By Abigail Field, an attorney and writer. Cross posted from Reality Check
Friday HousingWire ran a six-and-a-half page big bank/mortgage servicer propaganda piece called “Living Large“, by Tom Showalter. The article, subtitled “A person’s lifestyle plays into whether they will pay their mortgage after a loan modification”, purports to explain why people default on loan modifications. Instead, it spins a bank-exonerating morality play not justified by the data supposedly being interpreted.
I’ll get to the morality play and the “irresponsible borrower” propaganda it represents in my next post to keep this one to readable length. First, to clearly show the wrongness of the bank-serving mythology being sold as its interpretation, I’m going recap the data the ‘article’ presents to answer the questions the underlying study apparently aimed at: why did so many people with mortgage mods made in 2009 default on those mods by 2011? And what needs to be done to make mods more successful going forward?
Note: I can’t assess the data quality because I don’t have access to the underlying tables and sourcing info; I am working off HousingWire’s/Showalter’s analysis of it. I just take his numbers at face value, though as I discuss below, however, something is screwy either in the some of the data or Showalter’s reporting of it.
Regardless, after looking at the data as presented by Showalter, the answer’s clear: People defaulted because the loan mods weren’t steep enough to make them solvent. To get successful mods in the future, payment reduction needs to be enough for borrowers to be solvent again. That’s all. Importantly, a post-mod solvent borrower is what would’ve happened if the loan restructuring were allowed to happen in bankruptcy; we’ve long understood what dealing with debt crises takes.
The Data: Tremendous Financial Stress, Inadequate Modification
So let’s look at the data as described by Showalter. Here’s the setup:
A control group of a random sample of 1 million people with mortgages in 2009, skewed to be a little more than 50% subprime, Alt-A and jumbo prime, was compared to a random sample of 55,000 loans modified in 2009 and tracked through 2011. (Showalter does not say if the modified loan sample is a subset of the control group or not.) The debt loads, bill paying performance and other characteristics of the people in both groups, and of people within the modified group, were compared. In fact, the people in the modified group were broken out into seven different groups, A through G.
So what do we learn about these various groups? The metric most discussed is who was seriously delinquent–60-days or more past due–on credit lines from 2007-2009. This data point is fixated on because, according to the analysis, it is the overwhelmingly strongest predictor of defaulting on a 2009 modification by 2011.
Turns out the baseline borrower–the average borrower in the million person sample of people with mortgages in 2009–was seriously delinquent with 16% (1 in 6) of their “active credit lines” sometime in 2007-09. Think about that: the average borrower with a mortgage in 2009 became seriously delinquent on one or more accounts in 2007-09. That is quite a backdrop of financial stress.
So how do the people who qualified for a mortgage modification compare? Unsurprisingly, mod recipients were even more debt stressed: 30% of their accounts had been seriously delinquent during 2007-09. Mind you, they’re not deadbeats; they were keeping 70% of their accounts current. Still, they were struggling much more than the average mortgage holder.
What about the people who defaulted on their loan mod by 2011? Turns out they were even worse off, having been on average behind on half (51%) of their credit lines during 2007-2009. No surprise there–people with the most debt stress at the start continued to have the most trouble paying their bills. Still, that’s not the whole story.
See, the data show that the tipping point at which “loan modification redefault performance erodes substantially” is serious delinquency on 25% of accounts in 2007-09. But wait–the average for all modified borrowers is 30%! There’s only conclusion possible: the mods were systematically inadequate, unable to address the financial crisis faced by the average person they purported to help.
Redefaulting Data Screwy as Reported
How likely to redefault? Depends on the subtype. At best one in ten redefaulted (11%, subtype F, representing 2% of the sample), and then one in four (26%, subtype G, 3% of the sample). That leaves 95% of the modified borrowers redefaulting at a higher rate, and also signals that the data are screwy, at least as presented by Showalter.
See, he says the average redefault rate was 30%. Group A, which came in at 30% redefault rate, represents 22% of the sample. If 5% of the sample is below the average, and 73% of the sample above, shouldn’t the average be higher? It’s not like the other rates were very close to the average. Subtype C comes in at 34%, D at 37%, and E and B, which combined account for 56% of the loan mods, redefaulted at 41% and 51% respectively. No way that average is 30%; either Showalter or the data are just wrong.
