California Foreclosures, Are Loan Modifications Helping Southern California?
By: Kathryn Davis
RIVERSIDE CA, February 18 (FreeRateUpdate.com) – According to a recent report in the Wall Street Journal more waves of foreclosures will keep downward pressure on home prices in parts of the U.S. over the next several years like our poor California and neighboring Nevada and Arizona, according to two new studies.
The studies—both conclude that most efforts to modify loans with easier terms will delay, not prevent, the loss of homes to foreclosure as we have been reporting in the last five or so articles. The lack of success with the governments and the mortgage lenders loan modification programs has delfated many professionals and homeowners hopes of saving these homes.
One study estimates that five million houses and condominiums on which mortgages are now delinquent will go through foreclosure or related procedures that put them on the market over the next few years. That would represent the bulk of the estimated 7.7 million households behind on their mortgage payments, very dim numbers.
This “shadow inventory” that we have been talking about ,of homes expected to hit the market is enough to last about 10 months, based on the average sales rate over the past decade, the Irvine, Calif., firm says, could be longer in hard hit parts of California like the Inland Empire and Central California.
Over the past nine months, home prices have increased modestly in areas after a three-year plunge. That is largely because efforts to avert foreclosures have slowed the flow of foreclosed homes onto the market, temporarily slowing the supply, plus factor in the banks moratoriums and general overwhelming lack of service on loans.
Some borrowers are catching up on payments after having their loan terms modified, but current trends show that 70% of such borrowers eventually will redefault or they are only in trial loan mods with the mortgage lender who has no intention of transfering it into a permenant modification and these homes will once again be on the market bringing prices down further and adding to the flood of inventory.
Loan modifications may be helping marginally, but they are not going to solve the whole problem, mortgage experts say. I hate to say it, but I agree.
Loan servicers, firms that collect payments and handle foreclosures, seem to have “nearly exhausted the supply of plausible candidates for loan modifications” and will find that many loans are too high risk of continued default, some just aren’t plain worth it. Here in the Inland Empire where homes are worth one half of their loans and the average family only makes about $40,000 a year and most families have been hit with pay cuts, or job loss getting a successful loan modification is slim.
As a result, servicers increasingly are pushing “short sales,” in which homes are sold for less than their loan balances. I get many calls from defaulted homeowners asking for guidance and they all ask the same thing; “Is a loan modification worth it for me?” Most of them all have the same situation, they owe about twice as much as what their house could sell for, so they see that they could by the same house for much less then what they owe and that property would then have the chance at building equity giving them the financial cushion that draws homeownership. The big issue with a loan modification is this…. banks are nearly never reducing pricipal they are only drawing out longer loan terms, and reducing interest. So even though you could get a lower monthly mortgage payment you are still paying on a loan that is twice what your home is worth and thus it will take years before you can build ANY equity. So it’s basically saving a sinking ship. Why would you want to do that? Most of my clients with this same problem end up short saling the home and buying or doing a lease purchase option at the current market rate giving them a much better financial future here in Southern California.