Inside the OCC and OTS Mortgage Metrics Report (mentioned briefly this morning), is a collection of charts and graphs depicting mortgage re-default rates after loan modifications. To say the least, the information is damning.
Is it too early to declare mortgage modifications a complete failure?
Here is a series of revealing charts:
The following chart shows the percentage of loans that are 90+ days delinquent after a loan modification. Mathematically, that’s 18.5% of borrowers who never even bother making one payment after agreeing to modify their loan. The trend is worse than a year ago, there only 13.1% of borrowers gave up immediately.
Here is the same chart again, but showing the percentage of borrowers who became 60+ days delinquent following a modification. Note that 27.7% of borrowers stopped making payments almost immediately.
This next chart shows the exact same data, but for borrowers that became 30 days delinquent after a modification. Note that 42.7% all modifications were late again within the first three months. Most of them probably never even made one payment. Most noticeably, the re-default rate for Q1 2009 is worse than Q1 2008!
Roughly half of all modifications will officially “fail” within a year or so…and that certainly is alarming. I’m not sure how anyone could spin those numbers to be anything other than horrific.
Yet the most alarming trend that I see in these charts is that more borrowers are giving up quicker in 2009 than in 2008. And, it’s not an affordability issue. Even a year ago, modifications were done within income guidlines. More and more people are choosing to walk away even a modification. Social mood has darkened.
Clearly, the incentive to be able to simply own a home isn’t incentive enough…even if the monthly payments are manageable.
Borrowers want something more: money.
From the NAR to the words of presidents of all political persuasions, we have been bombarded with the notion that owning a home is a way to build wealth…and the drumbeat continues even in the face of a market meltdown. The result, perhaps, is that millions of borrowers bought houses not just to make memories, but to make money.
Remove money-making from the equation and an increasing number of borrowers are walking away…moreso when they are further underwater.
Modification programs are failing not because they don’t effectively reduce payments, but because, at the end of the day, a huge percentage of borrowers simply don’t want to own their homes anymore.
Short of mass principal reductions, modification will continue to show accelerating failure rates. The debt-burdens are just too high at any interest rate.
Our loans don’t need to be modified, they need to be un-done.
If these horrible numbers and trends don’t define failure, I’m not sure what does.
September 30, 2009 at 11:51 pm
Good post Greg
October 1, 2009 at 9:30 am
Successful modifications are very rare to begin with. If successful and the re-default rate is so high, I would say it never really got off the ground as a plan. Therefore, calling it a failed plan is giving it too much credit.
We can’t really expect lenders to voluntarily “fall on the sword”, can we? Modifications, short sales, and even foreclosures are a natural [possible] outcome of using leverage. Modifications are a newer phenomenon pushed on lenders by our omnipotent government. Short sales (and short pays) are numerous in today’s market which makes them seem like a new phenomenon. And foreclosures will always occur albeit a smaller blip on the radar.
My point is that congress forced lenders into this situation; lenders didn’t mind too much; Realtors and appraisers rode the wave; and now we are correcting. Let it correct itself already.
October 3, 2009 at 1:46 pm
“Modification programs are failing not because they don’t effectively reduce payments, but because, at the end of the day, a huge percentage of borrowers simply don’t want to own their homes anymore.”
This statement is probably true for some borrowers but I disagree that a “huge percentage” feel this way.
I can only speak for myself here: I have over $100,000 of my own hard-earned money invested in my home, which I put 20% down on a 30-year fixed in 2005.
I WANT to own my home…even if it’s only worth about half of what I paid for it. I had planned to live here long-term, raise my kids here and pay down my mortgage over the years so that I could sell for a profit some day.
Unfortunately, my home is not the only thing tied to the real estate market…so is my income. So as the value of my home began to slide in 2006, so did my income.
I immediately cut back on expenses, eliminating even some of the important ones such as health insurance in order to stay current on my mortgage. All of this while gas and food prices, insurance rates and property taxes were sky-rocketing. Then, my wife was laid-off from her job, which only made things worse.
It was a real struggle but I managed to stay afloat until 2008 when I suffered a severe knee injury while on the job. With my savings now gone and no equity left in my home, there was nothing I could do but default on my mortgage.
My mortgage servicer was unwilling or unable to offer a modification at the time, but after a couple months of haggling, they finally offered a modification that would help me keep my home.
Unfortunately, it wasn’t a very good deal, but I had to take it or I would be on the streets with my family. I first had to come up with nearly $6000 for closing costs and then my first payment was due within 30 days. I felt like I was being set up for failure.
However, we managed to stay current for several months but we couldn’t keep it up. We have been 30 days late for the past couple months and we are just praying that things improve before we fall further behind.
Bottom line, you can’t simply blame all of this on homeowners who bit off more than they could chew. This is a recession and people are struggling for a variety of reasons. I doubt very many people want to lose their homes. We simply have no other options.
October 3, 2009 at 3:58 pm
Agreed. I don’t blame families at all and that’s not something I meant to imply.
This recession is tough and a lot of people are stuggling. Stories like yours are becoming more and more common.
What I meant by “a huge percentage of borrowers don’t want to own their homes anymore” is that there are a chunk of borrowers who are well upside down and, even though they can afford the payments, they still don’t want to stay.
This isn’t ALL borrowers and, clearly, you fall in a different category.
That’s a tough spot you’re in. Hopefully, the banks will work with you.
Still…a question for you…
Assuming you are well underwater and prices are still falling, are you fighting as hard to keep the house as you would if you were close to break-even and home prices were starting to rise?
You may be and I applaud your efforts. Many others are certainly factoring the prospect (or not) of future appreciation into their decisions to stay or walk.
Good luck, Greg
October 5, 2009 at 7:59 am
http://www.truthout.org/100409G
Hi Greg. The data seems okay. Jay has a point…servicers are way understaffed and not set up to vet and negotiate customer requests…nor is it profitable in the way automated servicing tends to be.
Walking away can be a rational business decision to begin with. Businesses walk away all the time.
However, if there is data on how these modifications failed, it would be useful. And in that most of the money is still not used, hardly a big deal as a government expense. But the lack of oversight and data makes the whole program muddled. What does Elizabeth Warren say?
October 5, 2009 at 9:14 am
Muddled is a good word for it.
You are right in that the Gov’t is asking the banks/servicers to do something that they don’t have the infrastructure to do.
This explains why modifications can take a long time or never get done in the first place.
Here, the focus is more on rising re-default rates.
Perhaps the Gov’t hasn’t spent much actual cash on the program, but the effort time being thrown at this is immense. Plus, modifying loans in trouble is the only real solution that the Gov’t has come up with to the foreclosure crisis. There has been a goodl deal of political capital invested in this program’s success.
October 5, 2009 at 12:58 pm
http://www.nakedcapitalism.com/2009/10/on-the-inequity-of-handing-mortgage-servicers-27065760000.html
Can you explain the political pressures and costs? This is an area in which I havew no experience, but is drawing interest. Also, how could it be done? if at all. I can post if you send it, and the charts.
December 28, 2009 at 8:27 pm
I received a modification with national city bank. the only problem i have sir is the payment was no lower then what i was already paying. i would not be 5 months behind at this point if i could have kept making my payment. so now what? the system sucks! national city or pnc has been no help i ve owned my home 12 yrs and never was late or behind until my husband was lkaid off from his job i have begged for help but im getting no where! so where do i turn for help? obama is a joke!