Will Re-Defaults Of Mortgage Modifications Undermine Housing Markets?Advisor Perspectives
Much has been written about residential mortgage modifications, yet hardly anything has been said about the problem of re-defaults on modified mortgages. In large part, this is due to the paucity of accurate data about borrowers re-defaulting. It is time to clearly lay out how extensive this problem really is, what it means for mortgage markets and the dangers it poses for investors.
The basics of mortgage modifications
Millions of borrowers having trouble making regular mortgage payments have been given a mortgage modification by the servicer as an alternative to foreclosure. In their latest report, the consortium known as HOPE NOW shows a cumulative total of 8.4 million permanent modifications since the end of 2007. This includes the government’s HAMP modification program begun in 2009, proprietary modifications offered by non-government lenders and the GSEs’ modification programs.
Under a modification, permanent changes are made to the original mortgage via 1) reductions in the interest rate; 2) stretching out of the amortization period; 3) adding the interest arrears to the principal owed (known as capitalization); or 4) reduction in the principal amount owed.
Although this is a lot of foreclosure avoidance, it does not include any of the temporary solutions offered by lenders. The two main ones are known as forbearances and repayment plans. Millions of borrowers who may not qualify for a permanent modification have been provided a temporary reduction or deferment of the scheduled payment until their financial condition improves.
How many temporary solutions have been granted? HOPE NOW reports a cumulative total of 16.4 million under the category “other workout plans.” These temporary plans are not reported under modification data. Unlike a permanent modification, these temporary plans do not change the terms of the original mortgage. They merely defer or reduce the monthly payments until the borrower’s financial condition improves. As with permanent modifications, the borrowers given temporary workout plans are considered current. Take a good look at this HOPE NOW table to see what I am talking about.
What is the big deal?
Some of you may wonder why this modification re-default matter is important. Fair enough. Let me explain. In 2009, regulators such as the FDIC had become terrified that the housing and commercial real estate collapse might engulf the entire financial system. So they encouraged mortgage lenders and their servicers to find alternatives to foreclosure of seriously delinquent borrowers. As early as 2009, more than 1.2 million permanent modifications had been initiated. That number grew to 1.75 million in 2010 – the peak year of modifications.
2010 was also the peak year for completed foreclosures – slightly more than one million. As home prices continued their sharp decline in 2009 and 2010, panicked lenders and their servicers decided that they could stop the bleeding if they drastically reduced the number of repossessed properties placed on the active housing market. That is exactly what happened.
Read the full article here by Keith Jurow, Advisor Perspectives