Everyone knows that hindsight is a wonderful thing. Now our friends at the Federal Reserve Bank of Boston have issued a voluminous study of mortgage modifications during 2008. Until October 2008, the financial crisis had not reached full bloom. However, the study is extremely insightful into the rational behavior of banks and why mortgage modifications, up until now, have been something of a failure.
First and foremost, the study validates the fact that principal balance reductions in mortgage modification were truly an urban legend.
How mortgage modification shops were set up to influence individuals into thinking that they could get massive reductions in principal is beyond me…
However, at least for 2008, the verdict is now in. Only about 1.3 percent of all mortgage modifications included any principal reduction at all. Frequently, mortgage modifications have included increases in the outstanding principal balance. In fact, in the third and fourth quarters of 2008, principal balance increases occurred on 70.9 percent and 61.5 percent of all loans respectively.
What did occur, however, is there were indeed meaningful reductions in the monthly outlay that individuals had on their particular mortgages because of increasing the term of the loans as well as substantially reducing the monthly interest due on the loan. Thus, the average loan that was modified in the third and fourth quarter of 2008 saw a 21 percent reduction in monthly payments. In a few cases, however, approximately 6 percent of modifications during that same period actually saw an increase.