As stated in this article by Alan Zibel, The Associated Press: “More than half of all homeowners who had their loans modified to make the payments more affordable in the first half of the year are already in default again, banking regulators said Monday.”
Man… maybe Obama ought to tap me to be on his real estate advisory team… I would accept the same salary as the good ole’ boys… and totally credit back the appraisal fee on his next home purchase. In my Critique of the US Mortgage Plan, I write about loan modifications and how “the people who have already missed three or four payments have already damaged their credit something awful, so their incentive to make even modified payments on a depreciating asset is already reduced, if not eliminated.”
So what we’re seeing here is pretty simple really… once their credit score is damaged, people will likely fall behind on payments when their home’s value drops below the amount owed. There are only three incentives to pay off a home loan:
- To profit from the home’s appreciation.
- To preserve credit scores.
- For intangible benefits (…the reason the other 50% did not fall behind… yet).
Why pay the bill if the credit score is already damaged for years and it costs less to rent a comparable property? Why pay the bill if there was already one reward extended for not paying the bill?
If lenders are going to modify loans, then they ought to consider doing it proactively, before the credit is damaged. But rather than plug all the cartoon-like bullet holes that riddle this housing crisis, we may want to let the pressure find its own inevitable equilibrium. How about letting over-priced homes fall to levels buyers can afford? We are already seeing a successful resolution in the low-end markets as buyers triangulate the market bottom to determine fair bids. As for the high-end market… watch your back(yard).