Monday, December 08, 2008

Dugan: High Re-Default Rates

by Bill McBride on 12/08/2008 11:34:00 AM

Comptroller of the Currency John C. Dugan spoke today about the high re-default rates on modified loans. From the press release:

Comptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months.

“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 Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today.
...
A key question, Mr. Dugan said, 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?”
Default rates for Modifided LoansClick on photo for larger image in a new window.

This graph shows the re-default rate by month for loans modified in Q1 and Q2 2008.

For loans modified in Q2 2008, over half are already in default.

Here is Dugan's speech.
In general, the third quarter report will show many of the same disturbing trends as other recent mortgage reports. Credit quality continued to decline across the board, with delinquencies increasing for subprime, alt-A, and prime mortgages – and the greatest increase in percentage terms was in prime mortgages. Similarly, total foreclosures in process increased, as did foreclosure sales, just as they had done in the previous quarter.

Not all the news is bad, however. Foreclosure starts actually decreased in the third quarter, by 2.6 percent. And not coincidentally, mortgage modifications increased: the total in the third quarter was nearly double what it was in the first quarter.

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.
emphasis added
The only good news is foreclosure starts are down (as reported by the MBA too), but the reason is modifications have increased - and a very large percentage of modified loans re-default very quickly. Also note the comment on prime loans - we're all subprime now!

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