UPDATE: The sentence Showalter writes is “These borrowers…redefaulted at below average rates (average redefault rate <30%).” I read that as meaning the average redefault rate is 30%. Otherwise the 30% is a meaningless, arbitrary number. But considering that a 30% average doesn’t make sense, per the above, and given how incoherent the data presentation was generally, maybe Showalter doesn’t mean the average is 30%. Maybe he picked 30% just because it was the first round number above 26% and 11%, the redefault rates of the groups in question, and the average is in fact higher. Doesn’t really matter. The Mods Were Inadequate
It’s not just the pre-mod financial stress data that shows mods simply weren’t substantial enough to work. It’s the other data Showalter fixates on, namely what people did with the cash freed up by the mod. Given the “Living Large” headline, I expected to read that redefaulting, ‘bad’ borrowers blew their mod-freed up cash on shopping sprees, decking out their lives with flat screen tv’s, jewelry and vacations. Living Large is about self-indulgent pleasure chasing, isn’t it? But here’s the “lifestyle” choice that Showalter says make some borrowers good, and some bad: whether the borrowers decided to use the cash to pay Peter (the mortgage bill) or Paul (the revolving debt/credit card bill.) Seriously.
Showalter writes:
the borrowers in the high redefault group applied their discretionary cash to their distressed revolving debt, significantly reducing the proportion that rolled to a more serious level of delinquency. …The low redefault group behaved much differently. By 2011 they were letting their revolving debt roll to more than 60 days overdue at a much higher rate.
Since when is someone “Living Large” by paying down some bills while falling behind again on their mortgage? Snark aside, here’s the key point: both groups–the high redefaulters and low redefaulters–are still insolvent after mortgage modification. They still can’t pay all their bills even though they are trying to.
Showalter talks about high redefaulters paying down distressed revolving debt. He doesn’t claim the high redefaulters rang up large new debts with the cash, just that they chose to pay existing creditors other than the mortgagee.
Mods Should Make Borrowers Solvent
Let’s remember the context for these mods: our nation faced, and faces, a housing and foreclosure crisis triggered by the collapse of a lender-inflated, fraud filled housing and housing-related securities bubble. The crisis has been exacerbated by the unemployment crisis of the Great Recession. Our government stepped in to help, and responded quickly to save the bankers and Wall Street. The big help for Main Street was supposed to be loan modifications/refinancings.
Seen through the lens of public policy aimed at avoiding foreclosure, the inadequacy of the mods is even more obvious. Why did the government let the banks do mods that left people still insolvent?
But wait, banks might say: it’s not fair to put the homeowner debt reduction burden solely on the mortgage; why should our payment be cut so much that the borrower can service all their debts post-mod? Why not force the other debt lines to take a hit too? A variation on this whine is: but wait, by reducing the mortgage payment so much, you’re hurting pension funds and other investors, folk we don’t want to hurt.
Here are my responses:
Dear Bankers:
If you hadn’t falsely inflated principal balances by suborning appraisal fraud and adding fake demand to the marketplace by abandoning underwriting, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t engaged in widespread predatory lending including steering people into more expensive mortgages when they qualified for cheaper ones, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t engaged in predatory servicing, misapplying payments, forcing borrowers to purchase grotesquely priced insurance policies (even when they were maintaining insurance of their own), and charging rolling late and other junk fees, thus directly and fraudulently increasing the homebuyer’s debt load;
If you hadn’t worked so hard to kill mortgage-loan restructuring in bankruptcy, which would have led more people into bankruptcy and thus forced other creditors to take a hit too;
If you hadn’t defrauded homebuyers-as-taxpayers by making false mortgage insurance claims;
If you hadn’t defrauded homebuyers-as-pension-fund-participants by lying about mortgage-backed securities to the investing pension funds;
If you hadn’t criminally manufactured documents to foreclose on people’s homes;
It would have been enough to justify you lowering the mortgage payment to make borrowers solvent that you were bailed out with tax dollars and not held accountable for any of your crisis-causing misdeeds.
Dear Investor Protectors:
The issue isn’t whether the mortgage payment should be modified sufficiently to allow borrowers to become solvent. It’s who should pay for that modification. I agree with you: the banks should pay. There’s nothing about modifying the amount of the payment due you that comes out of the borrower’s pocket that requires investors to take the hit for the difference, except investor passivity and comparatively (to the banks) weak political power.
