In the last year in response to the rapidly growing foreclosure crisis in the United States many foreclosure prevention programs have been instituted which aim to prevent situations that would otherwise result in home foreclosure. Some of these programs include the Hope for Homeowners Act, Hope Now, and a recent effort by the FDIC and IndyMac. Recently the National Association of Consumer Bankruptcy Attorneys (NACBA) released a report based on findings primarily of Credit Suisse which projected that over 8 million foreclosures are expected in the U.S. in the next four years. This forecast exemplifies the need for the these types of programs. The only problem is that these programs have failed to yield the needed results and this failure has the NACBA pressing Congress and the new presidential administration to move for court administered loan modifications which promise to be more effective in remedying the current foreclosure crisis as opposed to these voluntary modification programs.
The main problem with all of the programs that have been instituted so far is that they are voluntary; the lenders must voluntarily agree to modify the existing mortgage loan when the lender usually has no financial incentive to do so. Secondly, the fact that most loans are securitized by bonds held by investors increases the difficulty of reaching a successful modification since several parties, which can be difficult to reach, must all agree to the modification. Additionally the mortgage servicer owes a duty to those investors to maximize their investment so modifying a loan often opens the mortgage servicer up to liability from the investors whereas simply foreclosing would be a safer option for the loan servicer. Additional roadblocks exist when a second or third mortgage is involved. All of these road blocks often lead to a gridlock in the voluntary loan modification programs prohibiting a successful foreclosure remedy.
The report issued by NACBA in December of 2008 states that less than ten percent of loan modifications through these programs actually result in a reduced principal balance of the loan and only about thirty five percent of the modifications actually reduce the monthly payment when in fact forty five percent of modifications have actually increased the homeowner's monthly payment. As NACBA urges, hopefully the upcoming Congress and presidential administration will to help institute a court administered modification process which will be effective in reaching the goals of remedying the foreclosure crisis.
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