As a harbinger of future times, the number of permanent loan modifications canceled due to borrower re-default doubled between February and March of 2010. The trend is ominous: 1,005 modified loans were canceled in January, 1,499 modified loans were canceled in February and 2,879 modified loans were canceled in March. Though most permanent modifications were canceled as the result of borrower re-default, 37 modifications concluded naturally by being paid off.
This is consistent with the historical re-default rate. Nationally, 60% of modifications undertaken by lenders are in default again just one year after the modification was granted. Modification plans that increased a borrower’s monthly payment or kept it the same had a re-default rate of 66%. Modification plans that decreased a borrower’s monthly payment by more than 20% fared slightly better, with a re-default rate of 40%.
However, the U.S. Treasury is still reluctant to declare defeat. In March, a total of 227,922 permanent modifications were active, up 35% from February. However, at its best, 227,922 is still a mere 6% sliver of the four million the federal modification program was intended to help.
first tuesday take: Though the monthly numbers of canceled permanent modifications are de minimis in the context of the national stage, the larger trend of failing modification workouts remains a constant bad omen for developing a bottom to California’s real estate market. The quicker we hit the true bottom, without the distracting and ultimately feckless rigmarole of a modification, the better the chances for a sustainable real estate recovery and an increase in sales volume.
The current re-default rate of 60% is very high and serves to completely delegitimize the merit of the extend-and-pretend fluff the modification program is all about in its current form. Like semi-effective life-preservers, these modifications superficially keep the victim afloat in the short-term but don’t prevent his ultimate drowning. The growing number of cancellations clearly indicates payment schedule adjustments alone aren’t working.
Distressed homeowners are not idiots and they are demonstrating they are not mathematically challenged. Once they examine the math revealing the negative worth of their largest asset – their home – they are making the financially prudent choice to walk away. Lenders have an instinctual aversion to voluntarily agreeing to a loan reduction to make homeowners solvent.
Congress has the ultimate weapon in this battle for solvency – grant cramdown authority to bankruptcy judges as they had before 2006. [For more information covering the rational decision of a negative equity homeowner to strategically default, see the April 2010 first tuesday articles, The underwater homeowner, his future and his agent: a balance sheet reality check – Part I and Part II.]
In re: “Defaults Rise on Loan Modification Program,” from the New York Times