Image courtesy: The Wall Street Journal)

Those of you who know me or work with me, know I am not a fan of Loan Modifications. Yesterday the Government announced that Half (1/2) of all recent Loan Mods are in default again.  Earlier this year and under pressure from the government, mortgage lenders made more than 200,000 loan modifications to delinquent homeowners.

The modifications came in one of three forms, or a combination:
1.    Interest rate reduction
2.    Loan term extension
3.    Principal forgiveness

What does this mean to the economy?  The slow trickle of the historic foreclosures could continue for years. I am a strong advocate of getting it over with ASAP and getting back in gear with Free Market Contract Law!

But despite the modifications, as of October 1, more than half of the homeowners that received assistance were already two months behind on their modified monthly payments.

This late-pay statistic was a focal point on Capitol Hill yesterday as the government admitted delinquencies “were larger than [they] thought they’d be”.  Loan modifications are proving inadequate at slowing foreclosures and yesterday’s session opened the door to more effective foreclosure prevention measures.
However, of all of the statistics published, there was one of particular interest.

Based on its loan modifications to-date, the FDIC has found that modified borrowers default far less when new monthly payments are less than 38 percent of monthly household income.  This is important because Freddie Mac guidelines for ordinary mortgage applicants currently cap that rate at 45 percent.
If the 38 percent figure holds up long-term, it may lead mortgage lenders to permenantly reduce maximum debt-to-income allowances.  Already, mortgage insurers have taken this step so it’s not out of the question for lenders.  Tighter guidelines mean fewer mortgage approvals.

If you’re unsure of whether now is a good time to buy a home, consider that mortgage rates are low, mortgage guidelines are tightening, and foreclosure prevention efforts reduce the supply of available homes.
Prices may not have bottomed, but the market is giving everyone a lot of reasons to consider buying now.

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