Monday, December 8th, 2008 at 9:40 AM
Re-Default
from cnbc.com
Many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said on Monday, citing recent data.
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“The results, I confess, were somewhat surprising, and not in a good way,” John Dugan, head of the U.S. Office of the Comptroller of the Currency, said in prepared remarks for a U.S. housing forum.
“Put simply, it shows that over half of mortgage modifications seemed not to be working after six months.” Dugan said based on data collected from some of the biggest U.S. institutions, like Bank of America, Citibank, and JPMorgan Chase, home foreclosure starts fell by 2.6 percent in the three months ended in September.
However, data which is to be issued by the OCC and the Office of Thrift Supervision next week could throw cold water on a push by some U.S. policymakers for loan modifications as the key remedy for the ailing U.S. financial and economic crisis.
Dugan said recent data showed that after three months, nearly 36% of borrowers who received restructured mortgages in the first quarter re-defaulted.
The rate of re-default jumped to about 53% after six months, and 58% after eight months, Dugan said, without providing an explanation for the trend.
Jim Klinge, a little-known real estate blogger from Carlsbad, California, said that foreclosure is the only way out of this mess, and to get on with it.
Posted on Monday, December 8th, 2008 at 9:40 AM in Foreclosures/REOs, Loan Mods | 25 Comments » | 
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Hmmm… I wonder what this suggests for 2007-2008 97-100% LTV FHA originations going forward?
Kingside | December 8th, 2008 at 10:14 amKnock me over with a feather. Who’d ‘ave thunk? So, options A-F haven’t worked, anyone care to guess what they’ll try next? Maybe just letting the market do what it does and correct? Naw, can’t do that.
SD_Coastal | December 8th, 2008 at 10:18 amLOL, I’m guessing you added that last line.
Kwaping | December 8th, 2008 at 10:21 amNo surprise here. The most important determining factor in any loan situation is not the size of the loan or the value of the collateral, but the reliability of the borrower. Why would anyone think that a borrower who is willing to let a mortgage go into default will become any more reliable just because the numbers are smaller.
GeneK | December 8th, 2008 at 11:23 amHave to disagree with you Gene. A more important factor than borrower reliability is the consequence of defaulting. The ramifications are simply not enough to deter possible defaults. This is why there are an ever increasing number of prime borrower defaults. The reason they were prime in the first place is that they were reliable borrowers. Now they are weighing pros and cons of staying or walking and deciding to walk. If the consequences of walking away were great enough to prevent people who are able to perform from defaulting, then I may agree with your assessment.
Partyboy | December 8th, 2008 at 12:07 pmPartyboy, when the consequences of walking away are insufficient to deter, the people who continue to make their payments on time are the ones whose character drives them to pay off their debts even when it would be easier to default. That’s what makes a borrower “reliable.”
GeneK | December 8th, 2008 at 1:31 pmWe’re talking about the chicken and the egg, Gene. I believe that you are operating under the belief that people are inherently reliable or unreliable. I believe that a person’s reliability is largely based on the consequence of their actions. This has shown to be quite true recently. And I don’t believe that character has anything to do with it as walking away from a home is a perfectly legal option. If they were performing an illegal act by walking, I would be able to get on board with what you are saying.
To further my point, if a father is in a position where walking away from a home is the best financial move for his family, he will do it. You could argue that he is an unreliable borrower, but he is doing so in an effort to be a reliable provider to his family. If the consequences of walking were more dire, he would have to consider what course to take to be the most reliable and responsible person he could be on all fronts. These issues are not as black and white as you portray them to be.
Partyboy | December 8th, 2008 at 1:56 pmAnother way to look at it; the loan modifications saved over 40% of those who would have lost their homes. To me that’s a good thing.
Mozart | December 8th, 2008 at 2:16 pmGood point Mozart, the glass CAN be half full
Partyboy | December 8th, 2008 at 2:33 pmWho said they’re saved? They just haven’t defaulted YET. Those numbers are staggering, I’m not too sure there is any positive spin you can put on that article.
SD_Coastal | December 8th, 2008 at 3:52 pmKwaping, yes, I added the last line!
Jim the Realtor | December 8th, 2008 at 4:07 pmThey have not tried communism, yet.
This sure is starting to look like Japan circa 1990.
j | December 8th, 2008 at 4:15 pm“To further my point, if a father is in a position where walking away from a home is the best financial move for his family, he will do it. You could argue that he is an unreliable borrower, but he is doing so in an effort to be a reliable provider to his family.”
Frankly, if I’m loaning money, whether the borrower is a “reliable provider to his family” doesn’t matter one bit to me. What matters is whether he is likely to keep his word to pay back what he borrows. In fact, someone who makes on-time payments at the expense of cutting back on things for his family would be preferable to me, especially if he uses the family cutbacks to impress upon his offspring how utterly important it is to grow up to be someone who pays back what he owes.
It’s probably a good thing for the real estate business that I’m not making the lending rules, because as far as I’m concerned, a foreclosure that can’t be explained by a job loss or some catastrophic illness in the family ought to be a lifetime disqualifier for another mortgage.
GeneK | December 8th, 2008 at 4:59 pmAh, remember the “good old days” when folks actually believed we might stem the crush of walkaways using good old social opprobrium? HAHAHAHAHAHAHAHA
Seriously, people are following the examples of their leaders, like John Thain, arguing for a $10M executive bonus for driving his company into a shallower ditch that it would have without his excellent driving skills.
Let’s try “social opprobrium” on Rick Wagoner next. I suspect that will work about as well at 38% DTI loan mods have…
DCRogers | December 8th, 2008 at 5:19 pmHonest
Since homes are rarely selling without foreclosure shouldn’t the REALTORS(R) be encouraging foreclosure in order to increase the wealth and income of their membership.
