Mortgage Modifications Just Don't Work, But Securitization Does

By Daniel Indiviglio

Atlantic Correspondent Richard Posner has another great column out today. In it, he considers several pieces of evidence that all point to the same conclusion: mortgage modifications are not doing a very good job of prevent foreclosure. Recent findings also suggest that securitization might do more good than harm. He smartly notes that Washington probably would have benefited by actually asking some mortgage bankers if their mortgage modification efforts were likely to be effective.

Here's a key paragraph from Posner's piece:

The reason is that mortgagees generally prefer either foreclosure or what they call "self-cure" to modification. They reckon that most delinquent borrowers will either resume their mortgage payments without a modification ("self-cure") or default irrevocably sooner or later, so that little is to be gained by a modification. The modification will (if meaningful) not only reduce the monthly payments received by the mortgagee, but also entail negotiation costs and, by postponing foreclosure, lower the price that the mortgagee will receive, either because house prices are falling (as they are now, and as Calculated Risk expects them to continue to be for the next year) or because the financially stressed homeowner will not maintain the house adequately, and it will lose value between modification and eventual foreclosure.



As for securitization:

The Fed economists' study found, surprisingly, no significant difference in modifications dependent on whether the mortgage had been securitized.



I have long believed that many struggling homeowners were better off foreclosing on houses they could not afford. I also think that securitization is generally a good thing for the mortgage market. It's nice to see that there's some new evidence to back up these assumptions. Check out Posner's full piece here.

This article available online at:

http://www.theatlantic.com/business/archive/2009/07/mortgage-modifications-just-dont-work-but-securitization-does/22277/