Saturday, January 3, 2009

Modified Mortgages Are Failing

The big hope was that mortgage modifications would make the necessary corrections as to keep people in their houses, thereby reducing foreclosures. Unfortunately the numbers released make the program questionable. Throughout the meltdown there has been a school of thought to let things play out and not intervene. The thought was things would work themselves out faster, and over the long run better, without intervention. Trying to solve one problem can easily lead to others - including new and unexpected ones.

Mortgage modifications easily appear to fall into this category. However the reason for heading into trouble needs to be evaluated. There are many people who financially will never realistically be able to keep their current residence. Such as people who never had the credit standing to own a home or people with such a significant income loss that nothing can be done to help.

Statistics are starting to pile up from the early modified mortgages and things are not working as hoped. The Record has an article titled Second chance slips away that puts things into perspective. Lets take a look -

Federal banking regulators are tracking a new and ominous statistic, the loan re-default, which is when a borrower falls behind again on mortgage payments after loan terms were changed to avoid foreclosure.

In New Jersey and elsewhere, government officials, housing advocates and industry trade groups have been encouraging lenders to relax loan terms to keep distressed homeowners in their homes. One goal is to stabilize housing markets, as growing numbers of foreclosed homes for sale drag overall property values lower, forestalling a recovery.

In their latest "Mortgage Metrics Report," released Dec. 22, the Office for the Comptroller of the Currency and the Office of Thrift Supervision said that the number of new loan modifications by national banks and thrifts increased to about 133,000 in the third quarter from 114,000 in the second.

But more than half of the nearly 73,000 loans that were modified in the first quarter of 2008 had re-defaulted within six months,
and that is "very troubling," Comptroller of the Currency John C. Dugan said in a statement.

Among other findings, the report — which included re-default data for the first time — said payments on 55 percent of the loans modified in the first quarter of 2008 were 30 or more days late after six months. The rate of seriously delinquent loans — those late by 60 days or more — was 37 percent.

First, remember that some economist predicted only 10-15% of modified mortgages would be prevented. If the statistic turns out to be around 40-50% the program may be working better than expected - but is it still worth it?

Second, we do not know how the mods were implemented. Across the board or case by case (some lenders did across the board which would not have worked - see here). We know from an earlier report that many people applying for modifications or help are not qualified. This is from an earlier post -

Also interesting at the end of the article there is a review of calls made to a housing hot line designed to keep people in their homes. Approximately 20% of the calls need budget counseling prior to even entering a contract, 10% want to leave their homes (sell or walk away), 35% would not ever be qualified due to income, 17.5% may be qualified but there are too many problems and only 17.5% qualified for a loan modification actually make it to completion. And these are the people reaching out for help.

There is a certain amount of failure built within the system - but there always has been. With the upsurge in unemployment, even well intentioned people will be unable to make the payments. Even with the increase in unemployment compensation mortgages will not be paid. When mortgages, taxes and utilities are factored in unemployment compensation levels will not keep any bubble buyers in their properties.

Other factors including keeping subprimers in their residency will, complications with piggybacks and HELOCs, as well as the underwaters who viewed housing as an investment, will most likely, just forestall the inevitable. Some levels of foreclosures is normal operating procedure to the system, the big problem is to weed out those destined for foreclosure and help the ones that can be helped.

Modification programs need accept the ones they can not change, modify the ones they can change, and hopefully have the wisdom to know the difference. (This philosophy can useful in all aspects of life - even the post-bubble foreclosure crisis!)

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