What’s Wrong With Loan Mods?by Tim Manni
Fresh statistics today revealed more bad news for foreclosure assistance. According to the Comptroller of the Currency (OCC), more than 50% of loans modified in the first quarter of 2008 defaulted within six months.
“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” said John Dugan, Director of the Comptroller in remarks at the Office of Thrift Supervision’s National Housing Forum today. “The data is similar for mortgages modified in the second quarter: the re-default rate after three months was 39 percent, and after six months, 51 percent.”
The Comptroller spoke in front of a panel which included the Office of Thrift Supervision Director John Reich, Federal Reserve Board Vice Chairman Donald Kohn, FDIC Chairman Sheila Bair, and Federal Housing Finance Agency Director James Lockhart. Presently, the Federal Reserve, the FHFA, and the FDIC are all currently involved with separate loan-mod programs. Early dismal reports and forecasts forced HUD to remove their numerical projections for the loan-mod portion of the Hope for Homeowners Act, and swiftly improve the program.
The questions remain: why are so many modified loans failing? “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?” asked Dugan.
Also, why is the government investing so heavily in a solution that has so far proven ineffective? To be fair, the statistics aren’t yet complete for the third quarter, and fourth quarter results will not be ready until 2009. Perhaps with the implementation of the FHFA’s “industry standard” of what’s affordable, re-default rates could improve.
Exit Question: Is the government wasting time developing a solution for people who are destined to fail from the beginning? Share your thoughts in the comments.