Mortgage Modifications are Happening not with the Intended Results

Federal regulators reported on Monday that many borrowers who went through a mortgage modification earlier this year still having trouble.

Mortgage modification is one of the techniques being pushed by members of Congress and some federal regulators to help stem rising foreclosures. The hope has been to offer more affordable rates to those who bought homes using adjustable rate mortgages. Those borrowers are now facing much higher interest rates than when they originally purchased.

The loan modifications are working to a degree, but the report shows that six months after modification almost 37 percent of those mortgages were 60 days or more delinquent.

This high rate of delinquency shows that the problem is more multi-facetted than regulators might have anticipated.

A straight mortgage modification might well work where the home owner purchased a home he or she could truly afford, in a market that has not rapidly declined. There are those situations out there.

There are also many circumstances where borrowers bought more than they could afford betting on appreciation that history shows we should not count on. Those people were having a tough time making payments even at the low teaser rates before the mortgages reset. In those cases, even a mortgage modification will not help.

In addition, some markets around the country have seen such significant reductions in home values. These were the markets that saw appreciation rates that were more than double the national average. They had nowhere to go but down after gains like that. Mortgage modifications there may help delay foreclosure, but many homeowners are asking why stay in a home that is now selling for 40 to 60 percent less than what they paid.

The defaults on loan modifications highlights one of the most overlooked problems with the bailout: prices on many homes in many areas simply need to come down. Any solutions that purports to address the housing crisis without facing this fact is igorning the laws of supply and demand.

Strangely, we do not hear regulators criticize the double digit percentage gains in prices that occurred during the boom years; yet they want to keep prices from coming down to a place where supply and demand intersect. This is happening in the face of price gains never before seen. History shows a decades long trend of steady but modest gains in home prices. Now that the free market is naturally working its way back to that trend line, regulators want to halt it progress. They clearly want to have all the benefits of a free market but none of the risks.

And even in markets where prices have have substantial reductions, the longer-term trend still shows nice, if more reasonable price gains. Given this fact, the risks are still relatively modest. See December 3, 2008 blog posting.

The reality is that individual consumers are much more powerful than regulators. They will dictate the pace of housing sales and the gathering recovery more than Washington insiders.

When consumers see value they are jumping. Well priced homes in the South Sound, for example, are selling in record times and for nearly full list price. See our blog article of October 29th. By the same token, overpriced homes are languishing on the market.

In California, sales are up 12 percent over last year mostly due to consumers reaction to price drops from 30 to 40 percent. These gains in sales are happening mostly without the aid of regulators. Instead, pricing that is appropriately addressing the supply and demand balance is the leading factor.

The good news in the Northwest and here in the South Sound continues to be that our prices did not inflate as rapidly as those other troubled areas in the country. That means we did not see as many subprime, adjustable or interest only loans. The combination of these two factors as helped our market experience a more measured return to sustainable prices. As a result, mortgage modifications may well prove to be success here. In the meantime, consumers will continue to look for value and act quickly as it presents itself.