The Bottom Line
Insolvent people will default on debts owed, making the choice that seems most rational to them about whether to pay Peter or Paul. Public policy aimed at keeping people in their homes based on loan mods is a total failure if the loan mods leave borrowers insolvent. And apparently the 2009 loan mods did just that. And that failure is unconscionable against the backdrop of banker wrongdoing and government solicitousness of bankers.
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Cough…
Mortgage-bond sales hit highest level since 2009
Nearly $176 billion in bonds backed by fixed-rate home loans are issued in November amid a refinance boom and lenders’ hurry to securitize loans before Fannie’s and Freddie’s fees rise.
Sales of government-backed mortgage securities rose in November to the highest level in more than three years, stoked by a refinance boom and a rush by banks to avoid a fee increase from Fannie Mae and Freddie Mac.
Nearly $176 billion in bonds backed by fixed-rate home loans were issued in November, up from $132 billion in October and the most since $229 billion in June 2009, MortgageDaily.com reported Monday, citing the data firm eMBS Inc.
The securities were backed by government-sponsored finance companies: the Federal National Mortgage Assn., or Fannie Mae; Federal Home Loan Mortgage Corp., or Freddie Mac; and Government National Mortgage Assn., or Ginnie Mae.
Lenders sell nearly all their fixed-rate mortgages because they don’t want them on their books if interest rates rise, a situation that devastated the nation’s savings and loans when inflation rocketed in the 1970s.
Since the market for Wall Street’s private mortgage bonds imploded during the financial crisis, Fannie, Freddie and Ginnie have been essentially the only options for home-loan sales.
As part of efforts to offset huge losses, Fannie’s and Freddie’s regulator, the Federal Housing Finance Agency, decided in August that the companies would increase the fees they charge lenders for guaranteeing loans used to back mortgage securities. The fee increase was modest — 0.1% of the loan amount — but enough to motivate lenders to rush to get loans securitized before it took effect.
The high volume is also being driven by a refinance boom, produced by government support for the slowly healing housing markets. The Federal Reserve has driven down mortgage interest rates to the lowest levels on record, and a revision of the Obama administration’s Home Affordable Refinance Program, or HARP, has made it easier for current but underwater borrowers to refinance their loans.
According to newsletter publisher Inside Mortgage Finance, 6 out of every 7 home loans issued during the third quarter was a conforming mortgage, meaning eligible for sale to Fannie or Freddie. Although that’s high, the percentage of conforming loans in 2010 was even higher, at just over 90%.
Guy Cecala, chief executive of Inside Mortgage Finance, said rising home prices and falling defaults have resulted in more lenders being willing to keep jumbo mortgages — those too big to sell to Fannie or Freddie — on their books. The maximum size mortgage for a one-unit property that Fannie and Freddie can back ranges from $417,000 in less expensive markets to $625,500 in the most expensive, including much of California
http://www.latimes.com/business/la-fi-mortgage-bond-sales-20121204,0,585304.story
skippy… Place your bets… and the rabbit is off… look at them go.
PS. Housing Wire… like a cortex jack in the back of retails little head[s.
The bankers pushing people out of 10 million homes, that would never again be occupied, ever.. was that a strategy or a mistake? Were the bankers just overcome by greed? Obviously they weren’t thinking too clearly, getting the worst borrowers in the country into their McMansions, and then allowing them to live there payment-free for 5 years.
Now they have all these homes to manage/maintain, which people can’t afford any more now than 5 years ago because private debt levels really haven’t changed that much. If this weren’t so tragically serious I would almost find this amusing, even comical, to think that some (alleged) adults concocted this scheme in the hopes that doing the same thing a second time would achieve different results.
I think I’ll go break into one of those empty homes and sleep in it.. maybe carry off some lumber.. and imagine some family’s life and dreams are in those walls.
IMHO, both sides of this debate are nonsense. The only proper response to the debt bubble is a universal bailout in which every American taxpayer gets an equal payment. Those with debts can discharge them. Those without debts (let’s call them prudent) keep the money. An amount equal to what the Fed has given the banks ($21 trillion and counting) could have totally eliminated the financial consequences of the bubble. Why wasn’t this done? Because our elite is committed to usury as a business model. Think about this the next time you use that credit card or sign up for that mortgage. Debt slavery is the name of the neoliberal game.
