Free Consultation
The office is open as per the NYS Covid-19 guidelines. We are now doing both in-person and telephone consultations. Please call the office at 718-855-6840 to schedule a time to speak with one of our experienced bankruptcy attorneys.

Report: Mortgage Modifications That Reduce Payments Work Best

During the Great Recession, mortgage-modification programs emerged as an alternative to default or filing New York bankruptcy. The federal government created one of the larger ones, the Home Affordable Modification Program (HAMP), but the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac also introduced their own versions. A new report by the JPMorgan Chase Institute assesses these programs’ effectiveness for homeowners and uses the results to ask how future mortgage-modifications programs should be crafted. Depressingly, there is always another recession coming, just maybe not soon.

But before discussing the institute’s findings, a word on its methodology. The authors began with a dataset of one million households with mortgages from Chase that received a loan modification from one of HAMP, a GSE, or Chase itself. The modifications were completed between mid-2009 and mid-2015, and they were first modifications only. This left the authors with 450,000 mortgages, a substantial sum.

One thing the authors found was that the more a loan-modification program reduced a homeowner’s monthly payments, the less likely the homeowner was to default on the mortgage. This should appear intuitive, but mortgage-modification programs aren’t always designed with an eye toward reducing monthly payments based on mortgagors’ incomes. In fact, some programs relied mostly on extending the life of the loan instead. The result is that the outcomes for HAMP participants were quite different from those of GSE-crafted loan-modification programs.

When borrowers had high pre-modification payment-to-income (PTI) ratios, participating in HAMP significantly reduced their payments compared to GSEs’ alternatives, often by twice as much. By contrast, the opposite was true for borrowers with low pre-modification PTI ratios. The reason is that HAMP targeted modifications with 31 percent PTI ratios, so borrowers already at that level did not gain much of a benefit compared to GSE programs. Borrowers on GSE modification programs rarely saw more than a 30 percent reduction in monthly payments, but high PTI-ratio borrowers with HAMP modifications could see payment reductions well in excess of 50 percent.

Consequently, what the authors dubbed their second finding, mortgage defaults fell by 22 percent for every 10-percent reduction in payments. The average default rates for homeowners on GSE programs never fell below 15 percent. The opposite was true for nearly everyone on HAMP, with high PTI-ratio borrowers defaulting at a rate of just 5 percent.

A second set of findings from the report are that principal reductions did not affect default rates for homeowners who were underwater on their mortgages, and principal reductions did not motivate homeowners to increase their consumption spending either. The authors reasoned that if principal reductions reduced defaults, then underwater homeowners were defaulting for strategic reasons. Because the opposite was true—there was no relationship between principal reductions and default—strategic default was not really a motivating factor. In short, the researchers validated something New York bankruptcy lawyers already know: Borrowers are honest and don’t want to default needlessly. The other point about consumption spending merely calls into question the belief that raising homeowners’ equity in itself will stimulate household spending.

Third, and finally, tying these findings together, the researchers discovered that households’ incomes matter more than home equity or loan-to-value ratios. Borrowers’ default behavior is linked to whether they can afford to repay their mortgages and not these other considerations. This finding validates the argument of a report I found last year, which asserted that unemployment was a bigger cause of mortgage default than previously thought. The authors recommended future loan-modification programs use the HAMP model of targeting lower monthly payments.

The JPMortgage Chase Institute report is here.

One thing the JPMorgan Chase Institute report did not talk about was the fact that despite its effectiveness at reducing mortgage payments, HAMP was a dismal failure because so many eligible homeowners were prevented from participating in it. Nevertheless, HAMP is long gone, and other loan modification programs might not help keep you in your home. If you are running into difficulties paying your mortgage, then talking to an experienced bankruptcy lawyer can help you assess your options. Although a chapter 13 bankruptcy is usually the best choice for keeping a home, participating in New York’s loss-mitigation program is available for debtors who file in chapter 7. Through loss mitigation, a debtor can compel a creditor with a mortgage on the debtor’s principal residence to discuss modification. I have seen many debtors successfully use the loss mitigation program.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

Recent Posts

Beware Grace Periods, Debtors

Too often, debtors see grace periods offered by lenders as free benefits. “Grace” makes it sound so innocent. However, debtors who routinely rely on grace periods when making payments will find themselves facing financial difficulties that might lead to bankruptcy. The reason is that although creditors offer grace periods to debtors, they also use them

Read More »

Bankruptcy May Not Rescue You From Vicious Personal Disputes

Bankruptcy is a technical process that assumes everyone working within it is mostly rational. To the extent that it expects parties to deviate from irrational behavior, the Bankruptcy Code and its accompanying rules include incentives to keep parties in line. Creditors are usually large and impersonal, and they rarely care if their debtors file bankruptcy.

Read More »

Non-Lawyers’ Explanations of Bankruptcy May Be Wrong

Do you have financial problems? Do you tend to ask your friends for advice? Is one of your friends an experienced New York bankruptcy lawyer who will explain the process for you? Are your friends otherwise knowledgeable people? The answer to these questions may be, “Yes but you don’t know it.” Although many bankruptcy lawyers

Read More »

6 Steps to Take Before Filing Bankruptcy

Leaving your case to an experienced New York bankruptcy lawyer is not the only step on the to-do list before filing bankruptcy. There are many things debtors should do (and not do) before they file, and the more organized and mindful debtors are, the easier the process will be and the more effective the result.

Read More »

Social Security Number Not Necessary for Bankruptcy

A question that’s commonly asked about New York bankruptcy is whether a debtor needs a Social Security number to file. Debtors ask because they sometimes run across the bankruptcy form title, “Your Statement About Your Social Security Numbers” (B 121), which asks debtors to list their current and prior Social Security numbers. The new bankruptcy

Read More »

How Can a Debtor (or Creditor) Get a New Trustee?

The trustee in a New York bankruptcy case is usually not the debtor’s ally. His or her purpose is mainly to administer the bankruptcy estate or ensure the debtor’s repayment plan goes according to plan. Trustees pursue preference payments, fraudulent conveyances, and other malfeasance committed by debtors. They frequently initiate adversary proceedings against debtors. In

Read More »
Scroll to Top