Feb102017
Nearly 75% of loan modifications fail within two years
Loan modifications always had high failure rates, but modifications since 2014 fared worse than bubble-era loan mods.
Every attempted loan modification delays a foreclosure, keeps an overextended borrower in a state of debt servitude, artificially props up home prices, and keeps much-needed supply off the market. Perhaps it wouldn’t be so bad if the attempts to modify loans succeeded at high rates, but the truth is that they don’t. Nearly 75% of loans modified fail within two years.
The public good served by these loan modifications is not readily apparent. At first, the banks did this just to survive the downturn. Then it became a political necessity as millions of people lost their homes. Now, it only serves the sense of entitlement of overextended borrowers to get a break on their loans so they can spend money on other things.
It’s time to rethink and rescind the loan modification entitlement.
Risky Business? New Loan Mods Re-default at Higher Rates
Rawan Shishakly, February 9, 2017
Analysts at Fitch have found that loans modified after 2014 have higher re-default rates. The data was published was part of the company’s “Historical Modification Data Review” which analyzed Fannie Mae’s dataset for modified single-family mortgages. The dataset contained 700,000 loans and a $135 billion balance. Of these, 448,000 loans were still active with an outstanding balance of $75 billion.
Based on the data being collected since 2009, there is a strong tie between new loan modification and higher re-default rates. Analysts found that loans modified after 2014 have higher re-default rates, with 2015 being the highest since 2010. The report cites weak credit attributes as a possible cause for the spike since the average FICO score was only 592. These loans re-defaulted quickly after modification. Seventy-five percent of them within the first two years alone.
Do you believe realtors when they say lending standards are too tight? FICO scores averaging 592? Seventy-Five percent redefault rates? No wonder lenders haven’t been keen on the idea of lowering standards further.
Traditionally, loan-to-value (LTV) ratios and credit scores are risk predictors, but the report stated that “loan modification terms play a significant role and there is direct correlation between the amount of the payment reduction and re-default rates. Borrowers who received multiple modifications have higher re-default rates.”
This has been a huge problem with loan modifications from the beginning. If the banks raise the standard of entitlement allowed under the loan modification program, more people will qualify — and more people will be sustaining their indulgences on via a loan modification.
The standards of what constitutes discretionary spending from essential spending depends greatly on the the spender’s sense of entitlement.
Personally, I really like to play golf. I don’t spend the $150 per week I would like to on golf because it isn’t an entitlement, and I can’t afford to treat it as one. However, if I were a loanowner, and if my sense of entitlement made it right, I could consider my weekly round of golf an essential. Since this entitlement creates a hardship for me, I can petition my lender for a break on my loan payments. After all, their loan payment is discretionary spending and the bank is picking up the cost.
Do you see the problem? Everyone draws their own conclusions about what is essential and what is discretionary.
It isn’t just lenders and borrowers that pay a price for failed loan modifications. New buyers pay the price through low inventory and higher home prices. Where is the justice in that?
Average asking rent hits $1,800 a month in Orange County
Rents ticked up across Southern California in the fourth quarter of 2016 as limited vacancies kept demand high, according to property data firm Reis Inc.
In all, 2016 marked the sixth straight year of steady rent hikes in the region, reports by Reis and others show. Apartment rents are up 15 to 25 percent since 2011.
Orange County tenants paid the 10th highest apartment rent among key U.S. metro areas in the final quarter of 2016, with landlords asking an average of $1,799 a month for a vacant unit, Reis reported.
The monthly rent increased $44 from a year earlier, an increase of 2.5 percent.
Los Angeles County tenants paid the 11th-highest rent among the 82 major U.S. metro areas covered by Reis. The average asking rent there was $1,775 a month, up $85 a month or 5 percent year over year.
In the Inland Empire counties of Riverside and San Bernardino, asking rents were $1,262 a month in the fourth quarter of 2016, an increase of $59 a month or 4.9 percent from a year earlier, Reis figures show. The average rent paid there ranked 24th highest among the 82 U.S. metros Reis tracks.
Banks used to be lenders, primarily. Now, they’re borrowers.
As a result, it’s in the best interest of the banks (not the debtors) to do mort loan mods; ie., banks use the mort loans as collateral to borrow short.
Problem is, when the mort loan goes bad, the underlying debt is extinguished…
AKA, the banks collateral. OOPS!
A Secret of Many Urban 20-Somethings: Their Parents Help With the Rent
Almost half of people in their early 20s have a secret, one they don’t usually share even with friends: Their parents help them pay the rent.
Moving into adulthood has never been easy, but America’s rapidly changing labor market is making it harder to find economic security at a young age. Skilled work is increasingly concentrated in high-rent metropolitan areas, so more young people are tapping into their parents’ bank accounts.
According to surveys that track young people through their first decade of adulthood, about 40 percent of 22-, 23- and 24-year-olds receive some financial assistance from their parents for living expenses. Among those who get help, the average amount is about $3,000 a year.
