Shares of both Countrywide Financial and IndyMac Bancorp dropped Tuesday after separate reports indicated that falling home values are more of a concern than resetting interest rates, adding that loan modification plans would likely be ineffectual.
“It will be a ‘Very Big Challenge’ to segregate these borrowers,” Paul Miller, an analyst at Friedman Billings Ramsey, said in a research note on Tuesday.
He added that working through loans on a case-by-case basis will be cumbersome and expensive for mortgage lenders.
Miller also noted that half of loan modifications end up as re-defaults, suggesting that the proposed solution does little more than delay the inevitable.
Miller and other analysts believe resetting mortgage rates aren’t the only problem facing homeowners, noting that high loan-to-value loans mixed with falling home prices would lead to many more defaults and subsequent foreclosures.
“We expect losses will continue to rise until home prices stabilize, which we expect to take another four to six quarters,” Miller said.
Barclays analysts said few homeowners would benefit from a loan modification, and expect many to default even when paying their teaser rate.
Economists at Goldman Sachs said legal issues have slowed the progress of loan modifications and may also limit the plan’s effectiveness.
Thomas Zimmerman, an analyst at investment bank UBS, said homeowners who may benefit from a loan modification can likely work out a deal without utilizing the so-called “Teaser Freezer” plan.
Shares of Countrywide fell 68 cents, or 6.37%, to $10, while shares of IndyMac dropped a buck, or 10.54%, to $8.49 at the close of trading Tuesday on Wall Street.