Loan Modifications don't work as 60%-70% of all mods redefault within 12 months

Loan modification are still the most popular first step in big banks attempting to avoid foreclosing on a delinquent borrower's property.  The problem is loan modifications don't work.  In fact, if anything, the loan mod process buys delinquent borrowers time to accumulate an even higher delinquent balance.  It also puts off our housing recovery, or at least stops housing from continuing its free fall.

Fitch reports little improvement in success rates for loan mods for U.S. non-agency RMBS.  The best way to improve losses is to speed up, not slow down, foreclosure.  In fact, short sales seem to be the only thing that is working to limit losses, and even that has only had moderate success.  Servicers report that borrowers, instead of becoming current, get to stay in their home even longer by extending the foreclosure process.

All the moratoriums, mediation, and robo-signers have pushed out the default timelines allowing lenders to pile up bigger and bigger losses, and allowing the deadbeats to stay in their houses rent free for a longer period.  This trend should continue and cause greater losses to the housing markets.  This top-down insane solution, devised by the genius Geithner and passed into law, makes the housing problem even worse. Via Fitch:
Modifications continue to be the primary strategy to work out problem loans, with approximately 20% of all non-agency RMBS loans by balance, including almost 42% of RMBS subprime loans, having received at least one modification as of December 2010, up from 15% and 35%, respectively, in May 2010. However, the number of modifications completed has steadily decreased since mid-2010, and, for December 2010, only an approximate 36,500 modifications were completed. Fitch believes that existing modification programs, while they may continue to reach a few newly defaulted loans, will not resolve the more severe borrower situations.

Fitch projects 60%-70% of modifications on subprime and Alt-A products will redefault within 12 months. Redefault levels on prime loans are projected at 50%-60% within 12 months of modification. These projections are slightly reduced from 65%–75% (subprime and Alt-A) and 55%–65% (prime) made in June 2010 due to improved results on more recent modifications.


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