It’s a stark reminder that social and economic mobility continues past grade school, high school and even college. Economic advantages continue well into the opening chapters of adulthood, a time when young people are making big personal investments that typically lead to higher incomes but can be hard to pay for.
Continue reading the main story
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The amount of help that parents provide varies by career and geography. Among young people who aspire to have a career in art and design, 53 percent get rent money from their parents. Young people who live in urban centers are more likely to have their parents help pay the rent.
The average amount of parental help for the 20-somethings — roughly $250 a month — covers 29 percent of the median monthly housing costs in America’s metro areas.
The choice of career path matters. Those in the art and design fields get the most help, an average of $3,600 a year. People who work in farming, construction, retail and personal services get the least.
Here’s what everybody is getting wrong about changes to banking rules
President Donald Trump issued an executive order Friday afternoon directing the Treasury secretary to submit a report on recommended changes to bank regulations in 120 days, and while the details of the order aren’t yet known, experts are confidently making a few predictions.
The first thing to know about the changes ahead for banks is that they won’t be tailored to let big Wall Street institutions go back to the high-risk practices that triggered the financial crisis.
Rather, the moves will take place more around the edges — cutting compliance costs, freeing up community and regional banks from the same rules as their bulge-bracket peers, and helping out investment advisors who believe they’ve been targeted unfairly.
The second thing to know about the changes is no one is repealing Dodd-Frank, a term that has become shorthand for the omnibus rules put into place since the crisis.
Getting rid of the entire law would be far too onerous for a $16 trillion industry that already has implemented many of the measures. Unlike the effort to repeal the Affordable Care Act — Obamacare — there’s little support for scrapping the entire reform package.
The third thing to know is that those provisions that will change in Dodd-Frank won’t go down without a fight.
While Trump can roll back some measures through executive order, there are other provisions that will have to go through the same legislative process that created the law. The president can’t simply void a law he doesn’t like. Bottom line: major changes to the financial industry are going to take time.
“The promises have been to simplify Dodd-Frank. It will probably be difficult to repeal it,” said John Berlau, senior fellow at the Competitive Enterprise Institute, a libertarian think tank. “What has been discussed is to make the playing field a little bit more even” between large institutions and smaller ones.
If the market has a shortage of low-end home and a glut of high-end homes, doesn’t that strongly suggest the entire market is simply overpriced?
A Mismatch of Home Buyers and Sellers Points to Pain This Year
Data suggests there is a significant and growing shortage of lower-priced homes and a glut of high-end ones
The divide between the prices of homes Americans want to buy and the inventory of such homes is growing, suggesting first-time home buyers and high-end sellers might have a difficult year ahead of them.
Across the U.S., 27% of online home searches in the fourth quarter were for starter homes, but only 21% of listings were in that price range, according to Trulia, a real-estate information company.
Meanwhile, just 44% of searches were for luxury listings, while 55% of home listings were priced at the high end.
The findings point to a critical imbalance in the market: There is a significant and growing shortage of lower-priced homes and a glut of high-end ones.
The result is likely to be swiftly rising prices at the low end and challenges for first-time buyers, and sluggish price increases and lingering listings at the top end.
Sales of new and existing homes were slow in December, in part because of a shortage of inventory at prices buyers can afford. Even as the economy strengthens and first-time buyers appear to be coming back into the market, they are being confronted with an abundance of listings they can’t afford and few they can.
“The big, high-level takeaway is that most Americans are looking for a starter or trade-up home but there are a ton of premium homes on the market,” said Felipe Chacon, a housing analyst at Trulia.
Yes, the entire market is overpriced. I also think that this article properly identifies how this new bubble is truly a bubble, whether it was generated by the same prior forces or not. Imagine a bubble in bubble wrap. If you press your finger on the left portion of the bubble, it flattens while the right side inflates further. At some point the force will break the bubble and return to equilibrium… or all of the market manipulation needs to continue to balance its downward pressure on the low end with the upward pressure on the high end. That seems a bit tough with all of the changes coming around the bend.
Very true! As an owner of a starter home, looking for a trade up home, the current market is very frustrating. There are so little suitable choices in the trade-up market we are reluctant to sell our home without more choices and better chances of landing the trade up home.
Loan modifications are for the banks benefit only to keep the buyer paying something. Its all about the banks….not the public
Larry says: Nearly 75% of loans modified fail within two years.
The Fitch report says: More than 75% of re-defaults occur in the first two years after modification
See the difference?
According to the report, only 25% of standard mods and 17% of HAMP mods re-defaulted within 2 years. (See the first chart on page 6 ‘Cumulative Default Rate by Modification Program’ and look at 24 months since modification.)
Since 2014, only 20% of all mods have failed within the first 2 years. (See the second chart on page 6 ‘Cumulative Default Rate by Modification Year’. Look at the plot for 2014 at 24 months.)
http://www.dsnews.com/wp-content/uploads/2017/02/Risk-Growing-in-Mortgage-Loan-Modifications.pdf
So take the conclusions Larry came to in this blog post and reverse them. That is the policy we should be embracing and embarking upon.