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Federal Reserve Bank of Boston in Massachusetts has released a study which showed another reason why bank REO properties keep increasing despite the Obama Administration’s loan modification program.
The study concluded that mortgage lenders are lacking in their efforts to rework many troubled home loans because it would mean losing more money.
The results of the Federal Reserve’s study suggested that the major effort of the Obama Administration to contain the number of bank REO properties in the country by giving lending institutions almost $75 billion to modify delinquent home loans to make them affordable may not work out as expected.
Paul S. Willen, a Boston Federal senior economist and a co-author of the study, said that the Obama Administration would be in a better position to solve the foreclosure problem if they would give the money directly to troubled homeowners to help them defray their mortgage payments rather than giving it to lending institutions that are not keen on working out delinquent loans.
Willen pointed out that if loan modification is profitable to lenders, they would have gone out and hire staff to do the work.
House Financial Services Committee head, Representative Barney Frank said that the results of the study may offer insights on why only a handful of troubled borrowers were able to receive help to prevent their homes from turning into bank REO properties.
Frank is planning to hold a hearing to discuss his proposal to give government loans to struggling homeowners who lost their jobs and could not qualify for loan modification programs and other assistance initiative because they do not have income.
According to the study, only 3 percent of delinquent borrowers who are behind on their payments for more than 2 months were able to have their loans altered to reduce monthly payments. Meanwhile, 5.5 percent of distressed homeowners received loan alteration that failed to give reduced payments.
The study covered 665,410 troubled home loans that were taken out from 2005 to 2007. And for six months, researchers monitored almost 150,000 homeowners who have received help.
The results of the study also refuted a widely held idea that the delay in loan modifications is due to investors using mortgage-backed securities to control the loans.
The number of bank REO properties nationwide rose to 844,389 during the first three months of this year, an increase of 73 percent from the same period a year ago.