Once in Default: Always in Default
Borrowers stay in default … Regardless of Obama Modification Programs New Study Shows
As we have previously discussed about Florida real estate, the whole premise of the Obama Administration’s housing bail out response was to provide, Florida real estate borrowers, the opportunity to modify their loans and get back on track. Based on prior studies, folks that fell behind typically self corrected or played catch up with their lenders about 25 percent of the time. And that was without any modifications. Thus, the Obama policy was simple: hope and pray that 25 percent of homeowners that fell behind would self correct and provide modifications to those who qualify thus eliminating the number of foreclosures clogging the courts.
Well the verdict is now in once again. According to the Wall Street Journal a study conducted by the well-known Fitch Rating Services concludes that the cure rate on loans is only about six percent! That is almost 75 percent less than expected. Oops… I guess the policy works minus a slight miscalculation. But it is simple to understand, prior research was conducted during a time when real estate prices fell at most 10-20 percent… not 30-60 percent.
What does this mean to Florida real estate? The prior studies never factored in what we call “strategic defaults” where homeowners decide to just stop paying because it no longer makes sense to keep paying. Plain and simple.
The Fitch study is compelling enough since it covers $1.7 trillion of mortgages. That is a sum that exceeds the amount of numerals on all my calculators in the house (except the I-Phone). But it says something else. It provides an insight into the fact that in all likelihood we will see many more banks fail and that the FDIC will soon need its own infusion of funds.
So, it will be back to the drawing boards for the government and Florida real estate buyers and sellers. Probably, we will see the many first-time home buyer credit programs extended since it has helped stabilize pricing in some areas. Stable pricing is at the end of the day is one of the key ingredients to resolving the crisis along with folks having the jobs and income to pay their mortgages. This is just what Florida’s real estate market needs.
As for Florida loan modifications, I still believe it is better to do a “short refinance” or “short modification” and keep folks in their homes rather than allowing another house to go on the block. It is illogical to understand why the Bank is willing to take the loss on a short sale or foreclosure, yet not willing to take the loss by keeping someone in their home at a lower principal amount. The systemic impact on the community is obviously more severe when a family is kicked out of their own home.
Clearly, only once modifications include meaningful principal reduction, will the cure rates improve. And guess what, you don’t need a new fancy study or high powered calculator to figure that one out.
From The Trenches