Voluntary Loan Modifications Fall Short


View this document (PDF)

Published: January 28, 2008

After denying for months that a foreclosure crisis even exists, the Mortgage Bankers Association (MBA) now claims lenders are making "vast efforts" to prevent foreclosure.  Unfortunately, the numbers show little progress.  During the third quarter of 2007, mortgage lenders started about 213,000 foreclosures on subprime loans, but offered meaningful fixes ("loan modifications") on only 28,000.

What are Loan Modifications?

When families are struggling to pay their mortgage, "loan modifications" allow lenders to restructure the mortgage so homeowner can continue paying without losing their home.  The mortgage freeze proposed by the Treasury Department allows lenders—on a voluntary basis—to keep eligible mortgages at their initial interest rate rather than allowing them to reset at unaffordable rates.  The problem is that economic conditions are getting worse, and few foreclosures are actually being prevented under this plan.

These disheartening results come on the heels of an initiative by the Treasury Department to encourage—but not require—lenders to "streamline" loan modifications by automatically freezing interest rates on eligible loans before the monthly payments increase by 30% or more.  Not surprisingly, this volunteer approach isn't producing significant changes. We at CRL have released an analysis showing that under the Treasury plan, only 3% of homeowners with adjustable-rate subprime mortgages are likely to receive a streamlined loan modification from their lender. 

Congress Can Remove Legal Barriers to Fixing Distressed Home Loans
If we do nothing, the foreclosure crisis will continue with very little change, and the damage will continue to spread throughout our economy.  However, Congress is now considering legislation that would make a huge difference. 

Both the House and Senate are actively considering bills that would lift the ban that prevents homeowners from getting reasonable loan changes approved and supervised by a court of law.  (The House bill is H.R. 3609, the "Emergency Homeownership and Mortgage Equity Protection Act"; the Senate bill is S2136, "Helping Families Save Their Homes in Bankruptcy Act.")  Today court-supervised loan modifications are available to family farmers and to wealthy investors with distressed loans, but not to families who are trying to save their home. 

If Congress does the right thing by passing this legislation, we would prevent about 600,000 foreclosures—that's compared to less than 120,000 loans eligible for streamlined loan modifications under the Treasury's plan.