Re-Default Rates Continue to Plague Mortgage Industry

30 Sep Re-Default Rates Continue to Plague Mortgage Industry

The mortgage industry and government continue to push loan modifications as a way of saving homes. The Treasury Department released a report showing how that program is working out.

The short answer is that it is muddling through. The Office of Comptroller of the Currency reported that 8.5% of all mortgages are now delinquent and almost 3% are in foreclosure. In step with this increase in defaults, more loan modifications are being done, and more of them include reductions of principal and interest payments. And the rate of re-default after a loan modification is worked out still appears to be running between 1/3rd and 1/2 of all work-our deals. Of course that means a very large number of home loans, when reasonably modified, are in fact performing too.

Part of the problem is of course that even where the servicer reduces the payments, the reduction may not be sufficient to actually get the homeowner’s budget back to breaking even, if they’ve suffered a layoff or cut in hours. Without actually re-writing the loan to make it affordable under current economic conditions, a large part of these loans are nothing more than a delaying action.

And as often as not, the reduction in payments is only temporary and does not give the consumer any reduction in actual principal. The consumer will be several more years away from accruing any real equity in the property which in turn makes it less likely they will view owning a home as more valuable than simply renting somewhere else. Thus, many re-defaults may simply be a rational consumer paying until they can find a cheaper rental then moving on. That’s the way a rational economic actor is supposed to behave.

And it’s only reasonable given that many loan modifications are only temporary deals which might give the consumer a chance to find more income to make the payment when it bounces up again. But such deal also have the effect of keeping some more property off the market for awhile longer and keep the servicers from bearing the costs of maintaining them. In a sense, such deals are a cheap way for the servicers to leave someone else to care for their inventory until they’re ready to take it and sell it. Call it “just in time” foreclosure planning.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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