Don't Pay Now, Don't Pay Later

The Office of the Comptroller of the Currency and the Office of Thrift Supervision just put out the second quarter Mortgage Metrics Report [pdf] and -- wait! wait! Don't leave! There may be a house in it for you.

Within three months, 27.7 percent of all modified mortgages were again delinquent. This continues the trend we saw last quarter (the first time OCC started tracking redefaults). The more loans you modify, the higher the percentage of redefaults you get. Understand: That doesn't only mean that the total number of redefaults goes up as the total number of modifications goes up; it means the percentage of modified loans that redefault is growing. In the first quarter, 65.9 percent of all modified loans had gone bad again after 12 months. In the second quarter that percentage -- a percentage of a higher number of loans -- had gone up to 67 percent.

Also of note: We are now starting to see results on loans that have been modified along the lines housing fairness advocates [pdf] lobby for: renegotiations in which the lender takes a substantial loss on the original loan. In some cases, monthly payments have been reduced by as much as 20 percent. Some 15 percent of those folks redefault within three months, slightly more than a third after one year.

Keep in mind that that last paragraph is considered success. The OCC argues, and the data indicate, that you have to reduce payments by at least 10 percent in order to make any dent in redefault rates.

The OCC uses indirect language again to describe mortgage-bailout efforts without indicating the results:

"Actions to keep Americans in their homes grew…"

"…efforts to assist homeowners and avoid loss were also on the rise…"

"…home retention actions have increased…"

Comments

[John Tagliaferro]

When will Barney Frank suggest the Treasury pay off the bad loans?

[Hazel Meade]

Housing fairness advocates need to get over the idea that they are doing anyone a favor by helping them stay in a mortgage they can't afford.

They would be better off living somewhere cheaper, and saving their money up so they can make a real down payment.

[Slutmonkey]

You misunderstand their idea. Their idea is to turn a mortgage you can't afford into one you CAN afford by forcing the bank to reduce the size of your loan/payment.

Apparently this strategy doesn't work, BUT the flaw in their reasoning doesn't appear to be related to the size of the loan or payment.

[John Thacker]

When will Barney Frank suggest the Treasury pay off the bad loans?

Whenever Republicans are elected, no?

[cangrejos fantasmas]

"Housing fairness advocates need to get over the idea that they are doing anyone a favor by helping them stay in a mortgage they can't afford."

Affirmative Action advocates need to get over the idea that they are doing anyone a favor by helping them get into a college they can't handle.

FIFY

[John Tagliaferro]

Whenever Republicans are elected, no?

Probably. Until then he will be advocating that mortgage companies don't forclose, no matter what.

[John Tagliaferro]

Foreclosure is racist, yo.

[Pro Libertate]

Why pay? Just stay and default. It's not like the banks are foreclosing very much.

I said it when this started, and I'll say it now: It's a mistake for banks to let these houses sit, especially the empty ones. Yeah, they're upside-down, but letting the houses fall to pieces isn't very smart, and showing the world that you'll let people default isn't really wise when you don't want others to follow suit. Frankly, I think lenders are assuming that the government will some how save them from yet more bad decisions.

[hurlybuehrle]

Finally, clear evidence that lenders are just really, really evil! I mean, unless it's evidence that a lot of people signed onto mortgages they couldn't afford, and are hoping that someone comes along to bail them out.

[J sub D]

Apparently my advice went unheeded.

Note the date.

[John]

I am in the process of looking for a house right now. I can tell from experience the people running the banks are retarded. There are a lot of forclosure houses out there falling down from people not living in them. But they are impossible to buy. The banks seem to have no interest in selling them. Or if they do, there is always a second lien holder who refuses to accept reality that they are out of luck and won't release their lien or accept any kind of reasonable settlement. So, the houses sit empty falling in. You would think that banks would be anxious to cut their losses and sell the houses for whatever price they will fetch right now and get the bad loan off the books. But they are not.

[Barrack Obama]

Some people don't understand the New Economics; I believe Hazel Meade is one of those people. Here is the New Economics in two easy lessons for people like Ms. Meade:

1) If you want something, you pay for it.

2) If you really really want something, like a house or health insurance, somebody else pays for it.

[Pro Libertate]

John,

There are boatloads of houses that are in default and even abandoned, where the lender has yet to foreclose. In my neighborhood, we have a number of empty houses that are still in the borrower's name. Leaving a house and a pool without power or care-taking in Florida is friggin' insane.

