Loan modification can-kicking went to extremes
The mainstream media housing market cheerleaders have been touting the declining delinquency rates as a sign of market health. As I recently pointed out, contrary to media spin, mortgage delinquencies are trending higher. We know that lenders don’t want to foreclose and recognize losses, particularly since banks are still exposed to $1 trillion in unsecured mortgage debt. If they were forced to write down the losses on their bad loans or approve too many short sales, the losses would drive them out of business — either that, or we would have another massive government bailout to deal with.
The only way lenders can avoid recognizing losses is to avoid foreclosure and deny short sales until prices rise back to bubble-era heights were sellers can get out without taking a loss. To this end, lenders engineered a dramatic shortage of for-sale product on the MLS by stopping foreclosure proceedings and encouraging underwater loanowners not to sell, often by denying their requests by insisting on full repayment. The lack of MLS inventory is forcing active buyers to bid up prices — rapidly — and restoring collateral value behind the lender’s bad loans. Once prices rise high enough that loanowers are not underwater, many will opt to sell to get out from under their excessive debt burdens, and many will be prompted to sell by lenders as the loan modification entitlement is rescinded as prices near the peak.
Unfortunately, if lenders simply stop foreclosure — which they have — it provides a huge incentive for struggling homeowners to strategically default to receive free housing, in which case lenders don’t receive any payments on their loans. In order to obtain some income from distressed borrowers, lenders developed elaborate loan modification programs, often with terms eerily similar to the toxic loan products of the housing bubble. Many loanowners signed up for these loan modifications because they wanted to keep their family homes. When prices started going up, many more signed up for loan modifications because they had a faint hope of future equity.
Pretending to care much whether or not loanowners stay in their homes is good for public relations, but lenders really only care that the borrower pay something on the loan long enough for prices to rise high enough for lenders to avoid a loss. Lenders are eager to buy time and get some income from these loans while they wait. Loan modifications are can-kicking, nothing more.
Lenders have low expectations for the success of loan modifications. Stable loans have delinquency rates of around 5% and cure rates are very high, 90% or higher. Loan modifications have default rates of 40% or higher, and cure rates are very low. Many loans have been modified two or three times.
Last year I reported that Loan modification defaults soar 24% as can-kicking fails. Despite the dismal failure of loan modifications by any traditional metric, lenders have increased the use of them and lowered standards to qualify even more borrowers. As a result, loan modification delinquency rates continue to soar.
Troubled homeowners who received modified mortgages through a federal program are seeing high default rates, a troubling trend that officials inadequately understand, according to an investigator’s report released Wednesday.
The oldest permanent modifications made through the federal Home Affordable Modification Program, which launched in 2009, were redefaulting at a rate of 46.1% as of March 31, according to the report from the special inspector general overseeing the Treasury Department’s efforts to shore up the U.S. financial system. HAMP’s permanent modifications from 2010 have redefault rates ranging from 28.9% to 37.6%.
“The number of homeowners who have redefaulted on a HAMP permanent mortgage modification is increasing at an alarming rate,” the report said. “Treasury’s data shows that the longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program.”
Even buyers from 2011 are receiving loan modifications and redefaulting at rates greater than 10%. The 2008 vintages are redefaulting at rates higher than 55%!
Unfortunately, Treasury officials have an insufficient understanding of factors behind failures, according to the report.
“Better knowledge of the characteristics of the loan, the homeowners, the servicer, or the modification, more prone to redefault will increase Treasury’s understanding of the underlying problems that cause redefaults and provide Treasury an opportunity to address these issues proactively,” the inspector general said. …
Let me help them increase their understanding: THE BORROWERS CAN’T AFFORD THE HOUSES THEY OCCUPY. Is that really so difficult to understand? Even with temporarily modified loan terms, the borrowers can’t afford the debts they have, and neither the banks or the government can afford the write those debts down, and even if they could, it would be a terrible idea laden with moral hazard. These borrowers need to move on. Foreclosure or short sale would release them from their misery, but the banks can’t afford that either. It’s quite a mess.
When Treasury launched HAMP, officials said the program could help 3 million to 4 million at-risk homeowners avoid foreclosure. However, as of March 31, only about 2 million HAMP modifications had been started, and 54% of these have been cancelled, according to the report.
There’s a track record of success… not.
Doubling down on a failed idea
Late last year I quipped that Banks went “all in” betting on success of loan modifications. So far the only measure of success has been the length of time they’ve been able to kick the can. Based on the sky-high default rates, borrowers haven’t been succeeding at all. Undaunted by their dismal failure, the GSEs have also stopped foreclosing and opted for loan modifications instead. What small improvement we have seen in the overall delinquency rate over the last year is due to a change in policy at the GSEs.
Increasing participation in a failed venture is never a good idea. However, the GSEs are going to really open the floodgates to loan modifications by eliminating documentation requirements.
Starting July 1, large numbers of non-paying borrowers will have the opportunity to modify existing mortgages through a more streamlined process. …
According to the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac will offer “a new, simplified loan modification initiative” to borrowers who are at least 90 days late with their mortgage payments. Modifications can include a lower rate, a loan term stretched to 40 years and principal forbearance in some cases.
“The loan,” says FHFA, “must be owned or guaranteed by Fannie Mae or Freddie Mac. Homeowners must be 90 days to 24 months delinquent, and have a first-lien mortgage that is at least 12 months old with a loan-to-value ratio equal to or greater than 80 percent. Loans that have been modified at least two times previously are not eligible.” …
If the loan only has to be 12 months old, that even allows people who bought in 2012 to get a loan mod. Why would they need one? We’ve been told recent loan vintages were underwritten with better standards. Was that a lie as well?
… the bottom line is that documentation is no longer required. … eliminating the requirement for these homeowners to show they have a financial hardship before entering the trial modification period creates a moral hazard.Those who can afford to make their current mortgage payment will be rewarded if they strategically default, in which case they can qualify for a program in which their new monthly payment is lower. The end result: Fannie and Freddie—and ultimately taxpayers—get a lower rate of return on a loan without any evidence that lowering that rate of return was necessary.
The reason given for eliminating the hardship documentation requirement: it “eliminates the administrative barriers with document collection and evaluation.”
Sounds more like a rationalization for cutting corners rather than a solid defense of doing what is right for the American taxpayer.
This new policy will cause a rash of new defaults as people quit paying their mortgages to qualify for the program. In the end, it will bring default rates down as new modifications are granted, but as Daren points out, it will do so at tremendous cost to taxpayers.
You are being fleeced by banks and loanowners yet again.