Foreclosure Follies

On Monday we published a letter from the FDIC complaining about our recent editorial on the agency's mortgage modification plan. Hours later, the Comptroller of the Currency released new data suggesting that the FDIC proposal may be as bad as we feared.

Background Reading

The FDIC wants to pay loan servicers to restructure delinquent loans and then have taxpayers share the losses if the loans fail again after six months. The FDIC did not appreciate that we reported private data showing that more than 50% of modified loans go delinquent again. The agency suggested that 15% might be a better estimate.

That estimate just got a lot harder to defend. Comptroller John Dugan released the default numbers on loans modified in the first two quarters of 2008, based on data from institutions servicing more than 60% of all first mortgages. "What makes these quarterly reports unique is that they are not merely surveys, but instead consist of validated, loan level data," said Mr. Dugan. "We believe the reports include the most accurate and reliable data on mortgage performance that is available today."
In today's Opinion Journal

According to Mr. Dugan, "The results, I confess, were somewhat surprising, and not in a good way." Of mortgages modified in the early part of this year, more than 35% had gone at least 60 days delinquent again after just six months, and a full 53% were 30 days delinquent or more. By eight months, this default rate had climbed to 58%. Second quarter modifications are on track to be nearly as ugly, with more than 50% of borrowers at least 30 days delinquent at the six-month mark. Come to think of it, these stinkers are going south so quickly that perhaps the FDIC's plan actually will protect taxpayers -- there won't be much left to insure after these toxic loans blow up in the first six months after modification.

Of course, that would mean that fewer foreclosures would be avoided, which is supposed to be the point of this exercise. For her part, FDIC Chairman Sheila Bair says that "The OCC's data on redefaults raises more questions than answers because it fails to define, in any meaningful way, the modifications that have redefaulted." In politics, when you don't like the data, merely wish it away.

She believes that her formula, which reduces interest rates initially but often creates larger obligations down the road, will yield fewer re-defaults than the industry average. Washington's housing bubble resulted in many loans going to borrowers who cannot or will not make their mortgage payments. Let's stop contriving ways for taxpayers to subsidize them.

From WSJ.com