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Mood of the Market

Tara-Nicholle Nelson
Inman News

Interesting, isn't it, how the cultural connotations of a word, and the mental images it evokes, evolve over time. The word "modification," for example, is not an inherent member of any given field of study, subject matter or cultural realm. Its dictionary definition simply means "change," (another simple noun/verb that has accumulated vast cultural and political significance and identifying power over the last few years).

Yet, there was once a day when the baby boomer generation heard the word "modification" and visions of electroshock therapy and Jack Nicholson in "One Flew Over the Cuckoo's Nest" danced in their heads. (Paging Nurse Ratchet.) Behavior modification is that field of psychology devoted to, uh, changing behavior.

While many people associate behavior mod with shocking little lab rats to see how long it takes them to cease and desist, it really refers to any sort of punishment, reward or other choice architecture that steers people toward or away from behavior. Everything from substance abuse rehab, to weight loss programs, to nail-biting cessation and even dog training falls under the behavior modification umbrella.

Fast-forward a few decades, and Jack's still at it -- playing off-kilter types, but to a much lesser degree of tilt, these days. But that same generation of folks who were his "Cuckoo's Nest" audience -- and their children -- now hear modification and instantly think: real estate.

I can't recall a time in the last 18 months when I've heard the word modification without its now constant companion: the word "loan."

It's such a well-worn phrase these days that, in true American style, most homeowners, real estate professionals and real estate fans (they exist) refer to the phenomenon in which a mortgage servicer changes the terms of a home loan by reducing the payment, interest or principal (rare, but it happens) -- or even forgives a portion of the balance through a short sale -- by shorthand: loan mod, or even workout.

I'm here to tell you, as a real estate broker and psychologist by training, that loan modification and behavior modification may seem like they are irreconcilably different, but in reality, they are more connected than you would ever think. Here's what I mean.

Every homeowner wants to be on time with house payments. Period. Traditionally, people would go late on their credit-card payments and even scrimp on food costs before missing a mortgage payment.

(I've had more than one client thank me for all the weight lost from trimming food budgets after buying a home!) Home equals shelter -- the only "financial" asset that is also such a fundamental human need that Maslow saw fit to rank it in his storied hierarchy.

Lately, however, researchers have noticed a trend: More and more homeowners are going late on their mortgage payments while staying on time with their credit-card payments. In a recent study by credit bureau TransUnion, the number of consumers who were behind on their mortgage but not on their credit cards rose from 4.3 percent in the first quarter of 2008 to 6.6 percent in the third quarter of 2009.

In that same time period, the number of consumers who went behind on their credit cards to stay on time with their mortgage dropped from 4.1 percent to 3.6 percent.

There are all sorts of theories as to what drives this phenomenon, which TransUnion calls the "new payment hierarchy." But I have one I've seen in the field: loan modification guidelines have modified the on-time mortgage-paying behavior of many a homeowner.

Almost every homebuyer who has ever rung up their lender's loss mitigation department to request to be considered for a loan mod has heard the cardinal rule: Despite governmental efforts otherwise, lenders simply do not consider for loan modification homeowners who are paying their mortgage on time.

Test it -- call any lender and ask! The customer service gal will tell you.

And I get this -- lenders are afraid of the snowball of loan-mod requests they believe would be an inevitable result of granting loan modification or short-sale applications of homeowners who aren't behind. Further, it's almost like a mortgage version of the game chicken: Lenders want you to not just state that you are experiencing a hardship; they want you to put your credit where your mouth is.

Really in hardship? Prove it -- take the credit hit of going late on your mortgage. Not willing to take that hit? Then, they won't believe your hardship tale, either. If you can afford to care about your credit enough to avoid falling behind, then you can afford to keep making your unmodified mortgage payment, it seems is the lenders' collective message.

Unfortunately, though, the constant carrot of a reduced payment, reduced principal or an approved short sale of an underwater property -- no matter how illusory -- has been enough to modify many homeowners' behavior, causing lots of folks to go late just to have their workout applications taken seriously.