FDIC Chairwoman Sheila Bair said the ultimate success of loan modifications depends on the direction of the economy, during remarks at the Chicago Federal Reserve Bank’s annual bank structure conference.
She said executed mortgage modifications were having positive results, but also warned that there’s still distress in the mortgage market (yeah, we noticed).
Additionally, she noted that borrowers will stick to making on-time mortgage payments if they are brought down to affordable levels, even if they’re underwater. It’s a bold assertion, to be sure.
I wonder how far underwater a borrower will allow themselves to be before they walk or stop making payments, even if they can afford it. When you’re a couple hundred grand behind value-wise, motivation might be hard to come by.
Conversely, she added that those who lose their jobs or experience some other kind of adverse life event likely won’t see much benefit from a loan modification, not good with unemployment approaching 10 percent.
Unfortunately, recent data reveals that earlier loan workouts have performed quite poorly, with nearly half of modified loans seriously delinquent after just months.
This, of course, can be attributed to the fact that only 42 percent of loans modified in 2008 resulted in reduced payments; 27 percent didn’t change the monthly payment, and 32 percent actually increased the monthly mortgage payment.
Many of these loan workouts were simple repayment plans, which lump the overdue interest and fees on top of the existing loan balance, pushing monthly payments higher for struggling borrowers.
Clearly these are destined to fail. Why would someone pay more each month to stay in a sinking ship, especially if their credit is already damaged?
The winning strategy seems to be lowering principal and interest payments, aka mortgage rates, which supposedly even outperforms principal balance reductions alone.
This would be music to lenders’ ears, as they could more easily justify a rate decrease as opposed to a write-off of principal.