Newsflash!

WASHINGTON (Reuters - 12/8/08) — Recent data suggest that many borrowers who received help with mortgage modifications earlier this year have tended to re-default on their payments, a top U.S. banking regulator said Monday.

"Put simply, it shows that over half of mortgage modifications seemed not to be working after six months."

Dugan said based on data collected from some of the biggest U.S. institutions, like Bank of America, Citibank and JPMorgan Chase, home foreclosure starts fell by 2.6% in the three months ended in September.  However, data, to be issued by the OCC and the Office of the Thrift Supervision next week, could throw cold water on a push by some policymakers for loan modifications as the key remedy for the ailing U.S. financial and economic crisis.

Dugan said recent data showed that after three months, nearly 36% of borrowers who received restructured mortgages in the first quarter re-defaulted.  The rate of re-default jumped to about 53% after six months and 58% after eight months, Dugan said, without providing an explanation for the trend.

The widespread or government mandated modification of mortgages in default is a recipe for disaster.  It is a purely political act producing no justifiable economic benefit.  After six months more than half of loan-mods are back in default.  What percentage will be in default after a year?  How about after three years?  These are people who SHOULD NOT OWN HOMES.  Government efforts do not prevent foreclosures, they simply delay them to disastrous effect.  The length of the downturn is extended and taxpayers are on the hook for inevitable losses.  The government appears committed to perpetuating the credit, consumer spending and foreclosure death spiral which it created.

Some policy maker with a backbone needs to articulate the reality that the only solution to the problem of overvalued housing prices is to faciliate the market clearing mechanism and speed up the equilibrium price-finding process.  Speed up foreclosures.  Incentivize people to get out of mortgages on which they will eventually default.  Remove the red tape.  Stop demonizing companies for rationalizing the market with much needed foreclosures.  The political reaction to the housing disaster may end up causing more damage than the disaster itself.

Foreclosures and falling house prices are inevitable.  What is not yet determined is the duration of the downturn or its severity.  Let the market work and we will experience a few years of unavoidable pain.  Allow the government to prevent the markets from operating and we will be lucky to only lose a decade.