Re-defaults are high after mortgage modifications
More than half of mortgages modified in a bid to avoid foreclosure fell delinquent within six months, a top U.S. banking regulator said Monday, casting doubt on a proposal to rewrite home loans en masse.
Comptroller of the Currency John Dugan said it is unclear why so many borrowers ran into trouble again so soon after getting help, and that raises questions about how policymakers should address loan modifications.
“Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt?” Dugan said at a housing conference in Washington organized by the Office of Thrift Supervision.
“Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”
The crumbling housing market is at the heart of the financial crisis that tipped the United States into recession and dragged down the global economy, and regulators are scrambling to find a way to limit foreclosures.
Sheila Bair, chairman of the Federal Deposit Insurance Corp, has been a big proponent of a home loan modification program that would encourage lenders to rework a greater number of mortgages by pledging public money to share the cost of defaults on restructured loans.
However, Dugan’s figures suggested that the cost to taxpayers may be high. He said his data showed that of mortgages that were modified in the first three months of 2008, nearly 36% had re-defaulted after three months, and almost 53% were behind on payments by six months.
These people lived far beyond their means. Dropping the monthly payments isn’t likely to help greatly as the banks are going to be incentivized to keep payments higher otherwise the mortgage would be spread out possibly over several decades. One should not ignore too that those with mortgages are incentivized not to worry much about keeping payments up to date given the bailout mentality currently running rampant. Why bother paying my mortgage when if I default the government will step in and take on the high risk, low return debt and refinance it to something ridiculously low? The system is entirely incentivized to fail… the fact it works at all is a testament to the market and some people’s personal responsibility.
