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More Loan Mod FAQs….
Q: Does this create an incentive for homebuyers to run up large balances on credit cards or under-report income before contacting their lender?
Yes. This is what economists call “moral hazard,” which risks rewarding behavior that should be discouraged.
Q: If I understand this right, if I’m current on payments, I don’t qualify for a reduction in the amount owed (a principal reduction). But if I’m behind on payments or claim default is imminent, I do. Is that right?
Yes. The caveat is that it appears that borrowers who remain current get an “incentive payment” of $1,500 if they remain current through their loan modification. They also qualify for a bonus of $1,000 a year for five years if they keep up with payments (the lender gets $1,000 a year too).
Q: You said above that only owner-occupied homes qualify, but how will banks verify this?
Different banks are likely to use different techniques. Some banks may send a certified letter, and others may make a physical visit. There seems to be no requirement that you live in the property today, so it’s reasonable to expect some vacant homes to be quickly reoccupied in the next few weeks or months.
Q: What incentive do lenders have to participate?
Foreclosure is a lengthy and expensive process; a front-page article in Wednesday’s Wall Street Journal profiling judges hearing foreclosure cases in Lee County, Fla. noted that many cases have been pending for months or longer. Banks may decide they’ll lose less money on a property — especially if home prices eventually rise — by renegotiating the terms of the mortgage rather than taking it to foreclosure.
This is already happening. An analysis by Alan White, a Valparaiso University law school professor, showed that half of the voluntary mortgage modifications already result in lower monthly payments — and that the average foreclosure loss on a first mortgage in November 2008 was $145,000. The new incentives from the Feds may be enough to convince more banks to agree to reductions in interest or even principal.
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