Mortgage Mods Still Not Working

Here’s a quick update on mortgage modifications. It seems that the magic formula, if there is one. that will make this work is proving to be elusive.

From the WSJ:

But as Fitch and others have found, finding the right way to modify a loan remains a challenge. Servicing firms increased the use of modifications a year ago and quickened the pace in the fall.

A key finding from the Fitch report was that subprime, pooled loans that have been modified are souring at high rates despite a change in the loan terms. Fitch said a conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change. That finding echoes prior U.S.-bank-regulatory agency reports of high redefault rates for modified loans.

The Fitch report said one reason for the high redefault rate was public pressure to modify loans even for borrowers who were likely to default whether the loan terms were changed or not. Fitch said another cause was falling home prices. Ultimately, these homeowners, deep underwater, walk away from the home, resulting in the redefault of a loan.

“Based on the redefaults to date, an optimal modification formula has not yet been found,” said Diane Pendley, author of the Fitch report and a managing director in the Fitch structured-finance unit. “However, servicers continue to adjust their efforts to successfully meet the goal of keeping borrowers in their homes.”

Job losses are another contributor to loans that sour after loan terms have been changed, Fitch said.

The Fitch report also raised questions about whether a decrease in a home-loan amount, known as principal reductions, is an optimal loan modification. Some mortgage-loan experts believe that the best way to help borrowers is to reduce the principal amount owed. The Fitch report found that loans that had decreased principal amounts, including by more than 20%, were still redefaulting in a range of 30% to 40% after 12 months.

So, even major principal reductions aren’t enough to keep homeowners in place. The recent evidence of a boom in the resale of foreclosures (link here) in some of the hardest hit foreclosure markets might be telling us something. Maybe, it’s that the market does work. Let prices fall to their proper level and the inventory starts to get absorbed. 

Pretty basic but then basic tends to usually work pretty well.

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