Banking Law

Housing Wire today ran a story that discloses additional evidence that the federal government's push to modify loans as a means to keep borrowers in their homes and, eventually, stop the downward spiral of housing prices, is working as well as many of us thought it would. In other words, it isn't working well at all.

Fitch Ratings is joining a growing chorus of voices that say the recent refi deluge will not likely stave off an eventual mortgage re-default for the majority of takers.

Auction companies HousingWire is speaking to for its July 2009 feature on the topic are predicting the same outcome.

Fitch?s conclusion is outlined in a just-released report citing ?information from servicers? as well as data from First American Loan Performance, which finds that re-defaults, 60 days or more, on U.S. residential mortgage-backed securities (RMBS) may hit 75% after 12 months.

Nonetheless, the rate of loan modification continues to increase with 7% of overall RMBS and 18% of subprime loans being redrafted through the end of last month.

?Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses,? says Fitch managing director Diane Pendley. ?With continued home value declines in many  markets, there is  growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay.?

The rating agency list six clear scenarios where re-defaults are likely to occur, including simple events, such as moving town for a new job and just leaving the property unoccupied to more shady instances where borrowers misrepresent owner-occupancy status in order to meet criteria for the Home Affordable Modification Program.

The Wall Street Journal (paid subscription required) also discussed another interesting finding by Fitch.

The Fitch report also raised questions about whether a decrease in a home-loan amount, known as principal reductions, is an optimal loan modification. Some mortgage-loan experts believe that the best way to help borrowers is to reduce the principal amount owed. The Fitch report found that loans that had decreased principal amounts, including by more than 20%, were still redefaulting in a range of 30% to 40% after 12 months.

When the dust finally settles, I wonder if we'll find that all these efforts to engage in "systematic loan modifications" did was to prolong the agony of many borrowers, increase losses to lenders, and delay the ultimate recovery of the residential real estate market? I'm not optimistic that we'll ever get an objective analysis of the issue, since so many powerful interests at the federal level have so much skin in the game. The spinning of the statistics will make a normal person dizzy, I assume.

Housing Wire's editor, Paul Jackson, has often observed that it does little good to modify a loan if the borrower's out of a job and can't afford any reasonable monthly payment, if the borrowers have so much other debt to service that they're doomed to insolvency no matter what adjustment is made to the amount of the monthly loan payment, or if the lender is dealing with the type of borrower who will walk away from a property that is "underwater" (whether or not the home loan payment is "affordable"). Fitch's latest data makes Paul look prescient.