to put it into perspective,” Urban said. “We are talking about billions and billions of dollars in home loans. If 50 percent, or even 70 percent, of the people in the program are dropped, the minority who do benefit represent a big, big dollar amount.”