Wednesday, February 11, 2009

What a Surprise, the Ability to Pay Matters on Mortgage Modifications, Too.

By Kathleen Keest on the Credit Slips:

Last week the Center for Responsible Lending posted a foreclosure ticker on its web site that counts projected new foreclosure filings as they occur: a new one every 13 seconds in 2009. That puts it at nearly 276,000 as I write this post. (You can check out your state’s share on the map.)

Cool as technology is, the figures are as depressing as the slow pace of response to the crisis is puzzling. In a December guest blog, Tara Twomey lifted the veil on the OCC’s report of disappointing re-default rates on modification. Professor Alan White’s analysis of remittance reports from loan servicers found that only 35% of modifications reduced the homeowner’s monthly payment, while 20% stayed the same. The largest share-- 45%--actually increased payments.

Yesterday, Fitch Ratings released a report that says (you heard it here first) "the key to a successful loan modification program is that the modification is sustainable." The modifications with 10-20% increases in principal and interest (P&I) payments had a 49% re-default rate within 6 months, more than double the re-default rate for modifications to a 20% or greater reduction in P&I payment (21%). Imagine that!

The Fitch report notes that payment reduction, at least so far, has a more direct impact on re-default than principal reduction. (They also, though, believe principal reductions that give homeowners equity are also likely to improve sustainability.) Fitch projects a high rate of re-defaults unless servicers start focusing more on – (ahem) – long-term ability to pay.

Seems that we’ve come full circle: Hey, guys, maybe you should think about whether people can make the payments when you originate the loan. Hey, guys, maybe you should think about whether they can make the payments when you try to fix the loan.

Should it really be this hard?

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