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: CL&P Blog

New Study on Mortgage Modifications

By Alan White

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By Alan White

I have just posted a paper on SSRN reporting on loan-level mortgage modification data from subprime mortgage servicer monthly reports. The gist is that voluntary mortgage modifications are not reducing principal debt, and are in fact increasing it, and that many modifications are not even reducing monthly payments. In addition, whether a homeowner gets a modification, and what kind they get, depends a great deal on who their servicer is.

The data in the report covers about 100,000 subprime mortgages, about 4,000 of which were modified in the last twelve months. The most common modifications are interest rate reductions to reduce the payment, interest rate freezes on ARMs, and recasting of arrears and reamortization, which increases principal debt and monthly payments.

From July 2007 to June 2008 losses on foreclosure sales have steadily increased, month after month, while the number of mortgages paid in full through refinancing and sale have dwindled to the point that foreclosure sales exceed the number of prepayments. The combined effect of all this is that subprime mortgages, which used to last only 3 to 5 years, will now take many more years before they are foreclosed or paid off, leaving homeowners with debt in excess of home values and payments in excess of their repayment ability, and needlessly prolonging the crisis.

The abstract is in the continuation of the post.

The 2007 subprime mortgage crisis resulted in home foreclosures at unprecedented levels, and calls for government action. The Bush Administration's response relied primarily on exhorting the mortgage industry to voluntarily modify the terms of existing mortgages to help struggling homeowners reduce their debt burden and bring mortgage debt in line with declining home values. Industry reports have tallied the rapid increase in voluntarily negotiated workouts, without specifying what the terms of those workouts have been.

To better understand the effectiveness of the voluntary mortgage crisis resolution plan, this paper reports detailed empirical information from a newly-created database. Loan-level information on the number and type of negotiated mortgage modifications was compiled from monthly servicer remittance reports from July 2007 through June 2008 for twenty-six mortgage loan pools.

The data show that while the number of modifications rose rapidly during the crisis, mortgage modifications in the aggregate are not reducing subprime mortgage debt. Mortgage modifications rarely if ever reduced principal debt, and in many cases increased the debt. Nor are modification agreements uniformly reducing payment burdens on households. About half of all loan modifications resulted in a reduced monthly payment, while many modifications actually increased the monthly payment. Finally, there is tremendous variation in the extent, if any, of payment relief offered by different mortgage servicers.

The combined effect of dwindling refinancing activity and modifications that do not write down mortgage debt, and in many cases do not even reduce monthly payments, is to delay, but not prevent, large numbers of foreclosures. Given the continuing accumulation of loans in the foreclosure and real-estate-owned categories, the subprime crisis will be worked out only over many years through painstakingly slow repayment, foreclosure and disposition of properties.

Full post as published by CL&P Blog on August 27, 2008 (boomark / email).