Well stated, jc.
I’ll get to that the “irresponsible borrower” propaganda in a moment, but my friends and I believe it is always important to refresh the short-attention span of the body politic in America as to that bailout “necessity”:
AIG (through its Financial Products group, one of its directors: Martin Feldstein of Harvard) sold $460 billion worth of “unregulated insurance,” i.e., credit default swaps, which meant it could incur a potential payout of between $20 trillion to over $40 trillion, but AIG had no capital on hand for any payouts, hence the largest insurance swindle in history, necessitating that bailout.
The Fed, and those bailout funds and then some from the Treasury, pumped out over $23 trillion which we know about (but not the full amount since there has never been a complete, forensic audit of the Federal Reserve).
So, AIG owed potentially $20 trillion or much more, and the Fed (along with the US Treasury) accounts for over $23 trillion pumped out worldwide……..sounds about right.
On those “irresponsible borrowers” …
Planet Money (NPR) did about its only real and accurate news story awhile back when it did a breakdown on the subprime borrowers: corporate speculators, individual wealthy RE speculators, corporate house-flippers, individual wealthy house-flippers, with the bottom sixth of the group being the actual residential families, couples and individuals purchasing a home or condo.
I will address moral hazard now. Those fuckers opened Pandoras Box and they will never be able to close it. People now walk around as a badge of honor in not paying their mortgage. No way to ever stop this spreading now.
Such a pleasant thought. Let the Banksters come begging. Let our totally corrupted government try to convince us to trust them again. They are so sorry for all their “mistakes”… defrauding pension funds by fraudulent securitizations and multiple pledging of the pretend collateral; committing forgery and uttering many times over; destroying the entire land title system and obstructing justice; getting off Scot free until they created both a bubble and a crash ruining both borrowers and investors but creating a banquet of profit for themselves – however, strangely, their profit wasn’t enough to keep them solvent and so we, the people they defrauded, bailed them out with several Trillion dollars – the equivalent of bankster mods which were open ended and required no obligation on their part… unbelievable.
Banks don’t even pretend to contrition. It’s all the fault of those debt slaves who were trying to live above their station, natch. Bunch Of ungrateful parasites on the butt of Americas swaggering lantern jawed Galts and Galtesses.
Just wondering, but will the chain of title be any more clear in this bubble than it was in the last one?
And by “clear” I mean “not corrupted by bad data and tens of thousands of felonies.”
Shouldn’t be, since congress never specifically altered the MERS system and its processes, and since, other than civil suits to date, criminal intention and culpability for each and every one of those felonies, that is, falsely filed affidavits under that so-called robo-signing, was never established officially (but obviously is legally the reality).
You are right Lambert. Unless the states weigh in this will be continued forever. Only the states can cure these titles. Unless both the states and the feds can come together and devise a validation of titles going forward. Cold day in hell until Obama is out of office.
We have no car payment or credit card debt were NEVER late or missed a payment other than the 2 Ocwen REQUIRED us to miss in order to “modify” – we had 4 “modifications” that RAISED our payments – we would make the Trial payments then be served with FC notice, re-modify, make payments, get FC notice over and over again until the final and 4th one, which I paid faithfully the 1st of EVERY month electronically, only to have Ocwen attempt to Foreclose a year later. Why? The mods were an (unsuccessful) attempt to get title in their name. When they were repeatedly unable to get title insurance they realized the only way to get the house in thier name (lender on Deed is BK- no assignments or recordings) was to Foreclose and get the house via credit bid. We won the first round when I exposed their fraudulent, out of order assignments allegedly provided by the lender who has been BK 5 years, via Ocwen, the agent for the Holder (HSBC) who is allegedly the holder for the holder in due course – an MBS Trust – also BK 5 years. (you can’t make this shit up) The CLerk tried every way he could to give it to them and couldn’t – I got a DWP as Pro Se. They are appealing – hearing is tommorow wish me luck as even my new attorney told me today “Well, you owe SOMEONE – just refi and pay them (100,000 more than I borrowed).” Bastards one and all.
Good luck tomorrow. I hope you prevail. Can I ask what state you live in?
