Banking Law

When I read Comptroller Dugan's remarks this morning about the rate of default recidivism by residential mortgage borrowers whose loans have been modified, my initial reaction was the same as Paul Jackson's of Housing Wire. Dugan had this to say about a soon-to-be -released study by the federal bank regulators:

The results, I confess, were somewhat surprising, and not in a good way. Take the loans that were modified in the first quarter of this year. After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent. The data is similar for mortgages modified in the second quarter: the re-default rate after three months was 39 percent, and after six months, 51 percent.



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Put simply, it shows that over half of mortgage modifications seemed not to be working after six months.

Jackson wasn't impressed by the regulators' surprise at these findings.

In other words, recidivism rates are right where they historically have been, despite growing pressure to ???do something??? about a growing number of foreclosures. Dugan characterized the results, however, as ???surprising??? for regulators.



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But the fact that regulators have been surprised by recidivism rates that are, frankly, about par for the course is telling insofar as it suggests that regulators have yet to really understand the crisis they are trying to solve.

???I want to know why Dugan and others are surprised by 50 percent redefaults,??? said one servicing manager that spoke with HousingWire. ???We???d have told them to expect it, if they???d asked.???

Anyone with experience in this space expects roughly 50 percent recidivism on loan modifications, various sources in the servicing side of the business said, give or take some wiggle room with differences in vintage and product type.

The fact that regulators were blindsided by these numbers seems likely to generate more cries for aggressive loan modifications, especially of the principal-forgiveness variety, from consumer groups and the government officials; but doing so entails huge moral hazard for lenders, and the very real risk that other borrowers currently performing on their notes will seek to default in order to lower their own mortgage balances.

While Paul intimates that the regulators' surprise indicates their firm grasp of mortgage industry ignorance (an intimation that the snark-meister in me yearns to embrace), I think the Comptroller is asking the right questions, and for a good reason.

The question is, why is the number of re-defaults so high? Is it because the modifications did not reduce monthly payments enough to be truly affordable to the

borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?

We don???t know the answers yet, but these are the types of questions that we have begun asking our servicers in detail. The answers are important, because they have

important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months. As that debate unfolds, we hope and expect that the data we glean from our Mortgage Metrics will provide a significant contribution towards finding solutions that will avoid needless foreclosures and help stabilize the housing market.

I suspect that when the Comptroller determines the answers to those questions, he'll have the ammunition he needs to show that the Sheila Bair-endorsed approach of across-the-board, systematic loan modifications will be shown to be what those in the mortgage business have known from the get-go: political theater, an exercise in public posturing that will have no substantive impact on keeping over-extended borrowers in their homes over the long haul, resolving the credit crisis, lessening the length or depth of the recession, or making silk purses out of sows' ears.

Then again, I could be wrong. By the time he obtains those answers, he may very well be back in private practice.