Why Not More Mortgage Modifications?
Writing in the New York Times, Gretchen Morgenson notes that “Alan M. White, an assistant professor at the Valparaiso University law school in Indiana, analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo. The loans were written in 2005 through 2007; data on their performance is provided to the trusts’ investors. Mortgages handled by five of the nation’s largest loan servicing companies — Bank of America, Chase Home Finance and Litton Loan Servicing among them — are contained in the Wells Fargo data.
“Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.”
The numbers presented by Professor White raise some interesting questions. For instance, why are there so few modifications? How many of the “modifications” actually resulted in lower monthly costs and how many are “payment plans” with steeper monthly expenses? Also, of course, we have the biggie, how many of the borrowers actually made payments under the new loan terms?
Re-Defaults
there’s a tendency to believe that loan work-outs are inherently good and universally save homeowners from foreclosure. In fact, that’s just not the case. While some work-outs benefit borrowers, the dull reality is that most do not.
For instance, the Office of the Comptroller of the Currency reports that after six months more than half of the loans modified by Fannie Mae and Freddie Mac have re-defaulted. As to lower monthly costs, at least 25 percent of all modifications resulted in higher monthly costs for borrowers.
Notice that the OCC discusses loan modifications and not payment plans. Payment plans typically mean that a borrower can pay off a missing mortgage payment over time, say six months or a year. That money, of course, is added to the usual monthly payment, meaning that the borrower’s cost is higher than at the time of the original default.
For the full story from the New York Times, see: So Many Foreclosures, So Little Logic.
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