More Than Half of Loan Modifications Fail within One Year

Loan modifications fail at a very high rate, not because borrowers are unemployed, but because borrowers were Ponzi borrowing, and now they are being cut off from credit necessary to continue making their payments.

37 Fresco Inside

Irvine Home Address … 37 FRESCO Irvine, CA 92603

Resale Home Price …… $1,750,000

I wanna go back

I wanna go back

Uh cause I remember way back when

Got kicked out the crib and had a place to stay

Sometimes I cant help but think, I Wanna Go Back

I Wanna Go Back…back in the time

I Wanna Go Back

I Wanna Go Back…go way back way back y'all

I Wanna Go Back…back in the time

Kid Rock — I wanna Go Back

Everyone who participated in the Great Housing Bubble wants to go back to the way things were before. That is the problem with Ponzi schemes; once they collapse, you can't rebuild them. Borrowers were only making their debt-service payments by borrowing more money. When faced with the prospect of paying their debts without continued borrowing, Ponzis can't do it.

Loan modifications seem like a great idea: borrowers resume making payments and get to keep their houses, and lenders don't have to foreclose and recognize any losses. In other circumstances, this solution may have worked, but with recidivism rates exceeding 50%, these programs are largely a failure.

Imagine a residential real estate market where all the owners borrowed using fixed-rate financing with at least 20% down and reasonable debt-to-income ratios and there was limited mortgage equity withdrawal (think Texas). A market like that would have significant equity and owners capable to withstanding some financial distress. An economic downturn would cause problems, but in a market like that, loan modification programs offering temporary payment relief would probably keep a majority of homeowners in their properties.

Unfortunately, that is not our housing market.

Borrowers in our market used 100% financing with debt-to-income ratios exceeding 50% and borrowed any equity as it appeared. In a market that has gone Ponzi, people can't afford their debt-service payments without additional debt. That is the essence of a Ponzi scheme. Loan modifications will not be successful in a Ponzi market because borrowers could not afford the debt prior to the financial distress. Therefore, loan modifications in our current market environment are doomed, and the statistics prove it.

Mortgage Mods: Most Borrowers Are Likely to Redefault Within a Year

By Lita Epstein

Mortgage modifications may not be the solution to the nation's housing problems, after all. Fitch Ratings predicts that 65 percent to 75 percent of modifications on subprime mortgages will redefault in 12 months. The redefault level predicted for prime loans that have been modified is slightly lower — 55 percent to 65 percent within 12 months of modification.

Along with foreclosures, the use of short sales and short payoffs increased in 2009, according the the recent report from Fitch. "Currently 50 percent of prime and 35 percent of subprime and Alt A distressed liquidation sales are not by REO [lender-owned] sale," according to Fitch. The percentage of loans that ended up in foreclosure was 25.7 percent by the end of 2009, up from 11.7 percent in the first half of that year.

All those statistics show how little can be done to help people as long as the job market continues to be weak.

Even when the job market picks up, these statistics will not improve. These borrowers went Ponzi. The only thing the recession did was accelerate their financial demise.

Yet Fitch said that "potential new moratoriums and mandated mediations are becoming more widely required," which Fitch thinks will delay final resolution on many of these properties until sometime in 2012. So we're still looking at distressed sales impacting the housing market for at least another two years. Maybe these delays will be long enough to help some people find a job and keep their homes.

Hope is not a plan, but that is all lenders have. Everyone seems to think they are benefiting from the amend-pretend-extend policies of lenders. Expect that behavior to continue until the cartel falls apart.

The good news for borrowers looking to get out of property underwater is that short sales appear to be increasing in popularity. While lenders have discouraged short sales until recently, the use of short sales has increased since mid-2009.

California leads the way in the use of short sales. Fitch found that 50 percent of all short sales or short payoffs were located in California. About 8 percent were in Florida and 7 percent in Arizona. With new guidelines from the Obama administration changing the rules for short sales, Fitch expects the percentage of loans "liquidated outside of REO sale will continue to increase."

Short sales are the solution du jour. Once lenders realize that will not solve the problem, look for foreclosure rates to go back up… unless lenders are going to enable permanent squatting through gifts of homes.

Even when a home defaults, it does not necessarily result in foreclosure. Fitch found that about 15 percent of all modified non-agency residential mortgage back securities (RMBS) get additional modifications. Of the modifications that were completed in the first quarter of 2009, 18 percent have been remodified to date.

Second, third, forth modifications. The amend-pretend-extend dance is getting ridiculous.

The data for the U.S. Treasury's Home Affordable Modification Program (HAMP) still are not available, since the first completed modifications under HAMP were seen in July 2009. Of the 1.7 million loans identified as HAMP eligible, 1.4 million were offered a trial plan by their servicer, but only 299,000 had actually converted to a permanent modification plan. Fitch expects that these modifications will default at about the same rate as the RMBS modifications.

Those modifications could show up later in the process, since the reduced payments are allowed over a five-year period. Then the payments increase to established caps.

When those payments start increasing another wave a defaults could be been.

