The Housing Scene

Many Loan-mods Don’t Hold

Mortgage giants Fannie Mae and Freddie Mac helped “save” more than 68,000 borrowers from foreclosure in this year’s first quarter by modifying their loans so the payments are more affordable.

That brings their total foreclosure preventions to more than 4.1 million, and drops the two companies’ rate of seriously delinquent homeowners to 1.1 percent as of the end of March, according to government reports. Hey, you can’t help everybody.

But according to another report from a well-respected real estate analyst, you sometimes can’t even help those you’ve already helped. That’s not a riddle. Rather, it describes the rate of recidivism, or the folks who lose their homes anyway, no matter how much assistance they are given.

An investigation by analyst Keith Jurow found “compelling evidence that a large and growing percentage” of owners are re-defaulting on their loans.

“Once, twice, even three times,” he said. “The only reasonable conclusion to draw is that modifications, as an alternative to foreclosures, have been a massive failure.”

Jurow told me in an interview that “the numbers are mind-boggling.” Consider these figures, which he offered in his column in the “Advisor Perspectives” newsletter:

In the last half of 2012, 24 percent of borrowers who received a loan-mod from Fannie Mae had re-defaulted within a year. By last year’s fourth quarter, 37 percent had re-defaulted. Even worse, 30 percent who received a modification in 2017 re-defaulted within 90 days. Ninety days!

Hope Now, a consortium of government-approved counseling agents -- companies that service home loans, investors and other mortgage market participants -- counts a total of 8.4 million mortgage modifications since 2007. This includes mods made under the federal HAMP modification program begun in 2009, proprietary mods made directly by lenders, and Fannie Mae’s and Freddie Mac’s own mod programs.

In most cases, permanent changes to an original mortgage are made by reducing the interest rate, stretching the loan term, adding unpaid interest to the principal still owed or reducing the amount owed. In other instances, temporary changes such as a reduction or deferment of the scheduled payment are made until the borrower gets back on his or her financial feet.

Because the temporary solutions don’t change the terms of the original loan, they are not reported under regular modification data. However, under the heading “other workout plans,” Hope Now says there have been 16.4 million temporary mods.

In all cases, all borrowers who have received a modification are considered current. Thus, the delinquency and foreclosure figures reported by trade groups and the government are highly misleading.

Loan-mods were seen as a critical part of the solution to help troubled borrowers avoid losing their homes. “If millions of delinquent mortgages could be modified, this would drastically reduce the number of homes that would have to be repossessed,” says Jurow.

But the result was far different, he says. Instead of solving the problem, it only “succeeded in artificially pushing up home prices and fooling everyone into thinking that the worst is over.”

Here’s what Jurow calls “the really shocking number”: By 2015, one-third of new loan-mods were on mortgages previously modified and whose borrowers had defaulted again. And the problem is not limited to Fannie Mae, which the analyst says is carrying $144 billion worth of mortgages it believes are uncollectible.

A 2014 review of loans insured by the Federal Housing Administration (FHA) found that nearly 3.3 million had been modified. But about 57 percent of those borrowers had already re-defaulted, according to Jurow’s report. Another review found that of the FHA loans that had been modified, nearly 60 percent re-defaulted within 36 months.

“The FHA default rate is the worst,” Jurow said.

Some of the nation’s largest banks are in the same boat. At Bank of America, the re-default rate on “troubled debt restructurings” is 45 percent. At PNC, it’s 57 percent. At Wells Fargo, it’s 35 percent.

These and other lenders, loan servicers and Fannie and Freddie “have been able to pull off this charade because hardly anyone knows how bad the re-default situation really is,” Jurow said. “Even mortgage pros don’t really know that there is a problem. How could they? The re-default numbers ... have been buried where few people can find them.”

“It’s hard to get good data,” he said. “They hide it. I really had to dig.”

Jurow’s worrisome analysis is meant to be a warning to mortgage investors and their advisers, who he says “don’t have a clue.”

“There’s only one plausible conclusion we can draw from these worsening numbers,” he says. “Mortgage modification has failed as a solution to the mortgage delinquency problem. Millions of borrowers continue to become delinquent regardless of their financial situation.”

But there’s a message here for borrowers, too: When considering a modification, make reasonably sure that you can fix your financial situation and avoid getting into trouble again. Otherwise, you are only delaying the inevitable. And it could cost you dearly.

For the rest of us, beware. The market in your area may not be as strong as you suspect.

The foreclosure crisis has not gone away. Eventually, lenders and investors have to come down on these serial defaulters.

They haven’t yet, Jurow speculates, because there are so many of them that it could throw the housing sector into another free-fall. But if and when they do, it could impact the value of your own home.

“There’s no doubt in my mind that this is going to end badly,” the analyst said. “It’s like a ticking time bomb. Sooner or later it’s going to explode. You can only kick the can down the road for so long.”

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