WASHINGTON — Loan modifications have been pushed for more than a year as a potential solution to the housing crisis, yet regulators said Monday that many are ineffective.
Comptroller of the Currency John Dugan previewed a report that found more than half of loans modified in the second quarter were 30 days past due within six months. Mr. Dugan said the data showed that "over half of mortgage modifications seemed to not be working."
But regulators, speaking on a panel at a conference here, interpreted the data differently. Office of Thrift Supervision Director John Reich argued that the data proved it is a mistake to spend taxpayer money on a huge effort to ramp up modifications.
"I do have concerns about allocating significant resources to loan modifications with such a high rate of redefault," said Mr. Reich, whose agency hosted the conference.
He said government money would be better spent on a jobs-creation program.
Federal Deposit Insurance Corp. Chairman Sheila Bair rejected that argument and said the problem lies in how servicers are doing loan modifications.
"I do think the quality of the mods are not what they should be," Ms. Bair said.
The FDIC has promoted a plan to offer a government guarantee to servicers that engage in systematic loan modifications.
Mr. Dugan disagreed with Mr. Reich that the data cast doubt on the FDIC plan. A government guarantee kicks in only if a modification does not result in a redefault within six months, Mr. Dugan noted.
"One of the things in the plan that I think is quite positive is the government doesn't start paying in loss-sharing for someone who defaults within the first six months," Mr. Dugan said on CNBC later. "So a number of these mortgages would be off the hook."
He seconded Ms. Bair's assertion that the FDIC loan modification program could be an improvement over current methods.
"Their modifications are done differently and are more steep and may result in fewer" redefaults, Mr. Dugan said on CNBC.
Ms. Bair said the FDIC's plan has been in place at IndyMac Bancorp., a large thrift the agency took over in July. So far none of those loan modifications have resulted in redefaults, she said.
Under the plan, servicers get a 50% guarantee on delinquent loans if they reduce the borrower's mortgage payment to between 31% and 38% of their income. The FDIC gives servicers several ways to accomplish that, including principal forbearance, reamortization, and lowering interest rates.
"You have to get down the full payment to the 31% debt-to-income ratio," Ms. Bair said. "You will significantly reduce your redefault rate."
She tried to see some positive news in the data, which is expected to be released next week as part of the OCC-OTS Mortgage Metrics report. "I think it's very important to look at this data carefully and know what it says and doesn't say," she said. "Even if you look at a 59% redefault rate, you still have 41% of families who are avoiding foreclosure and staying in their homes."
In a statement given to press later on Monday, Ms. Bair also took issue with the data. "It fails to define, in any meaningful way, the modifications that have redefaulted," she said. "Because of this lack of granularity it's impossible to make any judgment about the redefault rates of sustainable modifications versus cosmetic modifications that by their nature are more likely to redefault."
An OCC spokesman responded that "facts are the facts."
"The data show a large number of re-defaults, and now our job is to work with the servicers to find out why, and to find out what types of modifications are working and what types of modifications are not working," he said.
The agencies' report covers nearly 35 million loans worth more than $6.1 trillion — roughly 60% of all first-lien mortgages in the country. It is expected to show increasing delinquencies and foreclosures in process for all first-lien mortgages held by national banks and federal thrifts, Mr. Dugan said, though new foreclosures decreased by 2.6% from the second quarter.
The report will also show that borrowers redefaulted after loan modifications relatively quickly. Mr. Dugan said 36% of borrowers who received a loan modification in the first quarter were more than 30 days past due within three months. After six months the rate was 53%, and after eight months, 58%, he said.
Mr. Dugan said he did not know why redefault rates were so high.
"Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers?" he asked. "Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? We don't know the answers yet."
Getting to the answers is critical. "They have important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months," Mr. Dugan said.
Other regulators suggested alternatives for policymakers. Federal Reserve Board Vice Chairman Donald Kohn said principal reductions were important.
"My guess is there isn't any one solution," Mr. Kohn said. "You can work on the affordability side as Chairman Bair works on. I think you could work on the principal-writedown side as Hope for Homeowners was trying to do."
At a panel discussion earlier in the day, bankers continued to argue that systemic modifications are too difficult and loans must be modified one by one. "To say there is one type of foreclosure situation and all we have to do is modify it out and the problem goes away I think is an overstatement," said Curtis Hage, the chairman and chief executive officer of the $1.1 billion-asset Home Federal Bank in Sioux Falls, S.D.
Gov. Jon Corzine of New Jersey, who also attended the forum, criticized the Bush administration for not addressing the root cause of the crisis. Gov. Corzine called for a six-month moratorium on foreclosures to allow time to focus on modifying mortgages.
"We need a bottom-up approach by modifying mortgages," said Gov. Corzine, who spoke before regulators had released the new data.
The former Goldman Sachs Group chairman also called for rolling back the 2005 changes in bankruptcy law to allow judges to rework mortgages for struggling consumers. He criticized the administration's use of the $700 billion Troubled Asset Relief Program to put capital into banks. "Tarp is just a cloth concealing the problem … " and "saying we are putting capital in on top is not going to correct it. We need the government to take responsibility for speedy modifications or take loans on our balance sheet."
Ronald Hermance Jr., the chairman, president, and CEO of the $51.6 billion-asset Hudson City Bancorp Inc. in Paramus, N.J. said Tarp should be used to buy up banks' illiquid assets.
"Let's go back to the reason for which Tarp was created," he said.
But Neel Kashkari, the Treasury's interim assistant secretary for financial stability, defended the department's strategy. "This lending won't materialize as fast as any of us would like, but it will happen much faster as a result of having used the Tarp to stabilize the system," Mr. Kashkari said.