California Foreclosure Moratorium - will it work?
Posted under: Foreclosure in California
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June 14, 2009 7:47 PM |
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California is imposing a 90-day moratorium on housing foreclosures - the goal is to make lenders try harder to keep borrowers in their homes. Lenders must prove they tried to modify the delinquent loans before they can begin foreclosing. The California bill is similar to the Obama administration's Making Home Affordable Program.
But is any of this really working?
The idea is that lenders work with borrowers...sometimes cutting the interest rate to as low as 2 percent, then lengthening the life of the loan, both of which lower the monthly payments. Some borrowers are offered a forbearance plan, and other have a portion of their loans forgiven.
Will the California moratorium work?
The goal is to make lenders try harder to keep borrowers in their homes. They must prove they tried to modify the delinquent loans before they can begin the foreclosure process.
Do these modifications work?
Borrowers that get a modification do not necessarily get a lower monthly payment. Almost a third of borrowers nationally who received modifications saw their monthly mortgage payments increase. (Twenty-seven percent of modified monthly payments were unchanged, while 42 percent decreased.)*
How does a loan modification result in increased payments?
A modified loan could result in a higher monthly payment in any number of ways. A lender could roll the missed payments back into the loan balance. But a modification that doesn't lower the monthly payment is obviously no help to an already-troubled borrower. So why bother?
The Bottom line?
Nationally, the re-default rates for modified loans is 43%. Until lenders embrace these loan modification initiatives and offer help to distressed borrowers in a timely fashion, foreclosures will continue, homeowners will be forced out of their homes, and the real winners with be the financial institutions that took the government bailouts.
Source: OCC and OTS Mortgage Metrics Report as of 3Q '08
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