One-third of Mortgage Defaulters Don’t Need Help

boston_fed_study.pdf

Nearly one third of all homeowners who seriously default on their mortgages end up paying what they owe and don’t need to renegotiate their loans, according to a new, massive study by economists at the Federal Reserve Bank of Boston.

The findings suggest that foreclosure rates may not rise as much as expected in the near future because the “cure” rate is so high. The most recent delinquency survey by the Mortgage Bankers Association, covering the first quarter of this year, fond that the delinquency rate for all mortgages is now at a record high 9.12 percent (see Mortgage Delinquency Report (MBA), High delinquency rates and relative low REOs in some markets has caused many to speculate that banks have been delaying the foreclosure process in order to improve local real estate prices.

The Boston Fed study cited the high cure rates in its study, “Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization,” as one of two significant risks deterring lenders from choosing modification over foreclosure as the best solution to resolving mortgages in serious default. The study also found that between 30 and 45 percent of borrowers who receive modifications end up back in serious delinquency within six months. Thus, when 30 percent of borrowers in default don’t really need modification and as many as 45 percent won’t be helped because they will re-default anyway, lenders begin the process of modification knowing that only 25 percent of borrowers will be in a position to benefit from having their payments reduced and stay current on their mortgages in the future. For a copy of the study, click on the link above.

The findings, of course, have huge implications for the Obama Making Home Affordable Program. The plan is based on the assumption that modifications that reduce payments to a level borrowers can afford is a “win-win” strategy, good for lenders as well as borrowers. However, even though servicers of 80 percent of the nation’s mortgages have signed up for the program, it is taking a very long time to produce results. Beginning Tuesday, August 4, HUD and Treasury will begin releasing details on how each servicer is doing.

Should it be the case that the risks of modifying a loan for someone who doesn’t need it or for someone who is too far gone to benefit are so great that lenders will do better taking possession, the $1000 fee to service each loan the Obama program pays out won’t be enough to make any difference.

The study’s findings have broader implications. “If the presence of self-cure risk and redefault risk do make renegotiation less appealing to investors, the number of easily “preventable” foreclosures may be far smaller than many commentators believe,” it concludes.