Reworked Mortgages Have Huge Default Rate

Published April 1, 2009

Six months after having their mortgages reworked as part of a government effort to reduce the number of foreclosures and firm up the housing market, more than half the homeowners affected are back in default, according to independent analysts and John Dugan, U.S. Comptroller of the Currency.

“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,” Dugan said in December at the Office of Thrift Supervision’s National Housing Forum. Mortgage analysts have since been trying to explain the high default rate.

Jeffrey Taylor of Digital Risk LLC, a firm specializing in forensic verification of mortgage information, told Fox Business News consumers may be struggling with new priorities.

“Maybe they made a lifestyle decision versus a financial commitment to buy a house, which means sacrifices and giving up other things,” Taylor said of the redefaulting borrowers. “So where they are right now, apparently, is they’re trying to figure out what they want to assign value to: Making that monthly payment or maybe trying to keep up with their current lifestyle and other obligations.”

Lifestyle Over Finances?

Peter Tatian, senior research associate and housing expert at the Urban Institute, said the high redefault rate “is a very discouraging result. We need to look more closely at the types of loan modifications that we’re doing and see what could be done for people in the future. It might be that in a lot of cases people who are having difficulty paying mortgages have some event, such as a job loss, and their income has changed.”

Bob Davis, executive vice president of the American Bankers Association, agreed the major factors in defaults “are job loss, illness, and divorce.” With the unemployment rate climbing, more people are losing jobs and unable to make mortgage payments, he said.

Davis added, though, “The single biggest indicator of future default is past default, because this is behavioral.”

Davis cautioned the situation might not be as bad as Dugan’s report suggests.

“Those numbers were for a number of mortgages, some of which were not really modifications,” Davis said. “Some were payment plans, some were modified in minor ways” that did not significantly reduce the financial burden.

Causes Still Unknown

That is all speculation, though, as no one knows the cause of the high redefault rates, according to Dugan.

“Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers?” Dugan said at the December forum. “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?”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.