Charlotte, NC. Yep. In the belly of he beast. Pray for me, I’ll need it.
Dolley,
considering your a trust deed state, some robosigning fools at docx probably preped your paperwork…MERS, I am guessing was the purported assignor…but mers does not have any authorization to conduct business in North Carolina. It is not an OCC regulated entity to argue fed preemption. I am sure you have read the plea bargain where the founder/head of Fidelitys’ former entity, Docx, signs off on the fact over 1 million documents were improperly executed and constituted Fraud…it would be great if you posted what you did on scribd to see how you got a judge to accept your arguments. And…in florida, ocwan is dropping its drawers on some cases…not sure why they are giving you such a hard time…we have gotten three loan mods with principal reductions for our clients on ocwen cases. These things go in waves…every 13 weeks somebody sits down and devices another evil scheme to look good, so maybe where you are at they are not being helpful. And for the record…NONE of our clients who has gotten a loan modification has defaulted again…and yes, all of them got payments that were lower than they had…lowest interst rate so far…1.75 for five years with cap at 4.75 and LTV principal reduction to about 115% of value. And almost none of them surrendered any financial information to some former convenience store clerk now magically crowned as an assistant VP to “approve” the loan mod…our strongest weapon is the CRA…community reinvestment act…every lender in the country is currently in violation, and regulators have avoided reinspecting the larger institutions to allow them to keep their magical “outstanding” ratings…good luck
sorry, one more thing…in respect to the notaries…if its a docx document, you already can show from the plea bargain it is at least questionable…but in a few cases, we tracked down the notary, and only in 18 states is there a requirement that a notary keep a book/record/log of their notary acts…luckily, both Texas and Pennsylvania are used often by the foreclosure mills for their surrogate signing of documents. We have gotten two sets of notary logs…they tried to hand over just the page for the one document…we would not tell them the case information…it is a public document, their log books…they have to produce it…all of it…as long as you are willing to pay for their copies…and the costs can not be more than maybe a hundred bux…already spoke to regulators in Penn and Texas on it…suspect the notaries do not have the required logs…what we recieved was quite suspect…these robosigning notaries forget they are not just corporate carabinierri for their overlords, they are also officers of the state from which they requested the right to conduct notarial activities, and are subject to public record laws…the states are Alabama, Arizona, California, Colorado, DC(yeah not a state yet), Hawaii, Kentucky, Maryland, Mass, Miss, Missouri, Montana, Nevada, Ohio, Oregon, Penn, Tenn, and Texas… and even in those states where there is no need to keep a log for hand stampted notarizations, most of the others require a log kept for any electronic notarizations…be well
A LOAN MOD???? Seriously? Why don’t I just let them F me in the town square. They have NO STANDING or AUTHORITY to offer a loan mod and have proven they will breach every agreement they enter into.
Susan the other every time the “states and the fed get together” it means just one thing – we all get to bend over.
Having worked as an indepenant claims reviewer, reviewing Bank of America default programs and modifications, it is very easy to understand the default rate. More often than not the modification payment was higher than the original payment amount for the mortgage and often required substantial cash input by an already cash strapped borrower. Other times tricks were used by BofA to cause a default. For example, offer a forebearance, and before that first payment was made, offer a trial modification, and before that first payment was made, notify the borrower they could have a full modification if they would cancel in writing the forebearance and the trial modification since all these programs can’t be open at one time. Upon receiving the letter canceling the forebearance and trial modification, notify the borrower they did not qualify for the full modification because A. they did not perform on the first two programs offered and B. they rejected the initial help offered and could no longer qualify for a full modification because they rejected the initial help offered. By this point the borrower is so confused and upset that they move.
BofA is a snake pit of deceipt and trickery. And no amount of government oversight will change this situation. it is a discusting situation.
Um, WHAT “government oversight”?? The regulators are so far up BofA’s arse they can count their teeth. The head of the FBI in Charlotte just “retired” to go to work for BofA. Nice.
http://www.charlotteobserver.com/2012/11/21/3680082/charlotte-fbi-leader-briese-retiring.html
Control group is all wrong – you want to determine the effect of loan mods, you need to compare it to a significantly similar group who didn’t mod the loans.
You want to see what they’re doing with their additional money, you should compare it to what they’d do if they didn’t have it.
The study is worthless.