According to an article published today by Reuters, loan modifications are not the answer - this is something that doesn't surprise me.
The article goes on to say: "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."
Here is what the report found:
After 3 months = 36% re-default rate
After 6 months = 53% re-default rate
After 8 months = 58% re-default rate
In other words, these loan modifications seem to be buying some time, but ultimately not the desired result.
There are two things that I believe that will further compound loan modification efforts. First, the economy continue to deteriorate, more people are losing jobs today than in the past. Second, the housing market continue to deteriorate, home values are still declining. And as we have learned, it is declining home values that are indeed a cause of loan defaults as homeowners are unable to sell or refinance a loan that they can no longer afford - yet nothing substantively has been done to stimulate demand for real estate in order to provide a back stop for home values - something that I have been talking about for over a year.
And for those who think that these loan defaults are isolated to just sub-prime loans, you may be surprised to hear that the article goes on to say, "Dugan said the third-quarter report will show many of the same disturbing trends as other recent mortgage reports, as credit quality continued to decline across the board and delinquencies rose for sub prime, alt-A and prime mortgages."
What this means is that all mortgage types are vulnerable to property value declines - no surprise there.
But it also means that this little chart to your left paints a very grim picture about the next four years for the housing market.
This chart shows the number of adjustable rate mortgages that will be resetting over the next several years.
As these mortgages reset, and as property values continue to decline, the owners of these mortgages will have a difficult time refinancing or selling - does this sound familiar to what we are seeing today?
Loan modifications are not the answer because they do not address the systemic cause of this housing crisis which is the fact that there are too many homes for sale and not enough demand for them.