No, when those payments start increasing there will be another wave of defaults. The policies being implemented by lenders will ensure we have supplies of distressed properties for many years to come.

Eat the Nouveau Riche

I first profiled today's featured property last year. The owner has now been squatting in a multi-million dollar mansion for a very long time. He certainly isn't complaining about the amend-pretend-extend dance.

Over two years squatting in a $2,000,000 mansion

I must admit, when I see people living with no payments for over two years in an opulent mansion, it pisses me off.

This property was purchased on 7/28/2006 for $2,337,000. The owners used a $1,635,700 first mortgage, a $467,350 HELOC and a $233,950 down payment. Then, the fun begins….

Foreclosure Record

Recording Date: 06/02/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/28/2008

Document Type: Notice of Default

37 Fresco Inside

Irvine Home Address … 37 FRESCO Irvine, CA 92603

Resale Home Price … $1,750,000

Home Purchase Price … $759,000

Home Purchase Date …. 5/27/2005

Net Gain (Loss) ………. $886,000

Percent Change ………. 116.7%

Annual Appreciation … 16.2%

Cost of Ownership


$1,750,000 ………. Asking Price

$350,000 ………. 20% Down Conventional

4.80% …………… Mortgage Interest Rate

$1,400,000 ………. 30-Year Mortgage

$354,149 ………. Income Requirement

$7,345 ………. Monthly Mortgage Payment

$1517 ………. Property Tax

$400 ………. Special Taxes and Levies (Mello Roos)

$146 ………. Homeowners Insurance

$245 ………. Homeowners Association Fees


$9,653 ………. Monthly Cash Outlays

-$1545 ………. Tax Savings (% of Interest and Property Tax)

-$1745 ………. Equity Hidden in Payment

$642 ………. Lost Income to Down Payment (net of taxes)

$219 ………. Maintenance and Replacement Reserves


$7,223 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$17,500 ………. Furnishing and Move In @1%

$17,500 ………. Closing Costs @1%

$14,000 ………… Interest Points @1% of Loan

$350,000 ………. Down Payment


$399,000 ………. Total Cash Costs

$110,700 ………… Emergency Cash Reserves


$509,700 ………. Total Savings Needed

Property Details for 37 FRESCO Irvine, CA 92603


Beds:: 5

Baths:: 5

Sq. Ft.:: 4750


Lot Size:: 7,225 Sq. Ft.

Property Type:: Residential, Single Family

Style:: Two Level, Contemporary

View:: City Lights, City, Mountain, Faces South

Year Built:: 2006

Community:: Quail Hill

County:: Orange

MLS#:: P674831


Best Value at Quail Hill, Over $500,000 spent in Custom Upgrades. Beautiful Trevertine and Exotic Hardwood Floors. Custum Built in Family Room and Hallway & Kitchen. Central Vacuum & Clean Air Purification System and Much More!!!!


The realtor is really excited about that central vacuum and air purification system.

27 thoughts on “More Than Half of Loan Modifications Fail within One Year

  1. Chris

    Is it me or have there been more Irvine homes for sale nowadays? I see an increase in For Sale homes during these past few weeks.

    Don’t tell me it’s just the summer season selling…..let’s have some more juice on this.

  2. AZDavidPhx

    The realtor forgot to capitalize “spent” so they lose points for that. However, they did almost flawlessly interchange a “&” symbol at each occurrence of where an “and” should have been so they some partial credit for that. The realtor also successfully mispelled “custom” exactly 8 words after spelling it correctly so +1 point for the mis-spell and -1 for the correct spell. Overall, this listing is a solid B+.

    I would encourage the realtor to swap that last ‘and’ with an ‘&’, splice in a few more commas, remove a vowel from every other word, and use more exclamation points and CAPS LOCKING as follows:

    BEST VALUE AT QUAIL HILL!!!!!!!! Over 500,000$ Spent in Custum Upgrdes, Beutiful Trevertine & Exotic Hardwod Floors, Custum Built in Family Rom & Kitchen, Central Vacum & CLEAN Purifcation System!!!!, and MUCH MORE!!!!!

    1. scottinnj

      Plus if you are going to list a $1.75m house where around 40% of the purchase price is ‘custom’ upgrades, you might include more than 2 shadowy pictures of the interior that don’t appear to highlight said upgrades.

      But to be fair the realtor, this house would only generate around $100k of commissions if sold at tihs price, heck I’d probably hardly bother either.

      1. AZDavidPhx

        I don’t understand why they bother with all the editorializing. The free text description could be very useful if they would not use it like used car salesmen and add a bunch of superfluous grammatical diarrhea.

        Example of an effective description:
        Custom upgrades including Trevertine and hardwood floors. Remodeled kitchen and family room. Also includes central vacuum and clean purification system.

        That’s all it takes. Short and to the point. Neutral language and more professional looking. None of this “BEST MOMENT IN HISTORY TO BUY THIS GORGEOUS HOUSE FROM ME TODAY!!!!! Nonsense.

        Why these realtors feel it necessary to get up on stage and perform the used car salesmen shtick and introduce all the irritating noise into the descriptions is beyond me.

