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.
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?