The Lighter Side of Deadbeats

After more than a year in action, the Home Affordable Modification Program is showing improvement on redefaults. But that improvement will turn out to be brief, and the details demonstrate how little impact the expensive program can ultimately have.

Redefault occurs when a delinquent borrower works with a bank to change the terms of a mortgage, but then after some period of time stops making payments again. It occurs in half of all modified loans, and the alarming rate of redefaults prompts interventionists like Laurie Goodman and Elizabeth Warren to call for more generous principal-reduction loan mods – the idea being that if you give enough money to demonstrated bad borrowers, eventually they will become responsible.

HAMP takes money from your pocket and uses it to mitigate the bank's loss when it modifies a loan. In some cases we're talking about serious reductions in principal balance and a 20 percent reduction in the bad borrower's monthly payment. According to the second quarter OCC/OTC Mortgage Metrics report, these are starting to bring the rate of redefaults under control. The Wall Street Journal reports:

Nearly 11% of borrowers whose loans were modified under the Home Affordable Modification Program, or HAMP, during the fourth quarter were at least 60 days delinquent after six months. That compares with a 22% re-default rate for borrowers with loans modified outside of HAMP.

That's not nothing, and the direct quarter-by-quarter comparisons show a definite comedown in delinquencies at the six-month mark -- though the change is substantial only for deadbeats who got haircuts of 20 percent or more.

But dig a little deeper into the report [pdf] and you will see how little meaning there is in a time frame of less than six months. Even loans that received the most charitable modifications start redefaulting at higher rates once you get out to a year or more, with most categories over 50 percent redefault rates at the 12-month mark. The category of de jure government-guaranteed loans (In effect, all mortgages are now government guaranteed) has a whopping 64.8 percent redefault rate. Overall, 49.7 percent of all modified loans are back in default within a year.

Who is paying for all these trips to nowhere? On average, modifications during the second quarter reduced borrowers’ monthly principal and interest payments by $427. That includes both HAMP-backed mods and mods worked out privately between the bank and the bad borrower. About 450,000 loans have been modified overall, well shy of the four million Treasury hopes to modify under the program. So a $427 average monthly reduction, spread across 450,000 borrowers, leaves us with total losses of:

$192,150,000 in monthly reductions;

$2,305,800,000 in annual reductions;

$69,174,000,000 over the life of a 30-year mortgage.

You can see why Fannie Mae and Freddie Mac have to keep coming back for more money.

What if HAMP were a success, and reached its goal of permanently modifying four million bad mortgages? The total loss would come to:

$1,708,000,000 monthly;

$20,496,000,000 annual;

$614,880,000,000 30-year.

But even that doesn't tell the full story. The $427 figure is for all loan mods. Modifications done under HAMP are much more charitable, and end up saving the borrower, on average, $607 per month. Let's assume HAMP could get to its goal of four million modifications while keeping that figure about the same. (It would probably go much higher, because delinquent borrowers who have not yet had their mortgages modified tend to be in more dire condition.) Now we're talking about:

$2,432,000,000 monthly;

$29,184,000,000 annual;

$875,520,000,000 30-year.

And HAMP is only a $75 billion program. So where is the money going to come from? And when will they stop claiming that taking money from taxpayers (the vast majority of whom have never been late on a mortgage payment) and giving it to deadbeats and stupid banks does anything but drag out the problem?

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  • ||

    Let housing prices find their natural level though free markets? Let the lenders eat their losses?

    That medicine tastes yucky! I won't take it! I won't, I won't I won't!

  • BakedPenguin||

    Silly J sub D. Why take medicine when we can spend our way to solvency?

  • AlmightyJB||

    That would involve personal responsibility which evidently is a thing of the past.

  • ||

    CNBC's real estate reporter shill for the Board of Realtors was on this morning boohooing about all the millions of Americans who will never know the joys of home ownership.

    We can't expect people to actually make sacrifices, or trade-offs; that wouldn't be fair.

