The other day, New York Attorney General Eric Schneiderman announced a $60 million program for housing counseling and legal services for borrowers threatened with foreclosure. This will enable them to fight their evictions and get the support they need for working with banks for modifications.

I’m happy to see any money from the foreclosure fraud settlement go in the general direction of homeowners. We just learned that California sealed the state budget today by taking even more of the hard dollar settlement funds to fill that hole. But a new report out from TransUnion tells a very cautionary tale for those who get the kinds of loan modifications that are likely to come out of counseling and negotiation with the banks.

Six out of 10 homeowners who received a loan modification stopped paying their mortgage again after 18 months, but there may be a modest silver lining buried in the high recidivism rates.

A study by TransUnion has found that borrowers who received a mortgage modification performed materially better on new auto loans and credit cards than those who did not receive any help, an indication that some consumers who fall far behind on monthly bills are able to regain their financial footing […]

The study found that borrowers who had previously gone delinquent only on their mortgages — but not other loans — were better credit risks than borrowers who went delinquent on other loans as well as their mortgages.

Still, high recidivism rate are a concern since most of the borrowers will redefault within 18 months and are likely to end up in foreclosure. The study also found that nearly 42% of borrowers who received a loan modification stopped making payments within a year.

That’s not a very encouraging silver lining. And what this shows I think more than anything, especially because of the data on auto loans and credit cards, is that the types of loan modifications being granted are fundamentally flawed, and simply not designed to keep borrowers in homes over the long or even the medium term. We know that precious few principal reductions have been handed out over this period, with more modifications using interest-rate reductions or forbearance or other cosmetic changes that do little to help the borrower. As a result, you get a few more payments out of homeowners, and better payments on their auto loans and credit cards, before they re-default and slide into foreclosure.

This puts initiatives like HAMP in a new light. Because Treasury didn’t mandate that the modifications needed to be lasting, in the manner of principal reductions, the program was even more designed to fail, beyond the other deficiencies.

The regulators simply aren’t interested in bringing real relief to homeowners and allocating the losses from the housing collapse in any kind of equitable fashion. The OCC foreclosure reviews, which are supposed to get relief for those illegally evicted, have been extended again, to September 30, after more problems with take-up rates. The claim that “many” borrowers will see lump-sum payments of $125,000, when the spread is from that figure all the way down to $500, is fictitious nonsense. Similarly, low mortgage rates have largely not been delivered to borrowers, particularly underwater borrowers, because of the banks gaming HARP to artificially increase rates.

Finally, we have the “mandatory” principal reductions in the foreclosure fraud settlement, but I still cannot find confirmation that any of them have been carried out. Until we get widespread write-downs to market value, we’re still going to see struggles and cascading foreclosures, as this new data shows.

David Dayen

David Dayen

1 Comment