53% of loan mods still default

In comments made by John Dugan (head of the U.S. office of the Comptroller of the Currency), home loans that received modifications for troubled home owners, still default at an alarming 53% after 6-months.

From Reuters: Dugan states “The results, I confess, were somewhat surprising, and not in a good way”.

The data was collected from many of the large banks and was not based on surveys, but on real measurable data.

I hardly see how this data is surprising. What law makers fail to realize is that many of these homes are to much for the families no matter how much the re-modify the loan. They do not take into account the other expensive like up keep, insurance, utilities, etc. This may not have been an issue, but if you look back at the loans that were offered in the housing boom, many of these families had far to much of their monthly income dedicated to a home at the lower fixed rate.

People bought on an expectation the market would continue to increase and interest rates would remain low. If your three year arm is ready to expire, no problem, just refinance. What this means is that people were buying the absolute maximum house they could based on the lower fixed rate portion of their loan.

If these families applied for a fixed 30-year loan, they may have only been able to afford 30-50% less house, but that is not the case. So fast forward to the loan re-modifications. What they achieve in most cases is bringing the loan payment somewhere close to the low fixed rate they began with. That is fine, but what happens when gas triples or food cost doubles? There is no extra income for these families. Keep in mind, a lot of these families make good money, they just can’t afford a $700K house no matter how you structure it.

The banks are traditionally against loan re-modifications. The exact reason is complicated as it has to do with earnings and liability, but in this particular market a over weighing factor is the very fact that they do not have a good success rate. Looking at a families income, credit score, and other debit can and does give a very good baseline on what the success of such a program should be.

In a rush to save everyone and not offend anyone, our law makers make very expensive mistakes. Right now all the money is going to the most irresponsible of borrowers and to the banks who worked themselves into this mess. Do you really expect good results with this approach? The right approach is to save the families that can and have the ability to not default, provide a vehicle for families to transition out of a home and into a rental, and provide funding to interested parties that want to buy housing defaults in exchange for providing below market rents to families in trouble for a fixed time. For any system to work, it needs to stimulate all parties, wealthy, poor, and business, not just the troubled.

A surprise, not really, an expensive experiment, absolutely.