Consumer Law

Negative Prepayments

By Alan White

By Alan White

That's what mortgage servicers call it when a loan is modified by adding fees and interest to the principal.  Based on reports to investors, I estimate that in September and October $288 million was added to homeowner mortgage balances as a result of modification deals.  While the popular perception of mortgage modifications is that some people are getting "bailed out" or at least getting a break on their loans, the reality is quite different.

In the October investor reports I reviewed, covering about half the subprime and alt-A market, 72% of modifications reported included a "negative prepayment", i.e. upped the loan balance.  The average negative prepayment for these folks was $11,200.  The average amount of debt forgiven for these homeowners?  $97.51. Meanwhile, on loans that were foreclosed and sold, the average loss was $121,000.  For ALL modified loans, the average write-off was $1,914.  Even for the small subset of modified mortgages that did not include any negative prepayment, i.e. the most generous mods, the average write-off was $6,588.

This is insanity.  Servicers (with a few notable exceptions) are preferring to foreclose at a $121,000 loss per loan rather than to forgive more than a few hundred dollars of any homeowner's debt.  While there is much wringing of hands about the fact that many homeowners get "modifications" and then fall behind again, is it any wonder?  We can't really evaluate the success or failure of mortgage modifications that reduce debt, because there have hardly been any yet. 

Full post as published by CL&P Blog on November 10, 2008 (boomark / email).