Loan Workouts are on the rise, which is good news for the troubled real estate markets.  In the fourth quarter, delinquency rates were still rising, but the number of loan workouts also rose due to a number of factors.

One of the reasons for the increased number of loan workouts is the falling interest rates.  Many of the subprime mortgages are tied to indexes, such as the LIBOR, that have come down a good deal over the past few months.  The average subprime ARM today is resetting at an average of 8.76%, whereas in December, the average reset rate was 11.25%.  The drop in rates allows lenders more flexibility in coming to a loan modification, and these rates are expected to continue to drop in the near future, which should continue to help the loan workouts.

Additionally, we have seen the number of loan modifications as opposed to repayment plans increase.  Loan modifications are typically more beneficial to borrowers than repayment plans.  A modification changes the original terms of your loan.  Examples of modification would be fixing an adjustable rate for a longer period of time than the original loan called for and/or reducing the rate at which the loan is to reset.  Loan repayment plans, on the other hand, typically take the amount of back interest and fees owed on the loan, and chop that amount up to be repaid over a period of time rather than upfront.  A repayment plan does not lower your payment or change the terms of your loan, it just offers a repayment plan that can allow a borrower to get back on track.

Lenders working with borrowers on loan modifications is very important.  We are still in a down real estate market, with a surplus of inventory.  The first step to recovery is getting through the inventory on the market, especially the bank owned properties and foreclosures.  These are properties that have a severe drag on pricing.  With more loan modifications and workouts should come less foreclosures.  We are not seeing the delinquency rate fall yet, and foreclosures are still at record levels, so there is more rough road in the immediate future.  As lenders become more and more willing to work with borrowers, however, and as the loan modifications become more and more common, it should start to have an impact on the foreclosure numbers.

Check back in as I will be touching on more points related to the current market conditions.  As always, feel free to contact me regarding home loans or other financing questions.