Redefault Rate on Mortgage Mods 55% Within Six Months
by Tom on December 23, 2008
in Uncategorized
Proponents of mortgage modifications contend that the cost of even a deep principal reduction still puts the lender ahead of foreclosure, and experience in past real estate downturns would bear that contention out.
So why is this time different? Data from the Office of the Comptroller of the Currency show that 55% of mortgage mods redefault within six months. Even more discouraging, the three month re-default rate was higher for loans modified in the second quarter of 2008 than the first.
It is hard to know for certain without digging further into the data. With housing prices down nearly 30% nationwide, and foreclosure costs averaging $50,000, banks could afford significant principal reductions and still come out ahead. However, borrower advocates contend that many mods in fact reduce interest, but unless the principal is cut, the reduction in payments is insufficient to make enough difference with many borrowers. Without mining the data further, it is hard to know where the truth lies.
naked capitalism: Redefault Rate on Mortgage Mods 55% Within Six Months.
In the history of loan payments, 6 months is not very long. However, the data does suggest that putting too much faith in loan modifications is not going to pan out unless:
- The modifications are done on a case by case basis and truly reflect the needs of that particular case.
- They are steep and significant enough to make a difference.
I had a potential customer contact me once who wanted me to refinance her house. She had an “option arm” that had ballooned to an 11% rate (we were currently at 6%. She wanted to keep her house, get a better rate and get a fixed rate.
I couldn’t do anything because she owes more than the house is worth. However, she was going to go back to the existing bank and attempt to persuade them to do a loan modification to drop her rate, not down to current market rates, but even just down to 8%. We figured it out and that would be more than enough for her to live comfortably and make her payments.
Why did I tell you her story? Because if a loan modification is steep enough and custom tailored enough to the individual means, it could work. If it’s a one size fits all, it won’t.
