Unsustainable Mods

April 15, 2010

Treasury’s March report for the its mortgage modification program shows another uptick in the number of so-called “permanent” modifications. It’s a positive trend, sure, but still not much to celebrate.

Screen shot 2010-04-15 at 12.54.03 AM

The 231k borrowers that have received such mods represent only a fraction of total borrowers who are at-risk of default. Amherst Securities estimates that 7 million borrowers have already defaulted on their mortgage and another 5 million are at high risk of default.

But the bigger problem is that these “permanent” modifications are anything but permanent…

Screen shot 2010-04-15 at 12.53.22 AMAs you can see, relatively few borrowers are receiving principal forgiveness. Instead, most modifications rely on extend and pretend tactics like interest rate reductions and extended loan terms. Many loan modifications also simply add missed payments to the loan balance. Such tactics do nothing to solve the key problem of negative equity. Unless borrowers have skin in the game, they’ll have much less incentive to stay current.

The scarier stat is the so-called “back-end DTI” figure. At 61.3%, the average is up nearly 2% since last month.

This means that the average borrower receiving a “permanent” modification still faces total monthly debt payments — including home equity loans and all the other stuff mentioned in footnote 2 — amounting to 61.3% of monthly GROSS income. So even before taxes are taken out, nearly two-thirds of borrowers’ pay has to go to pay down debt, leaving little for other necessities.

The HAMP modification program only targets first mortgages for modification, and then only reduces payments on the first mortgage and other housing expenses to 31% of gross income. That’s high on its own, never mind all the other debt these borrowers are carrying. A program to modify second liens has launched, but won’t ramp up for a few months.

The bottom line is that HAMP mods are likely unsustainable. Expect many of these borrowers to re-default.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

“The American public will soon realize that all of these extent-and-pretend policies are for the banks’ benefit, not theirs. Social mood will darken further as the reality of further home price declines sink in, perhaps by September or October of this year.”
http://immoralhazard.housingstorm.com/20 10/04/14/the-pig-is-showing/

Posted by gregfielding | Report as abusive

This could just be because I’m fully anti-HOA, but if I’m a bank I’m looking for a reason why the HOA continues to get money when I’m taking a haircut.

Or, as a taxpayer, I’m wondering why money is being spent to entice banks to take a haircut when HOAs are still getting paid.

And car leases? Got to dump those. If you need your mortgage modified, you can make due with a nice affordable used car.

Posted by Beezlebufo | Report as abusive

“Expect many of these borrowers to re-default.”

Of course they will. If not the banks will simply turn around and lend them more. Has ANYTHING changed in the regulatory or business environment that discourages that type of activity?

Posted by ARJTurgot | Report as abusive

[…] Mortgages: carry on modding. […]

Posted by FT Alphaville » Further reading | Report as abusive