  • ||

    "millions of Americans who will never know the joys of home ownership."

    Like property taxes, maintenance problems, trying to find a buyer when you want to move, being stuck with it when you decide you don't like the place, etc?

  • Sippydog||

    Joys of Home ownership? I would take an RV anytime. Beats mowing the lawn. Home ownership as an investment is no longer valid in most of the country, and why the hell would anybody want to be tied to one spot anyway.

  • Paul Krugman||

    So where is the money going to come from?

    We'll just inflate our problems away! Suck my paradox of thrift!

  • DADIODADDY||

    only $75 Billion dollars, wow what an absolute fucking bargain

  • Draco||

    Why do editorialists like Tim so often leave the builders out of it (deadbeats and stupid banks and...)?

    Let's think about what happened with one of those new houses built in 2005 and sold in 2006.

    A builder bought some land (at rapidly escalating prices). He invested some money (very probably borrowed) on a "sure thing." "The way houses are selling these days, you can't lose money!" So, he builds the house and sells it: he gets the profit over the cost-to-build, the bank gets the note payments and all of that delicious "low-risk" interest, and the deadbeat would-be McMansion owner gets a house he really can't afford.

    So why does the builder come out smelling like a rose? He too wanted to get rich quick in an overheated market, and wound up building too much inventory.

    You might answer that the bank was ultimately to blame for financing it in the first place, which then reduces back to stupid banks and deadbeats.

    On the other hand, everyone was responding to market signals - so can you really blame any of them? Can we just get back to ur-libertarian mode and just blame the government?

  • The Wine Commonsewer||

    I think they're leaving out the builders because nobody is bailing them out (that I am aware of).

  • ||

    If you can't afford your mortgage, your deeply, deeply busted. Lightening the load a bit doesn't change that fundamental fact. I'm surprised it's only 50% redefault.

  • The Wine Commonsewer||

    My neighbor is a realtor and she just did a quick search.

    In a one mile radius around my house there are 16 homes in foreclosure or about to go down.

    Just for perspective, this isn't a suburban tract neighborhood, each property is at least 2.5 acres. There are only five houses on my street, which is a half mile long.

  • The Wine Commonsewer||

    this doesn't count homes that already were foreclosed upon and subsequently sold.

  • ||

    Pi * r * r = 3.14 *5280 * 5280 = 87538176

    87538176/43560 = 2009 acres

    2009/2.5 acres = 803 homes

    16/802 * 100 = 2% homes in foreclosure

    2% is not all that big of a number.

  • ||

    Redefault occurs when a delinquent borrower works with a bank to change the terms of a mortgage, but then after some period of time stops making payments again. It occurs in half of all modified loans,

    yeah i would be interested in how they define "default".

    Technically a person who is a day late on a payment is in default.

    Also a default is not the same thing as a foreclosure.

    I know i am being nitpicky but 50% is a big number.

    also in no way is my nitpicking meant to give support to the Home Affordable Modification Program.

  • ||

    yeah i would be interested in how they define "default".

    Me, too. I understand the working definition of default in the industry is missing three payments.

    HAMP and its ilk are why libertarians are so fond of saying taxation is theft. Because, lets face it, my money is being taken from me by threat of force, and being given (in part) to banks and homeowners to line their pockets.

    Its hard to buy the argument that taxes are the price we pay to live in a civilized society when this is the use they are put to.

  • johnl||

    Great Tim. But please stick to annual figures and do not multiply an annual figure by 30 to estimate a total cost. It's fine to compare the 20 or 29 bil annual cost to the 75 bil budget and say that's only a few years funding. But when you start to project out 30 years, people will ask why you aren't showing the NPV based on some discounting.

  • mrMagoo||

    Tim is able to pay his mortgage and pull in a nice, 100k+ salary for ripping and writing articles on...."deadbeats" who can't pay their mortgage due to unforeseen circumstances.

    Oh the irony.

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