[John]

J Sub D,

You are just out of touch with the times. I flipped by CSPAN a few weeks ago and book notes had some NYT reporter who had written a book on the mortgage collapse. At first he was kind of interesting. Then he got to how he felt that banks had "targeted vaunerable minorities". At that point he tells the story of a family that he called Salvadoran but were in reality American citizens who were being evicted from the $700,000 house in Manassas, VA. They had made $250,000 selling a house in 2007 and then let it ride hopeing to flip this house. All I could think was "these people are victims?" They were sophisticated enough to make a quarter of a million dollars on their first house. And God knows if they hadn't lost their ass on the second house they wouldn't be sharing any of it with me. But, I am supposed to pay higher taxes so that they can stay in their house because they were preyed upon by evil bankers.

Well fuck them. And fuck the banks. Perhaps a few people losing their asses will debase them of the idea that it is possible to consistently get something for nothing.

[John]

"There are boatloads of houses that are in default and even abandoned, where the lender has yet to foreclose."

That is because they can't figure out who owns the note to forclose. The wall street geniuses who came up with the idea of spliting up mortgages into hundreds of payment sized packaged never thought "hey, if the person defaults how are we going to foreclose when the mortgage is owned by hundreds different people?"

[ChicagoTom]

Frankly, I think lenders are assuming that the government will some how save them from yet more bad decisions.

That's not a bad assumption to make is it?

I mean it seems like Bush and Obama have both been pretty much set on making sure that banks didn't have to face consequences of their bad underwriting decisions, no ?

[hurlybuehrle]

@John: From recent personal experience I can also say that prime-location condos in Boston (e.g., Back Bay) are sitting vacant for the same set of reasons.

[John]

"That's not a bad assumption to make is it?

I mean it seems like Bush and Obama have both been pretty much set on making sure that banks didn't have to face consequences of their bad underwriting decisions, no ?"

No it is not Tom. It is called moral hazzard. The banks are being entirely rational.

[New World Dan]

I've been saying for a while, the answer to this whole mess is bottom up inflation. Print money and distribute it uniformly to everyone. Inflation will rebalance housing prices, while at the same time helping people make their payments while at the same time not screwing people who made smart decisions about what kind of house they could afford. It will mildly screw banks and other large debtholders, but I'm fine with that since the fox has been running the henhouse for quite some time. And even there, it won't be bad since it will make all those CDOs worth something again. They'll show an inflation adjusted loss, but a nominal gain. Damnit, how come I'm not Secretary of the Treasury? I suppose people holding treasury bills would get screwed, but come on, who cares about China?

[Toxic]

The flip side of what you are saying is that 66% of loan modifications hold it together for at least a year... that's pretty good, isn't it?

[ChicagoTom]

No it is not Tom. It is called moral hazzard. The banks are being entirely rational.

John you seem to have missed my point...cuz you re-stated it with different words as if I was making a mistake.

My point was that it isn't a bad assumption on the part of the banks. Believing they will be bailed out is absolutely a rational assumption for the banks to make.

[John]

Tom. I was agreeing with you. I don't think you are mistaken at all. Sorry to give the opposite impression.

[The OCC]

The OCC uses indirect language ...

That should read "Indirect language is used ..."

We are a Federal Agency, after all.

[Pro Libertate]

Who isn't a fan of The Dukes of Moral Hazzard? With Fannie Mae in her Fannie Dukes?

[P Brooks]

What we need is a new homestead act; any squatter who moves into a house and stays there for a year without being evicted gets clear title to the house.

See how easy that was?

[Pro Libertate]

I'd like some neo-adverse possession laws, because I could send my kids into a few houses around the neighborhood and become quite the property owner.

[P Brooks]

When your kids are bugging you, you can tell them to go home.

[B.P.]

Some 15 percent of those with the renegotiated loans default within 3 months? Is that even trying?

Seems to me most of these 15 percenters wouldn't have made a single payment under the new plan.

[Pro Libertate]

The house next door has been abandoned for over ten months. It's a bit of a wreck and was so before it was abandoned, but I keep telling my wife that we should buy it and house our older children there. Maybe my mom, too.

[R C Dean]

The flip side of what you are saying is that 66% of loan modifications hold it together for at least a year... that's pretty good, isn't it?

What matters is the ratio. Would you say that 1% of modifications holding it together for a year is good? Only 2/3 of modifications working is pretty poor, in my book.

[Craig]

Or you just stop loaning money to proven deadbeats, take the house, and sell it to the highest bidder to try to cut your losses.

[sassy]

The banks want to hold bad mortgages, actually. The more bad news they can report, the more they can whine for a bailout...and get it.

[Will Spencer]

Until banks foreclose on a loan, they are able to keep the property on their books at it's original value.

When the banks foreclose, they must lower the value of the property on their books to it's current value.

If the banks were to foreclose on all the loans upon which they should be foreclosing, the book value of the banks would fall.

The banks would "suddenly" not have enough assets to meet their obligations and the FDIC would be required to implement PCA (Prompt Corrective Action) and shut the banks down.

The banks can't afford to foreclose on bad loans without being shut down by the federal government.