As if you couldn't see this one coming a mile away: more than half of the loans modified in the first quarter of 2008 had redefaulted within six months of modification, according to statistics released Monday by the Office of the Comptroller of the Currency
"After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due," Comptroller John Dugan said in a statement
. "After six months, the rate was nearly 53 percent, and after eight months, 58 percent."
In other words, recidivism rates are right where they historically have been, despite growing pressure to "do something" about a growing number of foreclosures. Dugan characterized the results, however, as "surprising" for regulators.
Dugan's remarks came during a panel discussion with Office of Thrift Supervision
director John Reich, Federal Reserve Board
chairman Donald Kohn, Federal Deposit Insurance Corp
. chairman Sheila Bair, and Federal Housing Finance Agency
Director James Lockhart.
Dugan suggested that regulators weren't sure why redefault rates were so high. "Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?"
His remarks provided a preview of the data contained in the OCC and OTS Mortgage Metrics report, set to be released later this month. But the fact that regulators have been surprised by recidivism rates that are, frankly, about par for the course is telling insofar as it suggests that regulators have yet to really understand the crisis they are trying to solve.
"I want to know why Dugan and others are surprised by 50 percent redefaults," said one servicing manager that spoke with HousingWire
. "We'd have told them to expect it, if they'd asked."
Anyone with experience in this space expects roughly 50 percent recidivism on loan modifications, various sources in the servicing side of the business said, give or take some wiggle room with differences in vintage and product type.
The fact that regulators were blindsided by these numbers seems likely to generate more cries for aggressive loan modifications, especially of the principal-forgiveness variety, from consumer groups and the government officials; but doing so entails huge moral hazard for lenders, and the very real risk that other borrowers currently performing on their notes will seek to default in order to lower their own mortgage balances.
Read Dugan's full remarks here
Paul Jackson at firstname.lastname@example.org