"The big question looming over the push to rewrite the home loans of people struggling to make payments is whether or not such mortgage modifications keep folks in their houses for the long term. As I've mentioned before, there's a danger that loan modifications, at least the way they're currently done, don't solve the problem, just delay it.
This morning Comptroller of the Currency John Dugan gave a speech and shared some grim data: more than half of loans modified in the first quarter of 2008 fell 30 days delinquent within six months. Here's the graph he put up:
The data come from the largest national banks and thrifts and cover 35 million loans worth more than $6.1 trillion, or 60% of all first mortgages in the U.S.
Dugan called the results, part of his agency's new Mortgage Metrics report, "somewhat surprising, and not in a good way." He pointed out that a person could argue that 60-day delinquencies are a better indication of future foreclosure, but those figures aren't so good either—after six months, 35% of people were 60 or more days behind on their payments.
These are great numbers to have since historically we haven't—and problem solving often starts with data collection. Unfortunately, we're still not quite at the point of knowing what to make of it. As Dugan said this morning:
The question is, why is the number of re-defaults so high? 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? We don't know the answers yet, but these are the types of questions that we have begun asking our servicers in detail.
Godspeed on that.
Barbara!"
Here was my comment:
I then ran across it on Alphaville by Stacy-Marie Ishmael:"There has been a growing chorus of voices calling for measures to stem foreclosures in the United States. Just last week, Ben Bernanke unveiled a fairly aggressive set of proposals, including the government buying “delinquent or at-risk mortgages in bulk” and refinancing them under federal programmes such as Hope for Homeowners.
But recent comments from John Dugan, the Comptroller of the Currency, should give advocates of loan modification programs (and similar efforts) a moment’s pause.
Data released by Dugan’s office show that more than half of loans modified in the first quarter of 2008 fell delinquent 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
over half of mortgage modifications seemed not to be working after six months
Not all redefaulted mortgages go to foreclosure, and some have suggested that 60 days past due is a better indicator of ultimate failure to pay than 30 days – but even using that measure, the rate of increase in re-defaults was remarkably high, exceeding 35 percent after six months.
Dugan did not offer a reason for the high (and accelerating) rate of borrower re-defaults, but he did ask the right questions:
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?
The answers to those questions will have “important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months,” he added.
Dugan said he had posed those questions to mortgage servicers and was awaiting their responses.
FT Alphaville hopes more light will be shed on the matter when the OCC, in conjuction with the Office of Thrift Supervision, releases its Mortgage Metrics Report later this month."
Here was my comment:
Dec 8 22:38I also feel that this rate might help stabilize prices, which is really what these lenders want, not necessarily to stop all or even most foreclosures.
So, I made basically the same point. Then Yves Smith:
"The stock market is staging a very peppy rally on the hopes for the Obama infrastructure plan and the auto bailout, but key bits of news point to the stubbornness of some of the underlying economic stresses.
We have long advocated mortgage modifications as a remedy that banks used fairly freely in the stone ages when they held the paper. While we have also been told that the mods being offered these days are often too shallow to give the homeowners sufficient relief (ie, the bank could offer a reduction in principal, rather than the more common, and lower effective reduction of merely providing interest rate relief, and still come out ahead compared to a foreclosure). However, the latest report from the Office of the Comptroller of the Currency may put a dent in efforts to find ways to offer viable borrowers sufficient changes in terms."
Next, Felix Salmon:
"An even more key question is why on earth Mr Dugan is surprised by this number. As Paul Jackson points out, loan mods normally have a 50% failure rate. On top of that, there are two key points which Dugan seems to have missed:
- The single most important factor underlying mortgage defaults is falling house prices.
- House prices have continued to fall throughout 2008.
Given all that, we should be thankful that loan modification programs have managed to keep half of formerly-delinquent homeowners out of default.
We should also understand why, from a bank's point of view, it's silly to modify loans by reducing the principal amount outstanding. It makes sense to reduce interest payments -- to something well below the bank's own cost of funds, if necessary. But the bank will also want to protect itself if that doesn't work, by keeping the total amount owed high. The problem there is that the homeowner will remain underwater -- and having an underwater loan is a strong incentive for any homeowner to walk away.
