So we talked about a recent report about mortgage modifications, the Analysis of Mortgage Servicing Performance, here. I asked back in August whether or not the Mortgage Modification plan has failed, and nothing in this report, which is the latest in data collection by 12 state attorneys general and three state banking supervisors, makes me think otherwise.
If you are also reading the on the ground journalism, say this excellent article by Mary Kane, the closer you get to it the more of a disaster it looks:
The voluntary plans by servicers, however, were called “extend and pretend” plans by critics, who said servicers simply were setting up repayment plans with late fees and other charges rolled into them, without ever actually reducing a borrower’s debt. Re-default rates on those loan modifications have been high as a result. Making Home Affordable has been more aggressive about lowering a borrower’s monthly payment, and the government is pressing servicers to switch to using its program — one reason why Making Home Affordable permanent loan modifications are lagging behind. In addition, some borrowers simply can’t qualify for the government’s program because they are too far underwater on their mortgages.
So I’ll ask the obvious question. Is the current system predatory? I’m not a lawyer, and I know there isn’t a good working definition of what constitutes predatory lending. But let’s take a look at two separate charts in the report. One we’ve already discussed:
70% of people who go through mortgage modification have an increase in their balance. Here’s another chart that should worry you:
Within 1 year almost 45% of modified loans become “delinquent.” 7-9% reach 60-day delinquency within just the first three months after modification, which for all intents means the borrower didn’t make the first post modification payment. What will the 2 and 5 year markers look like?
So we have a financial technique offered to consumers that (a) piles on principal unexpectedly through hidden fees and surcharges and (b) has a reasonable expectation that the consumer won’t be able to make the payments. That doesn’t sound good, does it? Lawyers in the audience, would you consider this predatory? How do those arguments proceed?
It isn’t simply a matter of nobody being able to pay the loans. They find that with significant principal reduction you can get the re-default rate from 45% to 34%, though that is still very high. I am not sure what constitutes significant principal reduction, though I doubt it is on the order of the % decline in the neighborhood value, as the Zingales and Posner Slate article argued as a benchmark for principal reduction.
This is a long, stressful process, and it appears to leave nobody better off, except perhaps the servicers who get some nice fees and a subsidy from the government. This one or two year process is a period where the borrower could be taking the difference on their loan and a cheaper rental rate and start rebuilding their savings and financial lives (and ultimately, the economy).
That said, there is a norm asymmetry here, that is being exacerbated by unreasonable expectations from government officials as to the effectiveness of mortgage modification, a process that is subsidized by our taxpayer dollars. I get the sense that many are worried this is all they’ll get on this front from the administration, so better to try and get it working better than pushing for new efforts.
Where to Go?
Think Progress has a very important article on where the debate should go. Mortgage cramdowns would make banks have to take a writing down process more seriously. As Megan McArdle has written, the law around second-leins and securitization is a mess for these kinds of principal writing down situations, and could be modified. Many banks are probably worried about solvency issues ahead of the issue of properly writing down balances before foreclosure. If a mortgage is 95 cents on the books, but only worth 50 cents, given how weak banks are doing it might be worthwhile to let some foreclosure to 20 cents if they can keep the majority at 95 cents. There are FDIC workarounds for this that can be proposed or implemented. A version of Right to Rent could be pushed more aggressively. And in what I’d like to see some serious brain effort put into, taxpayer dollars could be used to subsidize short sales instead of ineffectual modifications.
Interestingly, as the document points out, we’ve hit the ceiling for the rate at which we can process foreclosures.
See how the “foreclosure closed” marker can’t scale at the pace of delinquency? There’s room for action there as well.
Currently we are trying to pay the banks to take care of this themselves. Given that so much innovation of late in consumer finances has gone into the process of making quasi-predatory items for consumers, it doesn’t surprise me that the fruits of this partnership are ineffectual at best. Now would be exactly the right time to push a stronger agenda, with bolder experiments, to fix this broken market.