Since the mortgage crisis, banks have paid over $243 Billion in penalties and fines. That’s Billion with a “B”. Most of these fines were assessed for misleading investors about their shady lending practices. JP Morgan Chase paid $13B for overstating the quality of bad mortgages. This practice played a crucial role in helping to inflate the housing bubble and worsen the financial crisis. Less than 4% of that Chase penalty actually went back to help distressed homeowners .
“Bank of America & JP Morgan Chase have paid over $120 billion in fines for misleading customers”
The most recent data from the Q3 OCC Mortgage Metrics Report stated that, 1.1% of mortgage modifications include debt forgiveness, which is considered the surest way to prevent foreclosure. However, 96% of other loan modifications include capitalization and a increase in terms or both.
Capitalization – actions that increase the unpaid principal balance of the loan by the amount of any delinquent payments and fees. (i.e. adding missed payments, late charges and even attorney fees to the loan balance)
Term Extension – Actions that delay the final maturity date of the loan that was in effect before the modification action. (i.e. extending your 30-year fixed to 40, 45- or a 50-year fixed payment)
The banks know that these modifications have high re-default rates. How does adding more debt to the back of a troubled loan help a homeowner?? It doesn’t. The banks know this. For the homeowners that have equity, the bank is more than happy to approve multiple loan modifications until your equity is exhausted. If you don’t pay and keep re-defaulting, the bank is just going to collect their delinquent payments and fees during the foreclosure sale.
There were 14,421 loan modifications in the first Quarter of 2020 and…
- 95% of these modifications combined capitalization, rate freeze and/or term extension
- 18% of all loan modifications re-defaulted within 8 months
- 41% of all loan modifications received a 20% or more decrease in monthly payment. However, these modifications had higher re-default rates. It seems like the more your mortgage is decreased the higher the likelihood of redefault.
- 24% of all loan modifications received a 10% or less decrease in monthly payment. 19% of these modifications re-defaulted
- 25% of loan modifications actually increased the homeowner’s monthly payment. This modification type had a 39% default rate
Lenders are reluctant to reduce principal and forgive debt as these are the only modification options that help distressed owners. No loan modification will solve the real problem of why you are behind in your payments. A $100 reduction of your mortgage payment won’t cure loss of employment, sickness or hospitalization with inadequate health care.
Our advice is an exit plan which includes a sale of the property to protect equity. A strategic default is needed for homeowners that are underwater with their mortgage.
Data compiled from the Third Quarter, Office of Comptroller Mortgage Metrics Report