Half of ‘rescued’ borrowers still default
Many modified mortgages in 2008 defaulted in 6 months, a top federal regulator says. A new study raises concerns over the quality of such loan adjustments.
WASHINGTON, D.C. — More than half of delinquent homeowners whose mortgages were modified earlier this year ended up redefaulting within six months, a top bank regulator said Monday.
Some 53% of borrowers with loans modified in the first three months of 2008 and 51% of those with loans modified in the second quarter could not keep up with payments within six months, according to U.S. Comptroller John Dugan, who spoke at a housing conference.
The report, which will be released in full next week, covers nearly 35 million loans worth a total of $6 trillion – or 60% of all primary mortgages in the United States.
The high redefault rate raises concerns about the long-term effectiveness of loan modifications, which many are pushing as a key solution to the nation’s financial crisis.
A record 1.35 million homes are in foreclosure, while the number of borrowers who have fallen behind on their payments soared to a record 6.99%, the Mortgage Bankers Association said last week.
Dugan said the Office of the Comptroller of the Currency is asking servicers for more details on the loans in his report to determine what went wrong. He wants to know whether the modifications reduced the monthly payments to affordable levels or whether the borrowers had too much other debt to keep their head above water.
“These answers are important, because they have important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months,” Dugan said.
Other regulators speaking at the conference questioned the quality of the loan modifications, saying that early efforts to restructure loans were not very effective. Many simply tacked on the missed payments and penalties to the end of the loan.
“The quality of the modifications are not what they should be,” said FDIC Chairwoman Sheila Bair. Verifying income is very important. (McAuleys World: No kidding! – Who put these people in charge? – Verifying income should be the first thing that is done! If we keep repeating what got us here in the first place – we will never get out of this mess)
Other regulators said that federal money may be better spent on economic stimulus and job creation since a growing number of foreclosures are caused by unemployment. In those cases, loan modifications won’t help.
“I have to wonder whether or not focusing on job creation..is a better way to focus federal dollars than on a loan modification process that may be only partially effective,” said John Reich, director of the Office of Thrift Supervision
Reworked mortgages not working
Even after help, homeowners end up back in default
More than half of delinquent borrowers who had their mortgages reworked earlier this year to avoid foreclosure were behind on their new loan payments after just six months, a federal regulator said yesterday.
John C. Dugan, US comptroller of the currency, told a housing forum yesterday that data his agency is collecting show the increase in repeat defaults by homeowners is “remarkably high.”
“Put simply, it shows that over half of the loan modifications seemed not to be working after six months,” Dugan said.
The findings raise several major questions for government and lending industry executives as they struggle for a fix to the nation’s foreclosure crisis: Are lenders not doing enough to modify loans so delinquent borrowers can afford them? Or, are too many borrowers just not cut out to be homeowners and shouldn’t be bailed out of their debts?
Even an increasingly popular proposal floated by the head of the Federal Deposit Insurance Corp. to refinance as many as 2.2 million troubled homeowners into affordable, fixed-rate mortgages estimates as many as a third, or about 700,000, could fall behind again by the end of 2009.
Other specialists said the problem is as much the homeowners. Paul Willen, an analyst for the Federal Reserve Bank of Boston, said too many borrowers simply cannot afford to own their homes.
“Many of the people in the foreclosure process are in deep, deep trouble. They are not a modified loan away from financial happiness,” said Willen. “Many people who are heading into foreclosure don’t need a modification, they need an exit strategy.”