The closing of our review found in the final paragraph sums up the analysis of this report succinctly by unmistakably concluding, the game is over and these homeowners have debt levels that are untenable.

The Comptroller of the Currency discussed a report on delinquency and default rates on mortgages that have already been modified.  These are home loans that were in default and essentially rewritten or modified and are now once again delinquent or in default.  The remarks by the Comptroller of the Currency were delivered at the Office of Thrift Supervision’s National Housing Forum on December 8, 2008.  The remarks in the speech are based on a report that is going to be published late this month referred to as the second OCC and OTS Mortgage Metrics Report.

This report, that is not yet available for public view, is an in depth analysis of mortgages throughout the U.S.  According to the report, “The mortgage metrics report covers nearly 35 million loans worth more than $6.1 trillion, or about 60 percent of all first-lien mortgages in the United States. The quarterly reports are unique in that they are not merely surveys, but instead consist of validated, loan level data using standardized definitions for prime, Alt-A, and subprime mortgages, and standardized definitions for loan modifications.”

Though the report is not available, the Comptroller not only made a brief speech about the data but added a chart to support the remarks.  The chart depicted the data for mortgage loans that were modified in the first quarter and second quarter of this year and illustrated the percent of these loans that are now 30 days or more past due.  Based on the chart, loans that had been modified in the first quarter of 2008 showed that more than a third of the loans were 30 days delinquent after three months.  In addition, loans that were outstanding for more than 6 months had gone into a delinquency rate in excess of 50%.  The Comptroller declared that, “Put simply, it shows that over half of mortgage
modifications seemed not to be working after six months.”

We cover this report simply because it supports our long standing premise that interest rates and home prices are not the problem.  The problem is the last 10 year credit binge our economy was running.  When the mortgage crisis kicked up with high delinquency rates and high foreclosure rates, the unemployment rate was low.  November 2008, the most recent release, showed the unemployment rate at 6.7%.  Certainly not a pretty number, however the rate in November of 2007 was 4.7%, the November 2006 rate was 4.5% and the November of 2005 unemployment rate was 5.0%.  The average unemployment rate from November 1998 to 2008 is 5.08%.  In December of 2006, RealyTrac reported, “The report …shows a national foreclosure rate of one new foreclosure filing for every 961 U.S. households, the highest monthly foreclosure rate reported so far this year.”  Since then the numbers have only deteriorated.  The correlation between employment and foreclosures in the past three years is statistically speaking, rubbish. The production and income components of the economy are not the problem with home delinquencies, its credit. 

Although many government officials are apparently flustered as to why modified loans re-default, any good banker in the mortgage business can explain it.  These homeowners are overextended and a reduction in the interest rate does not make the mortgage payment low enough to bring about a viable budget for the homeowners.  Depreciated home values is a frequent excuse volleyed about to explain delinquencies.  Our reply is simple, what on earth does that have to do with making a mortgage payment.  If the homeowner makes $65,000.00 a year with a $425,000.00 mortgage it doesn’t matter if the house is worth $200,000.00 or $2 million, the borrower can’t make the payment.  The borrower could once, by refinancing and extracting equity that delayed the day of reckoning.  Now that game is over and the borrowers have debt levels that are untenable.  The credit hangover is not going to be cured by more credit or new roads and highways.  This is a long term problem, credit levels are already down to some degree and they will need to be reduced further over time.

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