I guess old habits are hard to break. Prices will be up 20% next year.
LV Renter | December 8th, 2008 at 5:58 pmI pay my debts because it’s important to *me* to be the kind of person who does, not because of “social opprobrium.” With the possible exception of the spirit of my father looking down on me (if he is), I couldn’t care less whether anyone else thinks this is admirable or that I’m an utter sucker.
GeneK | December 8th, 2008 at 6:08 pmIf you don’t pay people money you owe, you’re a deadbeat. If you decide it’s the best “business decision” for your family to walk away from your mortgage, then you decide to be a deadbeat and that’s what you are.
Furthermore, as far as “business decisions” are concerned, I’d like to know for which business the best decision is not to pay people you owe money to. That particular family shouldn’t own another house for 10 years.
The Blur | December 8th, 2008 at 6:57 pmJust think…if the lenders had required 20% down, max 28-33% DTI ratios on VERIFIED incomes, FICOs over 680 (at least), and six months’ reserves…none of this would be happening right now.
The problem is that nobody has any skin in the game. With each modification, the borrower sees it as getting “X” more months of free rent. Outside of moral or ethical constraints, they have no reason to pay back the loans.
All obvious to some of us years ago, yet here they are again, trying to loosen lending standards and drive down the down payment requirements (a big push in Washington is to get FHA and Fannie/Freddie loans with zero-down requirements and low FICO scores “to help the poor people,” you know). They’ve even created soap operas (telenovelas) in Spanish, touting the benefits of home “ownership”. Will they ever learn?
CA renter | December 8th, 2008 at 11:19 pmThis is what I was talking about above:
Nuestro Barrio
Engaging storylines meet meaningful messages in Nuestro Barrio, a Spanish-language education drama about life in the United States. The 13-episode Nuestro Barrio (Our Neighborhood) follows the very popular telenovela, or soap opera format, using storylines of romance, jealousy and conflict to engage viewers while subtly introducing them to valuable lessons on banking, credit, homeownership and more. Freddie Mac supported the production of Nuestro Barrio and provides select lenders with the opportunity to be a part of the series and to distribute Nuestro Barrio DVDs, which include a photonovela recap of the characters, themes and lessons learned.
Freddie Mac: Consumer Outreach and Education Initiatives
http://www.freddiemac.com/news/archives/afford_housing/2007/20070521_nuestro_barrio.html
CA renter | December 8th, 2008 at 11:21 pmBlur,
Buying a home is just like anything else. If you finance it and you decide to stop paying, the good or service taken back (or stopped in the case of a service). It is not as if you are paying for something you have already received, you are paying for an ongoing service, ie. shelter. If you buy a tv with a credit card and don’t pay the bill but keep the tv, then I agree with you about being a deadbeat. But lenders knew the arrangements of the mortgage contract and allowing people to buy with no money down was a huge risk which is not working out in many instances. Walking away from a house with a mortgage of $3500 a month and renting for $2000 a month, especially when the value of the home is about half of the purchase price is a sound business decision. There is your example, and it is a very very common situation today.
Partyboy | December 9th, 2008 at 8:10 amCA Renter,
You assessment is right on the money. While I can admire the dedication to self sarifice by Gene in an effort to be “honorable”, at some point you have to do what is best for you or your family. If you don’t look out for your own best interest, no one will…espcially lenders. I don’t think Gene is a sucker, he just has different priorities than some people may have.
Partyboy | December 9th, 2008 at 8:15 amWithout getting into the moral issues, it’s worth noting that the loan originators made a business decision to lend a certain amount of money to be used to purchase a defined asset. They did this in order to make a profit. If they had been exerting due diligence they would have noticed that the future value of the asset would almost certainly drop far below the value of the loan.
Let’s say I’m a lender and am approached by a person who wants to, oh I dunno, sell bags of cat litter over the internet using a sock puppet as a mascot. I lend the sock puppet bags of money in hopes of making a sweet profit, because, hey, the internet can sell anything. The sock puppet declares bankruptcy and doesn’t pay me back my loan. I wouldn’t argue with anyone who said the sock puppet is a deadbeat, but I was still making business decisions like a person a couple kittens short of a full litter.
Dwip | December 9th, 2008 at 9:04 am“While I can admire the dedication to self sarifice by Gene in an effort to be “honorable”, at some point you have to do what is best for you or your family. If you don’t look out for your own best interest, no one will…espcially lenders. I don’t think Gene is a sucker, he just has different priorities than some people may have.”
Well, I also wouldn’t have overextended myself to buy a house (or anything else, except maybe catastrophic medical treatment), so if it was me we were talking about, it would be for a mortgage I could afford to make the payments on without having to cut back on things for my family, because that’s the only kind I’d ever sign my name to.
I don’t make moral judgements about people defaulting on their loans because they’ve been hit with some catastrophic life event (lost their jobs, someone in the family required massively expensive medical care, etc.), and maybe not even someone who was dumb enough to jump headfirst into a mortgage they could never have afforded to pay back and now admits their mistake. But people who can afford to make their payments and just choose to walk away because it’s financially advantageous are nothing better than scum, and nobody should ever trust them with anything again.
GeneK | December 9th, 2008 at 9:18 amOh yeah, and I also happen to believe that being “honorable” and teaching your offspring to be as well IS doing “what is best” for me and my family.
GeneK | December 9th, 2008 at 9:20 amBut people who can afford to make their payments and just choose to walk away because it’s financially advantageous are nothing better than scum, and nobody should ever trust them with anything again.
Agreed, but since banks decided to let computers decide a person’s trustworthiness it won’t be enforced. I certainly wouldn’t loan them money, but the banks will after a few years since nobody has to explain things to the computer.
JordanT | December 9th, 2008 at 12:40 pm