MADISON, Wis. — Modified loans continue to default at an astounding rate with more than half of all those modified in the first two quarters of 2008 failing within 12 months of the modification according to new figures from the Office of the Comptroller of Currency.
CUNA Mutual economist Dave Colby is hopeful that modifications that came later in 2008 and into this year were more effective at addressing the underlying repayment problems in those troubled loans. He said many lenders were trying to "dress up their books" in the first couple of quarters of 2008 by offering token modifications, such as interest-rate reduction, that did little to stem the tide of defaults.
But the numbers for Q3 and Q4 2008 and the first quarter of 2009 are not promising. More than 30% of all loans modified in Q3 2008 re-defaulted within three months and that trend has gotten little better in the subsequent quarters with failure rates at 28.1% in Q4 and 27.7% in Q1 2009. The 12-month re-default rates are on pace to actually get worse than what was seen in the first two quarters of 2008, and that could spell even more trouble for the housing market and lenders. With the foreclosure crisis now starting to heavily impact the Midwest, housing prices could have farther to fall despite an uptick in sales volume and values over the summer.
How Many Foreclosed Homes Are Being Held Back?
"No one in the industry has a really good grasp of how many homes are not on the market from foreclosures being held by the bank/investor until the market stabilizes," Bill Vogeney, chief lending officer at Colorado Springs-based Ent FCU said.
"What you have nationally is the housing market (showing) a bottom, but maybe it is a false bottom as lenders see the re-default rate and those houses come back into the market," added Colby, noting that such a phenomenon could make lenders even more cautious and damper economic growth.
Credit unions are likely not experiencing re-default rates anywhere near the national statistics, said Dwight Johnston, VP-economic and Market research at WesCorp, but that doesn't mean credit unions can afford to ignore the trend. There is still a chance, Johnston said, that the re-defaults they are seeing coupled with a major housing head fake will hit CUs bottom lines once again.
What If Things Get Worse?
"The risk is that the housing market continues to get worse, so when they have to foreclose they take an even bigger loss than they would have," he explained.
While Colby is convinced there is "additional risks to the downside" in the housing market, Bill Garcia, president of lending and collections consulting firm Solutions in Finance, believes there is a firm bottom in place thanks to high sales volume the industry has seen for the last few quarters. Garcia lauded credit unions for achieving a much higher rate of success in loan modifications, but warned that housing value recovery "is going to be five to ten years down the road."
A number of experts told CU Journal interest-rate reduction is not enough to prevent default in most cases, but creative solutions such as extended maturities with call options, principle reduction and longer extensions are helpful. "If modifications help keep people in their homes a little longer, [and] they give them time to find new jobs or sell the homes, they're important," Vogeney told the Journal, pointing out that Ent FCU's re-default rate is a mere 4%. "I think we should be focused not on the re-default rate, but on the success rate. A lot of the re-defaults were more likely borrowers that could not afford the home originally. I think a portion of the re-defaults are people who realize they're upside down in their home, that their situation isn't going to get a whole lot better, and they'd prefer to conserve their cash by renting. They walk away, even though they can pay."
