New data shows that more than half of the loans modified in the first quarter of 2008 became delinquent again within six months, ""Comptroller of the Currency John C. Dugan"":http://www.occ.gov/dugan.htm said at a national housing conference in Washington yesterday.
""After three months, nearly 36 percent of the borrowers had redefaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,"" the Comptroller said in his ""remarks"":http://www.occ.treas.gov/ftp/release/2008-142a.pdf at the ""
Office of Thrift Supervision's"":http://www.ots.gov/ (OTS's) Third Annual National Housing Forum.
During the first quarter of 2008, mortgage companies provided loan workouts for more than 500,000 borrowers who were struggling to make their monthly payments, based on industry figures from the ""HOPE NOW Alliance"":http://www.hopenow.com/media/press_releases/pdf/27-28_April%20Release.pdf. Even after modification, a majority of these borrowers have since missed at least one payment, putting them at renewed risk of foreclosure, according to a new report from the ""
Office of the Comptroller of the Currency"":http://www.occ.gov/index.htm (OCC), which will be released in full later this month.
A key question, Dugan said, is why is the number of redefaults so highx ""Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowersx Is it because consumers replaced lower mortgage payments with increased credit card debtx Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly paymentsx Or is it a combination of these and other factorsx"" Dugan asked.
According to Dugan, it is not possible to determine from the available data to what extent the borrowers were beyond help and to what extent mortgage companies were not trying hard enough to offer effective assistance. Dugan said his office is asking servicers for more details on the loans to determine what went wrong, and he said, the answers to all these questions ""have important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months.""
Dugan's remarks and the findings of the OCC study underscore the limited success the industry has had in reducing foreclosures by modifying mortgage loans, fueling both sides in the debate over whether a large-scale modification program will prove effective.
""Sheila Bair"":http://www.fdic.gov/about/learn/board/board.html#bair, chairman of the ""Federal Deposit Insurance Corporation"":http://www.fdic.gov (FDIC) also spoke at the housing forum panel discussion. A long-time crusader for a nationally-led loan modification system, Bair said, ""The quality of the modifications are not what they should be.""
Early efforts to restructure loans often consisted of simply tacking the missed payments and penalties on to the end of a loan, often resulting in higher monthly payments for the homeowner. Citing a recent Credit Suisse study, Bair noted that modifications which lower the interest rate have only a 15 percent redefault rate.
Last month, Bair unveiled a governmental plan to address the foreclosure crisis by modifying loans to as low as 31 percent of a borrower's gross monthly income, through interest rate reductions or by extending loan terms to 40 years. The plan was quickly shot down by the Bush Administration because it called for funding from the Treasury's Troubled Asset Relief Program (TARP). The idea has ""since been revived"":http://dsnews.comindex.php/home/news_story/2262 by ""
Federal Reserve Chairman Ben Bernanke"":http://www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm and Bair has dropped the TARP price tag for the program to $20 billion. It has also been reported that Bair is in talks with President-elect Barack Obama's transition team about funding her proposed loan guarantee program to facilitate loan modifications by banks.
""Rep. Barney Frank (D-Massachusetts)"":http://www.house.gov/frank, chairman of the House Financial Services Committee, said Monday that Congress will not give the Bush administration the $350 billion left in the $700 billion financial system bailout package unless loan modifications are part of the plan, according to a ""%{=FONT-STYLE: italic}CNN%"":http://www.cnn.com report.
However, other regulators contend that federal money may be better spent on economic stimulus and job creation since a growing number of foreclosures are caused by unemployment, and in such cases, loan modifications won't help, %{=FONT-STYLE: italic}CNN% said.
Dugan's remarks on Monday provided a preview of the second Mortgage Metrics Report to be published by his office and the OTS in December. The report is expected to show continued increases in delinquencies and foreclosures in process. However, Cougan noted, the report will show new foreclosures decreasing by 2.6 percent from the second quarter.