How Often Do Loan Mods Fail ?

Mark Hanson of Hanson Advisors (via Barron’s) on why Loan mods are not the answer.

As the tables below show, loan mods seem to lead to subsequent default with distressing regularity.

They illustrate the fundamental flaw in the notion, widely embraced, not least by the Obama administration, that loan modification is salvation for troubled homeowners, beleaguered builders and lenders. Bull, says Mark:

“Loan mods are designed to keep the unpaid principal balances of the lender’s loans intact while re-levering the borrower. Mortgage modifications turn homeowners into underwater, overlevered renters for life, unable to sell, re-buy, refi, shop or save. They turn homeowners into economic zombies.”

Consider the tables below: On the left we see the re-default rates of homeowners who were current on their loans when they first defaulted (sounds odd, I know, but these tend to be people who can afford their homes but who subsequently ran into economic problems).  The data tells us how many of them have defaulted again 10 months after their loans were modified.

The adjacent table (at right) shows the same thing, only this time with homeowers who were seriously delinquent prior to loan mods. As you would imagine, their re-default rates 10 months  after their loans were modified are considerably higher. These are often the people who could barely afford their home (or not at all).


Loan Mods Default Rates



What Has Sergey Wrought?
Barron’s, July 13, 2009

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