Sentences to ponder

Recent data suggests that many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said on Monday.

"The results, I confess, were somewhat surprising, and not in a good way," said John Dugan, head of the U.S. Office of the Comptroller of the Currency, in prepared remarks for a U.S. housing forum.

"Put simply, it shows that over half of mortgage modifications seemed not to be working after six months," he said.

Here is more.  I thank Brad W. for the pointer.


What i've read of this analysis is surprisingly sketchy. If the modifications are working half the time, does that mean the benefits outweigh the costs (i.e. is it worth doing modifications that work half the time if it avoids more costly & disruptive foreclosures the rest of the time)? What types of modifications are working better than others? How big are the modifications being analyzed, relative to the size of the mortgages & relative to the family incomes of the mortgage holders (e.g. what percent of family income is going to the mortgage before & after the mods)? What's happening to family incomes over the course of the analysis (i.e. are the mods not working because they're chasing a collapsing family income, or because the fmily was just never a good credit risk to begin with)? What other family debts are competing with the mortgage debt that might be compromising the effectiveness of the modification packages?

It doesn't appear that questions like these were even asked, let alone answered. Which makes this finding (assuming it's valid) extremely ambiguous. It doesn't deserve the high-profile publicity it's getting, and the fact that it's being rolled out there so prominently despite its limitations suggests that the OCC is trying to influence public opinion against large-scale mortgage modification programs rather than trying to shed light on the issue.

The data is sketchy, but I think that the full analysis will be coming out within a month.

“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,† the Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today.

The big money foreclosures are concentrated in California, Nevada, Arizona, and Florida, typically in exurban areas that are miserably hot in summer and long commutes to jobs all year round (e.g., 50 to 125 miles inland from Los Angeles). In other words, they'd be attractive second homes for affluent Northern snowbirds ... if prices fall low enough. There are a huge number of Baby Boomers approaching retirement age who would be in the market for a winter home in the four "Sand States" if the government would let prices fall.

As Aaron said, a lot of people with adjustable rate mortgages were sub-prime borrowers and had teaser rates that didn't require much of a down payment. Once housing prices fell, it was in their interest to default on the loans, since the banks would take the biggest loss.

Even a mortgage rate modification wouldn't have had an effect after the bubble burst because, as someone has mentioned, it would take time for the rates to have an effect on the economy and to cycle through the bogged down monetary and fiscal system.

What needs to happen now (in all of my infinite wisdom) is that people should begin regarding their homes as a place to live, not an investment. My mom always preaches how glad she is she bought a house in Jersey for $132K because 5 years later it was worth a whoopin' $350K. More homes or less homes, if everyone would just stop trying to sell one way or another, the equilibrium would be restored.

Surprise, surprise.

A lot of the people defaulting aren't doing it because they can't afford to pay. They're doing it because they can't see the sense in owing $500k on something now worth $300k.

Of course, the media never talks about these people. Only those whose payments have jumped as their mortgages they agreed to dictate.

The media seems to have massive blind spots. In one breath they talk about layoffs and falling asset prices and what bad news this is. In another, they tell us the good news is that fuel prices have dropped dramatically.

But they never connect any of these events together. The common thread behind all of them is the systemic deflation. The media seem clueless, the talking heads in Washington spend all their time grandstanding and the Fed thinks just lowering interest rates and shipping money to banks so they can buy US government debt with it is somehow going to solve things.

This country needs an education as to whats really happening here. Or we are really screwed.

Half sounds pretty good. These are, after all, the same people that are losing their jobs.

Just renegotiate mortgages and cut the problem in half?

58% were past due in just 8 months, lets see what that percentage jumps up to in 2-3 years. The big problem is that people can't actually afford these homes. 38% DTI ratios (versus gross income not net income) is an unsustainable amount of debt. You can manage it for a little while, especially if you can take a HELOC out every once in a while to pay off your other debts.

Banks also have a lot of troubles taking care of the other liens on the house without the foreclosure process. The first mortgage holder takes the house through foreclosure and it wipes out the second mortgage. It's much easier to just foreclose on the house, get your cash now, wipe out the other loans and loan that cash back out than to try and work something out with a borrower who's already shown they will default on a loan and the second mortgage company. We have a process for dealing with defaulted loans, and it works fairly well. If the government would stop passing laws preventing banks from getting on with it, we'd get through this mess a lot faster.

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