As ever, there are no easy answers. But maybe it really takes a year's worth of re-default data to persuade the OCC of that."
I think that we should understand that these are not normal times. That's why people are surprised. They were hoping that the lenders would bend over backward to modify these loans so that people could afford to stay in them. Obviously, and I agree with Felix Salmon here, the banks are going to go only so far.
However, I believe that it is in the lenders interest for home prices to stabilize. After all, they're left with an asset after foreclosure that they lost money on, and it doesn't help them if the assets they are getting back are cheaper and cheaper. So, I think that they've taken a middle road. Be lenient enough to slow the rate of foreclosures down, but don't bend over backwards to avoid foreclosures. I believe that this makes sense.
The borrowers can walk away, but, if they do, they will also lose money. So, it is in their interest to remain in the home if they can. Unless, of course, they believe that they could walk away and buy a home later on much better terms. I have no idea how wise this idea is, since I'm dubious about predicting future mortgage rates in the next few years.
As well, whatever people say about housing prices, I suspect that they'll end up higher much faster than most people believe. However, there are some areas that are in very bad shape because building homes or condos in some areas did get way out of control. But that's not everywhere.
"As if you couldn’t see this one coming a mile away: more than half of the loans modified in the first quarter of 2008 had redefaulted within six months of modification, according to statistics released Monday by the Office of the Comptroller of the Currency.
“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due,” Comptroller John Dugan said in a statement. “After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”
In other words, recidivism rates are right where they historically have been, despite growing pressure to “do something” about a growing number of foreclosures. Dugan characterized the results, however, as “surprising” for regulators.
Dugan’s remarks came during a panel discussion with Office of Thrift Supervision director John Reich, Federal Reserve Board chairman Donald Kohn, Federal Deposit Insurance Corp. chairman Sheila Bair, and Federal Housing Finance Agency Director James Lockhart.
Dugan suggested that regulators weren’t sure why redefault rates were so high. “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?”
His remarks provided a preview of the data contained in the OCC and OTS Mortgage Metrics report, set to be released later this month. But the fact that regulators have been surprised by recidivism rates that are, frankly, about par for the course is telling insofar as it suggests that regulators have yet to really understand the crisis they are trying to solve.
“I want to know why Dugan and others are surprised by 50 percent redefaults,” said one servicing manager that spoke with HousingWire. “We’d have told them to expect it, if they’d asked.”
Anyone with experience in this space expects roughly 50 percent recidivism on loan modifications, various sources in the servicing side of the business said, give or take some wiggle room with differences in vintage and product type.
The fact that regulators were blindsided by these numbers seems likely to generate more cries for aggressive loan modifications, especially of the principal-forgiveness variety, from consumer groups and the government officials; but doing so entails huge moral hazard for lenders, and the very real risk that other borrowers currently performing on their notes will seek to default in order to lower their own mortgage balances.
Read Dugan’s full remarks here."
I think, again, that people are being disingenuous here. These are not normal times. Do we expect this percentage of foreclosures in normal times or this percentage of decrease in the price of houses in normal times or the tough terms for lending now in general in normal times? Why would you expect this percentage to be to the same?
Posts
Monday, December 8, 2008 at 5:07 pm
I think that the data is interesting, and leads me to believe that these negotiations are a bit tougher on the borrowers than we had imagined. In other words, the lenders are willing to bend a bit, but only a bit. There are limits to their willingness to negotiate a new monthly payment. They're not willing to accept any amount that people can obviously pay, but are pushing that amount as high as they can.
I would say that 50 %, in that scenario, is reasonable, if it wouldn't be worse for the borrowers. But Barbara is asking the correct question: How realistic are these renegotiated payments? And how much do they differ from what was being paid before?
After all, a 50 % rate might be fine if what you're really trying to do is stabilize prices, not really end foreclosures.