The failure of 'help': 'modified loans' don't modify repayment

By Warner Todd Huston

One of the fixes that Democrats are insisting upon to save people's homes is the idea of the "modified mortgage." A modified loan is an offer to homeowners that have either become delinquent in payments or have become overwhelmed in interest to have their loans reinstated with certain modifications that are expected to make payments lower to the borrower. The idea is that the troubled homeowner can forestall foreclosure and stay in their home.

Sounds like a great program. The bank or mortgage holder can continue getting paid without all the hassle or foreclosing and taking possession of the house, the homeowner is not thrown out in the street and with all that turmoil avoided, society is in approximate harmony. And, with Democrats making noise on how they support these sorts of programs, they get to pretend they care about Mr. and Mrs. America down on their luck.

It's a win-win for everybody, right?

But, does it work? Maggie Thurber of Thurber's Thoughts did a little poking around at the office of the Comptroller of the Currency, Administrator of National Banks department of our wonderfully, caring U.S. government to see about that question. There she discovered a few enlightening paragraphs in the mortgage metrics report of the third quarter of 2008.

For the first time mortgage metrics have been gathered for these modified loans and the report is not very encouraging.

The conclusion of the report, in brief, is that delinquencies continue to rise, foreclosures and other actions leading to home forfeiture also continued to rise, and loan modifications were associated with high levels of re-default."

Maggie was alarmed at the re-default rates of these sort of loans and pointed out the following paragraphs in the report mentioned above:

For loans modified in the first quarter of 2008, more than 37 percent of modified loans were 30 or more days delinquent or in the process of foreclosure after three months. After six months, that re-default rate was more than 55 percent. For loans modified during the second quarter, the three-month 30+ day delinquent re-default rate was more than 40 percent.

For loans modified in the first quarter, more than 19 percent were 60 or more days delinquent or in process of foreclosure after three months. That rate grew to nearly 37 percent after six months. For loans modified in the second quarter, that re-default rate was more than 21 percent after three months.

It appears as if more than half the modified loans went right back into default within six months. Thurber also notes that Fannie Mae and Freddie Mac loans had even higher default rates than that of traditional (read capitalist) lenders. Fannie and Freddie, as we all know, are more-or-less political agencies and not capitalist agencies.

So, in the end, it appears as if these modified loans that the Democrats are pushing are not very effective and we see that, once again, things Democrats want are less about the ends for which Democrats claim and more about creating an image of the Democrat Party as the "caring" party.

In the 1940s, as Franklin D. Roosevelt was creating the false impression that Social Security was a sort of government sponsored insurance program — even as the Supreme Court demanded he stop selling it that way — Roosevelt admitted that his plan had nothing to do with economics and would probably make it harder and more expensive for employers to hire people during the greatest national economic disaster of American history.

FDR admitted that the Social Security Act was nothing but a vote-pandering device. FDR said, "I guess you're right on the economics, but those taxes were never a problem of economics. They were politics all the way through." In other words, he didn't care a whit if the program was a good one based on sound economic principles. In reality, he just wanted to create the appearance that he and his Party "cared" about people to get votes.

And here we see in this pushing of modified mortgages yet another example of that sort of pandering by Democrats because in more cases than not, the whole thing does little real good.

But it sure makes Democrats look caring and benevolent, eh? So, mission accomplished. It's not about economics. It's politics all the way through.

© Warner Todd Huston