29 May 2009

loan modifications aren't helping anyone

Policy makers should abandon the clearly futile efforts of keeping struggling mortgage holders in their homes. The massive default rates on modified loans show that most of the people who run into financial trouble with their homes are unable to make payments even with assistance. It would be far better to just let these suffering debtors walk away from their homes, and find accommodations they can actually afford (which are usually better than what they had).

The only thing all these loan modifications accomplish is to waste everyone’s time and money (including the taxpayer, which is picking up much of the tab), while preventing the real-estate market from adjusting to more reasonable price levels.

Fitch found that a conservative projection was that between 65% and 75% of
modified subprime loans will fall delinquent by 60 days
or more within 12 months
of having been modified to keep the borrowers in their homes. This is an even
worse result than previous reports by federal regulators. Even loans whose
principal was reduced by as much as 20% were still redefaulting in a range of
30% to 40% after 12 months.

2 comments:

  1. Interesting!

    The loan modification process can be frustrating and confusing for many distressed homeowners. But you have to know what exactly is loan modification. A loan modification is a permanent change in one or more terms of a borrower's home loan.

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  2. A loan modification is a permanent change in one or more terms of a borrower's home loan.

    Yes, I understand that. However, the point I want to make is that a huge percentage of people who actually get modified loans only wind up going delinquent on their new modified mortgage. Some studies put the re-default rates at 50%, and some even go higher.

    I just don't see how it helps anyone to put a homeowner in a re-worked mortgage they are still going to be unable to pay (which statistics show is clearly the case).

    http://www.calculatedriskblog.com/2009/06/modifications-and-re-default.html

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