  3. AZDavidPhx

    I always get a kick out of these listing descriptions where they tell us how much money the seller spent on the place as some kind of a trick to make the reader overlook the WTF fantasy wet dream of an asking price.

    As though the dollars “spent” have any meaning whatsoever. Yeah, I totally overpaid for some upgrades so now you should have no problem overpaying for the house.

    And how do we know that the seller really spent 500K on upgrades? How do we know that they didn’t really spend 100K on upgrades and 400K on toys that they will be taking with them upon their departure?

  4. Alan

    I’m wondering if the problem with the various mortgage modification programs is understated even more than what is hidden today. How many of these properties are actually 2nd (and 3rd, etc.) properties for speculation purchases? Perhaps with a spouse or child listed as the “owner”, or just outright lying about it not being owner-occupied. When they are struggling or unable to keep up payments on their actual residence, nothing except for free will work with all of the secondary properties.

    Are there any estimates for the percentage of houses bought for speculative appreciation in Irvine?

    1. IrvineRenter

      If you count owner-occupants, I would estimate 99% of houses in Irvine were purchased for speculative appreciation.

      1. Geotpf

        I guess the question would then be what percentage of Irvine houses are owner occupied (for real)?

      2. lowrydr310

        Ooh, uh, yeah. I’m going to have to go ahead and sort of disagree with you there. Yeah.

        It all depending on the owner’s time frame. I don’t have any evidence to back this up, but I would guess that 99% of buyers buying speculatively seems rather high. I’m sure there was more than 1% of recent buyers in the last 3 years who bought a house to live in for the long run; I’m sure some people are ‘speculating’ and expecting appreciation in 15-20 years (I don’t believe they’ll see any appreciation; just lots of money lost on taxes, interest, insurance, and maintenance, but that’s a different story), but they’re not the same people who thought they could buy a house and sell it for 100% return on their investment in five years.

        I just can’t imagine any recent Irvine buyers honestly thinking that they’re going to cash out big in the near term on the next alleged inflation of the giant housing bubble. People buying now have to be looking at the true cost of ownership, which is near rental parity in many cases (as you point out – I personally believe that ‘rental parity’ statistic will be meaningless at some point over the next five years as rents continue to decline). This time IS different, and despite all the happy fluffy goodness you hear from the news outlets, the economy isn’t healthy and isn’t improving.

        -Mr. Permabear

  5. Sue in Irvine

    “Foreclosure record 6-2-10 notice of sale”.

    Does that mean a bank or someone bought it on
    6-2-10? Is the owner still able to live there after the notice of sale?

    1. Major Schadenfruede

      “Sales of previously owned homes fell unexpectedly in May as delays in processing mortgage applications hampered the closing of contracts benefiting from a popular homebuyer tax credit, an industry group said on Tuesday.”

      So, let me get this straight: The popularity of the tax credit caused a surge of mortgage applications which overwhelmed the industry so that they couldn’t process as many loans compared to last year?


      Oh, and this caused the stock market to tank today?


  6. newbie2008

    Which house is: “This property was purchased on 7/28/2006 for $2,337,000. The owners used a $1,635,700 first mortgage, a $467,350 HELOC and a $233,950 down payment. Then, the fun begins….

    Foreclosure Record
    Recording Date: 06/02/2010
    Document Type: Notice of Sale

    Foreclosure Record
    Recording Date: 07/28/2008
    Document Type: Notice of Default”

    The textdata doesn’t match the featured pictured property.

    I don’ think the owner was a pro or experienced or knowledgable at gaming the system.

    He’s losing real money — his own significant downpayment, $233,950 for 2 years of free rent, but that is about the going rate for renting a mansion.

    1. Chris

      Until we have total deadlock in gubbermint, we’re going to continue seeing this $hite.

      Expect the last extension around the end of this year (after the election).

  7. Mark

    Inventory of SFH is up in Irvine, Lake Forest and Mission Viejo.

    I’m just disappointed in the selection. Most are pretty roughed up both outside and in, and a high number are short sales.

    1. AZDavidPhx

      The Treasury Department on Monday said more people had been kicked out of trial loan modifications than had received permanent modifications.


      “This program was not designed to prevent foreclosures. It was not designed to sustain homeownership at a level that would be unachievable, imprudent to try and do,” Geithner said in testimony

      Just say it, Timothy, it was to help banks control the flow of foreclosures by stringing along desperate house debtors for a little while.

  8. DarthFerret

    IR or anyone,

    Does someone have any historical data on cure rates for loan mods over the past couple years? I could have sworn that I read an IHB post several months ago talking about re-default rates above 90%. Today’s post says that re-default rates can be as low as 65%. While very, very far from good, is there some improvement in the loan mod cure rates? Or is this simply a case of imprecision in the cure rates quoted by these studies?


  9. Laura Louzader

    It’s bad enough these folks are squatting in a multi-million dollar house while I must faithfully pay my rent on something MUCH less pretentious.

    On top of it, they have HORRIBLE taste in decor. They should have spent some of that HELOC money on a professional designer.

Comments are closed.