Deadbeat: Not Just A Circumstance, A State of Mind

Lose what little faith you still have in your fellow Americans with the new Mortgage Metrics Report. For the first time, the quarterly report [pdf] from the Office of the Comptroller of the Currency and the Office of Thrift Supervision includes information on redefault rates for modified mortgage loans.

That is, lenders are increasingly offering supposedly distressed borrowers substantial reductions in principal and interest payments. (See page 25 to see how rapidly these modifications are becoming much more charitable to the borrowers.) Redefault data track how many of these renegotiated loans end up back in trouble. There's a wide variety in types and degrees of trouble — everything from 30 days' tardiness on payments to completed foreclosures.

But one pattern emerges when you add up all the redefaults per quarter and compare them to the total number of loan modifications: When you take deadbeats and give them a free opportunity to get out of contractual obligations they willingly signed before God and country, a fairly reliable majority of them — and often a fillibuster-proof 60+ percent — end up deadbeating again.

In general, the more loans you modify, the higher the percentage of redefaults: In the first quarter of 2008, 68,001 loans were modified, and 40,206, or 59 percent, of those have ended up 30 days late again, or worse. In the first quarter of 2009, 185,156 loan mods were done, and of those, 120,067, or 64 percent, ended up in trouble. (Check my math: to get a total-in-trouble number I'm adding up "30-59 days Delinquent," "60 or More Days Delinquent," "In Process of Foreclosure," and "Completed Foreclosure." To be sporting, I'm leaving "Short Sale or Deed-in-Lieu of Foreclosure" out.) 

If there's any good news in this, it may be that while the total number of loan modifications is skyrocketing, the percentage of redefaults is increasing sporadically relative to total loan mods, rather than growing in a straight line. So in the fourth quarter of 2008, for example, only 46.9 percent of modified loans ended up back in trouble.

But even that isn't really encouraging, because some of the "trouble" categories were artificially depressed in that period (through, for example, statewide foreclosure moratoriums in effect in some of the most deadbeat-rich areas). Also, the terms of loan mods are getting much more generous: Where last year banks tended to offer only small gestures like maturity-lengthening or a slightly better interest rate, now they're offering to reduce principal, pay all closing costs for new mortgages etc.

So if these borrowers really are honest citizens who just need help getting back on their feet, the percentage of redefaulting loans should be going down, not up. That's not the case, because they are not honest citizens. They're deadbeats, and it's time to stop pretending they can be anything else.