Modified mortgage loans default again

December 8, 2008

The stock market is very optimistic that within about six months, we’ll be over with this crisis. The crisis may need go away at some stage later this year, but stagnation, and perhaps even contraction will remain with us for quite a longer while. I detailed the reasons for that in a previous post, but the belief that the government’s takeover of the US economy by becoming the main creditor of the US consumer and the corporate sector will resurrect a healthy economy is superstitious. If socialistic economies were that prosperous, the whole world would have gladly followed the USSR – into oblivion.

An argument Bloomberg makes today is that many companies hold so much cash or cash equivalents that buying stocks now allows a speculator free and immedite profit. Prudent invdividuals will not be overtaken by that suggestion by countering that there’s a reason for the existence of these firms’ cash hoards: they have no confidence in the future, they have no investment plans, and they are very worried about their own survivability. The fact is that this mentality can indeed create magnificent bargains under the right circumstances, but most of the time it will create large holes in the investors pockets.

What can be said with some confidence, in my opinion, is that we’re very far from being in a healthy investing environment. Valuations are suffering revisions quite often, and the life span of any firm is much shorter than it was only 13-15 months ago. It’s certain that the economy will suffer muchmwore before it will be able to grow again in  meaningful manner, and we also know that risks are still extremely high, with rewards only modest, when averaged for a portfolio. More importantly, there’s no need to hurry at the moment. Liquidity is gone for a very long time, and the market simply has no potential to create any bubbles.  Patient people will prosper.

Just to sober us all, here’s a report from Bloomberg today:

Most U.S. mortgages modified in a voluntary effort to keep struggling borrowers in their homes and stem foreclosures fell back into delinquency within six months, the chief regulator of national banks said.

Almost 53 percent of borrowers whose loans were modified in the first quarter were more than 30 days overdue by the third quarter, John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency, said today at a housing conference in Washington.

“The results, I confess, were somewhat surprising, and I say that not in a good way,” Dugan said, citing a third-quarter survey his agency plans to release next week.

Lenders and loan-servicing companies have been modifying mortgages by lowering interest rates or creating repayment plans through the voluntary Hope Now Alliance. The group, which includes Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., said last month it helped 225,000 borrowers keep their homes in October.

Foreclosures rose to a record in the third quarter as one in 10 U.S. homeowners fell behind on payments or were in foreclosure, the Mortgage Bankers Association said last week.

“Our third-quarter report will show many of the same disturbing trends as other recent mortgage reports,” Dugan said. “Credit quality continued to decline across the board, with delinquencies increasing for subprime, Alt-A and prime mortgages.”

The OCC’s survey represents institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion, Dugan said.

‘More Questions’

The data “raises more questions than answers because it fails to define, in any meaningful way, the modifications that have re-defaulted,” Federal Deposit Insurance Corp. Chairman Sheila Bair said in a statement.

The lack of detail makes it tough to distinguish “re- default rates of sustainable modifications versus cosmetic modifications that by their nature are more likely to re- default,” said Bair, who has proposed using $24 billion from the U.S. Treasury’s $700 billion financial-rescue package to modify 1.5 million mortgages through the end of 2009.

Dugan’s figures reflect a failed focus on interest rates in loan modifications, House Financial Services Committee Chairman Barney Frank said today in a Bloomberg Television interview. If companies were to cut the amount owed on mortgages, borrowers would be less likely to default again, Frank said.

“The people who made the bad loans or bought the bad loans from others need to realize” that they would be better off with principal reductions than with foreclosure, the Massachusetts Democrat said.

Foreclosure ‘Timeout’

New Jersey Governor Jon Corzine, speaking at the conference earlier today, urged a three- to six-month “timeout” on foreclosures, saying keeping people in their homes is necessary to correct a “deeply troubled” market.

“Housing markets and mortgage-finance markets are the fuel for this problem,” said Corzine, a Democrat and former chairman of Goldman Sachs Group Inc. “We need a systematic protocol and process.”

John Reich, director of the Office of Thrift Supervision, questioned whether the federal government should be more involved in foreclosure prevention.

“I do have a concern of allocating government resources with such a high rate of re-default,” said Reich, whose agency sponsored today’s National Housing conference


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