Orlando Real Estate News

Will Loan Modifications Help Homeowners in Orlando, Florida?

In areas like Orlando, Florida, hard hit by increased foreclosures and decreased home values, loan modifications held out some hope for slowing the real estate market's downward spiral. However, initial early data may indicate many struggling homeowners should opt for short sales instead of modifications, and their lenders may now see short sales as a better option, too.

According to the latest data released Monday by the federal bank regulator, Office of Thrift Supervision and Office of the Comptroller of the Currency, loan modifications may not be the answer to the real estate foreclosure crisis. Of homeowners who worked with their lenders to modify their loan terms, more than half fell behind on the new payment arrangement.

Ruth Simon, writing for the Wall Street Journal-Real Estate section, says such "high default rates raise questions about the effectiveness of efforts to work with troubled borrowers..." The numbers tell the tale: Loan modifications were given to nearly 73,000 borrowers in the first quarter of 2008 with another 114,000 modifications in the second quarter. Reports from the first quarter to September 30 indicated that nearly 36 percent of the revised loans were past due only three months after the modification, and over half were two months past due six months after the modification. Although some of the homeowners were able to bring their loans current after they fell behind, over 41 percent were at least 60 days past due eight months after their new payment agreement.

John Dugan, Comptroller of the Currency, said there may be many reasons the loan workouts are not working. One factor may be that the lenders in their report, who hold more than 60 percent of the outstanding loans (Citigroup, Bank of America, and J.P. Morgan Chase), are not making adjustments that result in affordable payments for the borrowers. These companies also may have failed to verify the homeowners' income, and in some cases, added in past-due amounts which resulted in higher balances and even higher payments. In the Orlando area where home prices are down nearly 25 percent over last year, the homeowner may already owe more than the home is worth at today's standards, and an increased balance may negatively affect a borrower's incentive to keep up their payments. In fact, Credit Suisse Group reported borrowers were less likely to default on their mortgages when their loan balances were reduced, but this is not the traditional modification currently being offered to U.S. homeowners.

The FDIC's loan modification program for IndyMac loans could have a lower default rate because it focuses on "sustainable" payments. However, any success through this workout formula may be offset by the weakening economy and worsening unemployment.

For homeowners, who find they can't maintain the new payment terms worked out by their lenders, a short sale may be a better alternative than the inevitable foreclosure. Short sales occur when the lender agrees to accept less than the balance owed, something becoming more viable for Orlando homeowners as real estate values drop and they find themselves upside down on their mortgages.

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If you are wanting to sell your Seminole County or Orlando area home in the next 6 to12 months, now is the time to begin putting your plan into place while time is still on your side. Please contact us for any real estate assistance you may need.

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