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Loan Modification Not Working   December 8th, 2008
More than half of borrowers who get loan terms modified re-default       


More observations...

There is news today that further demonstrates that there may not be much we can do about the current crisis other than let it run its course so we can get back to a sustainable situation. The article below reports that of those homeowners who are having problems with their mortgage and negotiate better terms/lower payments with their lender, more than half end up re-defaulting on their mortgage within a year.


Office of the Comptroller of the Currency director John Dugan on Monday released statistics showing a high re-default rate on mortgages that have been modified in the first two quarters of 2008. "The results were surprising, and not in a good way," Dugan told a gathering in Washington at the Office of Thrift Supervision's annual conference. According to the OCC statistics, which looked at loans modified in the first quarter and second quarter of 2008, 36% of borrowers had re-defaulted by being more than 30 days past due and after six months, the rate was roughly 56%. After eight months, 58% of borrowers had re-defaulted. The OCC tracked the number of borrowers that re-defaulted on their mortgages after the modification was completed. Dugan acknowledged that not all re-defaulted mortgages go to foreclosure, but he argued that the number was very high. Dugan said he was not sure why there was such a high level of re-default, pointing out that it may be because the modifications were not low enough to be affordable.

So, basically, even when lenders work with borrowers to reduce their payments and give them favorable terms, most of those borrowers will then go on to default on the new, more-affordable terms. Why? "Because the modifications were not low enough to be affordable" In other words, there are people with homes that even after you make the loans more affordable, they still can't afford it.

It all comes back to what we already know: There are a lot of people with houses that simply have no business owning a house because they can't afford it. Short of giving houses away, nothing's going to change that. The natural correction we're going through is basically going to require that those people that can't afford houses leave their homes. I know it sounds cold and heartless, but that's the reality. We can't continue to try to prop this situation up because doing so just kicks the ball a little further down the field. It doesn't solve the problem.

The problem is that too many people are in houses they can't afford. As attractive as it may sound to put a moratorium on foreclosures or renegotiate more affordable terms for homeowners or prop up housing prices, it's impossible to defy market forces over the long-term.

We need to start looking at options that will allow these unqualified homeowners to leave their homes in an orderly fashion that hopefully won't saturate the market with unoccupied, abandoned homes. As long as we keep trying to defy market forces by trying to keep people from losing homes they can't afford, we're fighting a losing battle and just extending the crisis further.

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