Half of Loan Modifications Fail

[Parsad]

Over half of the delinquent home owners that received loan modifications defaulted nine months later.  Cheers!

 

http://www.bloomberg.com/apps/news?pid=20601010&sid=aVYxPZ56vjys

[nodnub]

This is really interesting headline, but I don't feel this article is up to snuff.  I have a feeling there is a lot more to this story.  I see "principal forebearance" mentioned but not principal reduction or forgiveness.  Tanta @ Calculated Risk wrote an article about the distinction a couple years ago.  

 

Until now, modification programs have focused on lowering interest rates.   If you have an underwater mortgage, it might still make sense for you to walk away -- even from a reduced rate. Especially if you started out with a 2 year teaser rate and just recently got hit with high rates in the last year or so.  The "new" lowered rate under the mortgage modification might still be higher than the teaser rate (which might have been all you could really afford).

 

If the incentives in the system are wrong, then it will not function as designed.

 

[Uccmal]

So - 45% or so have been successful.  If I was the bank and managed to avoid having to foreclose on 45/100 places then I would consider the first part of the program a success, especially when there is no actual write down involved.

 

I am guessing that foreclosure is a pretty expensive process, with legal fees, admin fees, real estate fees, and 65 C on the dollar for the final sale (estimate only).  By the time a bank is finished they are likely getting well less than 50 c/initial dollar - probably closer to 20-30%.   

 

The next and more obvious step is writing down the mortgage principal 20-30%, as per the Bank of America.  For the bank this of course costs a lot in write downs, but it keeps cash coming through the door and is almost certainly cheaper than total foreclosure.  It also keeps property taxes coming in for municipalities, which would be pretty important in California right now.