Tuesday, July 14, 2009

Modified Loans Plan By Obama's Administration Not Working

As the tables below show, loan mods seem to lead to subsequent default with distressing regularity. They illustrate the fundamental flaw in the notion, widely embraced, not least by the Obama administration, that loan modification is salvation for troubled homeowners, beleaguered builders and lenders. Loan mods are designed to keep the unpaid principal balances of the lender’s loans intact while re-levering the borrower. Mortgage modifications turn homeowners into underwater, over levered renters for life, unable to sell, re-buy, refinance, shop or save. They turn homeowners into economic zombies. On the left we see the re-default rates of homeowners who were current on their loans when they first defaulted (sounds odd, I know, but these tend to be people who can afford their homes but who subsequently ran into economic problems). The data tells us how many of them have defaulted again 10 months after their loans were modified.

The adjacent table (at right) shows the same thing, only this time with homeowers who were seriously delinquent prior to loan mods. As you would imagine, their re-default rates 10 months after their loans were modified are considerably higher. These are often the people who could barely afford their home (or not at all).

What was significant was those who were not in default (i.e. current) prior to the rush to modify loans, whereby they then took up the offer to modify their loans to either lower their monthly payments or take advantage of lower rates - their subsequent default rates were exceptionally high as well.

The other point to note is that while the default rates are high, they are so because unemployment continued to rise over the last 9 months, and while there has been some recovery in house prices of late, for most of the year house prices has been dwindling down as well. Thus the default rates are understandable to a large extent.

What this shows is that as well intended as Obama's plans were to start with, it needs to be accompanied by a a substantive recovery in economic activity and employment for the plans to work well.


Loan Mods Default Rates



p/s photos: Kim Hee Sun

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