Loan Modifications Will Only Exacerbate Housing Troubles

By
Mortgage and Lending with Canopy Mortgage, LLC NMLS 124492

Loan Modification Results With High Re-Default RateAs is the norm, speculation and trigger words often get the headlines in the media outlets. Unless you have been in a bomb shelter, it has been unavoidable to hear all of the debate around a successful loan modification program and/or system to help troubled homeowners.

It has been such an important topic that the president-elect has already made public appearances and proclaimed of its importance in the new administration. Not only is it good for America's economy, but also the consumer psychology.

The main reason is due to the fact that homeownership had become the back bone of consumer spending of the last decade.

In a press release made today by the Office of the Comptroller of the Currency (OCC), John C Dugan disclosed that there was a high re-default rate amongst homeowners who had their loans modified in the 1st quarter of 2008. Re-defaults are classified as loans with payments in excess of 30 days delinquency. Here are the facts about the re-defaults:

  • 36% Re-Default after 3 months
  • 53% Re-Default after 6 months
  • 58% Re-Default after 8 months

Unlike other reports, the OCC and Office of Thrift Supervision Mortgage Metrics Report  encompasses 60% of all first-lien mortgages in this country. This represents roughly 35 million loans worth in excess of $6.1 trillion.

Previewing the results for the 2nd quarter are even more frightening. Here are the preliminary results recorded thus far:

  • 22% Re-Default after 1 month
  • 30% Re-Default after 2 months
  • 39% Re-Default after 3 months
  • 44% Re-Default after 4 months
  • 51% Re-Default after 5 months

These kind of numbers definitely give investors a substantial argument against streamlined loan modifications. Furthermore, it definitely makes you wonder 1) how effective are loan modifications, 2) are we simply creating another housing implosion for the future and 3) do these homeowners really deserve a 2nd / 3rd chance at homeownership.

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Rainmaker
190,666
DEBORAH STONE
Balboa Real Estate San Diego, CA - San Diego, CA

James:

I agree that loan modifications should not be handed over to everyone....especially those with no income, or who have declared bankruptcy. But there are significant numbers of peple who are in precarious positions financially NOT due to their taking on more loan than they could afford, but because "the rug was pulled out from under them", i.e. loss of job, less income, medical issues.

I think some people deserve a 2nd chance, since life happens, and there are no guarantees. But the loans should be modified on a "CASE BY CASE" basis only....no handing over bailouts to everyone with a sob story who can't pay their mortgage.

 

Dec 08, 2008 02:18 PM #1
Rainer
70,975
James K Barath, CMPS
Canopy Mortgage, LLC - Crown Point, IN
FICO Pro, Certified Military Housing Specialist

Deborah,

Many of us in the real estate industry, including us mortgage professionals, are surviving and yet we still keep paying our bills. No one would argue that people need 2nd chances. Unfortunately, many consumers (more than 50%) are taking advantage of the system to stay in their homes longer at the cost of you and I.

Dec 08, 2008 02:31 PM #2
Rainer
129,115
Justin Ukaoma
Vizion KC - Kansas City, MO
Kansas City Real Estate Investments

Interesting statistics.  I think the loan modificaition programs are great for those people who got wrapped up in toxic loan program with teaser interest rates and such.  For the great majority of individuls a loan modification is not going to solve the real problems in their lives such as loss of income.

Dec 08, 2008 02:55 PM #3
Rainmaker
190,666
DEBORAH STONE
Balboa Real Estate San Diego, CA - San Diego, CA

Justin and James:

I think that if there is a willingness on the part of a Lender to modify a loan so that the owners will not be homeless and add yet another vacant property to a neighborhood, that would be preferable. Foreclosures help no one, and modifications should be used on a "case by case" basis. Not everyone who is having $$ problems right now is taking "advantage" of the system. Flooding the market with tens of thousands of foreclosures is only going to exacerbate the problems and cause a slower recovery. Giving a 2nd chance to people experiencing "temporary financial problems" is the best case scenario. Stringent methods to determine people "taking advantage of the system" from people who are worthy of a 2nd chance should be used, whetehr this is a prequalification of some sort, I don't know. All I know is that Lenders don't need more foreclosures on their books. It would be in everyone's best interest.

Dec 08, 2008 03:25 PM #4
Rainer
70,975
James K Barath, CMPS
Canopy Mortgage, LLC - Crown Point, IN
FICO Pro, Certified Military Housing Specialist

Justin,

Everyone still continues to talk about Alt-A / Subprime loans as the culprit. They are not any more responsible than the individuals who believed that they could afford a $300,000 home on $30,000 salary or an individual who thought it imaginable to have only a $500 a month payment on a $550,000 home. At the end of day, common sense has to prevail.

Dec 08, 2008 03:30 PM #5
Rainer
70,975
James K Barath, CMPS
Canopy Mortgage, LLC - Crown Point, IN
FICO Pro, Certified Military Housing Specialist

Deborah,

Foreclosures have there place in real estate. You must accept them as part of the checks and balances in the real estate industry. To have someone temporarily housed by loan modification only to have them default later hasn't done anyone good. In matter of fact, the real costs will be even greater to taxpayers.

It has been my experience that homeowners that don't care or have a vested interest in their properties do not maintain them. Consequently, over time the subject property becomes even more of an eye sore and burden to the community, banks, investors and recently taxpayers.

No one is diminishing the impact of the wave of foreclosures that will hit the market in the coming months. We must allow it to happen naturally. Otherwise, we are creating a temporary dam that will not survive the impetus to awash the housing market.

What good will it do to artificially maintain housing values only to have to succumb to more pressures downward upon re-defaults?

Dec 08, 2008 03:39 PM #6
Anonymous
All Great Responses

I always appreciate the views of different people regarding issues such as loan modifications, The truth is that there is a much greater risk if the loan mods and short sales are not completed. With the number of homes in foreclosure it will be years before this morket recovers, as far as who deserves the loan mods, thats tough to answer, how about I present this one...If my neighbor gets help because hes fallen behind, why shouldn't they give me a pat on the back for being a good guy that pays my bills?

Dec 11, 2008 06:08 AM #7
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Rainer
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James K Barath, CMPS

FICO Pro, Certified Military Housing Specialist
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