Interest Rate Roundup

Monday, December 08, 2008

Redefault rates in focus

John Dugan, Comptroller of the Currency, had some interesting comments earlier today that are worth highlighting. He notes that loan modifications aren't a panacea for foreclosure prevention for a simple reason -- many times, mods don't work. Borrowers often "re-default" even after getting some relief from their lenders. That's especially true in times like these when home prices are falling, unemployment is rising and many borrowers, quite frankly, just bought too much house.

Here is an excerpt from his comments below ...

"Of course, it stands to reason that the more mortgages that are modified, the fewer should result in foreclosure starts. But how true is that statement? In an attempt to shed light on this question, we collected a new data element in our Mortgage Metrics for the third quarter. Specifically, we asked our servicers to track the extent to which mortgage modifications earlier in the year were successful, in this sense: what percentage of borrowers re-defaulted on their mortgages after the modification was completed, and how quickly did they do so?

"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.

"I have a basic chart (AVAILABLE HERE) illustrating these numbers that we will post on our website with these remarks, and its upwardly sloping lines vividly demonstrate the monthly increases in re-default rates. Put simply, it shows that over half of mortgage modifications seemed not to be working after six months."


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