Mortgage Modifications Prove Ineffective

As I’ve been saying since last summer you can’t modify, legislate or rescue someone from a mortgage they can’t afford:

From the WSJ:

“Many troubled homeowners are quickly falling behind again on their mortgage payments after their loan is modified, new data from the Office of the Comptroller of the Currency show.

The OCC data reflects actions taken by the 14 largest national banks and thrifts, which together represent 60% of the mortgage industry. Nearly 36% of borrowers were more than 30 days past due on the loan payment three months after their loan was modified and nearly 53% were more than 30 days late after six months, according to the OCC.

“The results, I confess, were somewhat surprising, and not in a good way,” Comptroller of the Currency John C. Dugan said in a speech in Washington, D.C. on Monday. Mr. Dugan said it wasn’t clear whether the low success rate reflected the fact that the modifications weren’t reducing monthly loan payments enough to be truly affordable, whether the mortgages were so badly underwritten that they weren’t affordable, even with lower payments, or if both factors were at work.

The high re-default rate raises questions about the effectiveness of current efforts to work with troubled borrowers and comes at time when the federal government is facing increased pressure to do more to reduce foreclosures.

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,” Federal Reserve Board Chairman Ben Bernanke said in a speech last week.”

As I’ve been saying since last summer, you can’t rescue/modify/legislate away the reality of people purchasing homes they can’t afford; and the fact that people are actually surprised by this indicates how disconnected and clueless activists, politicians and policy makers are about the root cause of problem.

I.e. they’re focused on trying to treat the symptom (foreclosures and loan defaults), as opposed to focusing on the root cause (people with mortgages they simply can’t afford), because it’s either unpopular to admit the latter or they simply don’t truly understand the problem.

It would be interesting to see the more complete data set in order to determine the relationship between the kind of financial situation the homeowners were in (overspent, temporary financial difficulties, on the bubble with regards to affordability), the type of modification they received and the results in terms of propensity to go back into default.  I suspect such an analysis would reveal that if you separate people who just have oppressive terms (or temporary financial difficulties) from those who simply overspent, you’d have a subset of homeowners that could actually benefit from loan modification.

On a go-forward basis activists, banks and policy makers need to differentiate between those with temporary financial difficulties (and/or those on the bubble) who could afford their homes with a little bit of help, and those who simply bought more home than they can afford.

This really goes back to the point I made earlier about the need to make mathematical decisions (even if they’re unpleasant) that address root causes, as opposed to only trying to treat unpleasant symptoms instead.

Finally as time goes on I suspect the rate of default for modified mortgages will continue to increase, as in the majority of cases all the bank has really done is delay the inevitable.

Source:

The WSJ: “Modified Loans Do Little to Help Homeowners” — Ruth Simon, December 8, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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