Marketplace: Failing Mortgage Mods and Foreclosures

I did an interesting interview with Marketplace Radio on why mortgage mods fail so often.


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How to get off the mortgage treadmill
Marketplace Public Radio, October 23, 2009



Bob Moon: This economic mess started with the subprime mortgage crisis. People couldn’t afford their mortgages, banks tightened credit, the rest is history, right? Well it would be. Except we’re still there. The ratings agency Fitch said this week that over half of all mortgages modified to help people stay in their homes go right back into default in a matter of months. Seems we’re on a mortgage treadmill and that does not spell relief for the economy.

Barry Ritholtz of Fusion IQ joins us now. Welcome to the program.

Barry Ritholtz: Thanks for having me.

Moon: I’m visualizing trying to hold back a big landslide that just keeps coming and coming and then, just when you think you have a control, there’s another slide somewhere else. What are these numbers really mean for regular people and for the broader economy?

Ritholtz: Well, understand what we’re looking at when we’re talking about a mortgage modification. We begin with a home owner, or as some people call them “home ower,” that’s in a house, but doesn’t have a whole lot of equity. The house is now worth considerably less than what they paid and their mortgage, which they were hoping to either refinance or somehow work around, has become an owner’s burden.

So they’ve been unable to get out from behind too much house. And so you end up with a series of incentives and a series of steps designed to prevent foreclosures from taking place. But the bottom line is, many people are in homes they just can’t afford and there’s not a whole lot you can do to prevent a foreclosure, unless you reduce the amount that owed. And very few banks seem to be willing to do that.

Moon: And if these number’s don’t change, then we are just going to continue to see more and more defaults?

Ritholtz: The foreclosure picture looks fairly negative for the next, let’s call it 12 to 24 months. We’re now absorbing about 300,000 foreclosures a month. That’s a pretty severe number compared to historical norms, about three million a year. I wouldn’t be surprised to see another five million foreclosures before housing really stabilizes and gets healthy.

Moon: I thought that we had all these programs in place though, that were supposed to not just stop foreclosures, but to keep them from happening in the future

Ritholtz: What the data has shown us is that when they enter one of these modification programs, that on average, somebody — without real delinquency in their mortgages — who go through a modification, about 50 to 60 percent of those people end up 12 to 18 months back in behind the eight ball, behind their mortgage. And people who go into a mod, already delinquent 30, 60, 90 days behind, they’re going into foreclosure at very high rates, at 75 to 80 percent.

Moon: So this number over half of all modified mortgages going back into default after only a few months. Should that be telling us something?

Ritholtz: Yeah, it’s telling us that modifications aren’t going to work. Unless you’re going to make the house appreciably less expensive for that home owner, for most people that are going through modifications, it’s just a temporary stop gap. It doesn’t solve the underlying problem. These minor changes around the margins — lower interest rates a little bit, reduce the payment slightly, because we’re extending the term of the mortgage — they’re not addressing the fundamental issue, which is, literally millions of people ended up buying houses that they can no longer afford

Moon: What I hear you saying is “Let’s stop postponing the inevitable.”

Ritholtz: You know, it wouldn’t be the worst thing in the world to just tear the band-aid off, let house prices get back to their normal levels, relative to traditional metrics. I know it sounds cold and if you’ve ever spoken to anybody who’s gone through a foreclosure, it’s a miserable, miserable experience.

But from a macro perspective, looking at the entire country, it would be healthy for the economy, to see foreclosures go forward, to see home prices normalize. That would lead to more housing activity and that helps to create jobs. Until we start house prices get to a point that’s going to cause more activity in the real-estate sector, the whole economy is just more or less muddling along.

Moon: Barry Ritholtz with the online research firm, Fusion IQ, the author of “Bailout Nation.” Thanks for joining us.

Ritholtz: Thanks for having me.

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