Research Primer: Loan Modification Programs
NERA Economic Consulting has published another useful primer, this time on the complexities of loan modification programs. It does not take a position, but clearly lays out the issues and the pros and cons of various alternatives.
NERA analyzes 5 complexities:
- The incentive to default to qualify
- Moral hazard and adverse selection
- The risk of redefault on modified loans
- Potential conflicts of interest between servicers of mortgage-backed securities and investors in these securities
- The reputational effect for lenders and servicers
The report includes an ominous chart illustrating the rising trend of redefaults. It shows that more than 50% of loans modified in the second quarter of 2008 had redefaulted after 5 months.
The concerns about redefault are frequently supported by statistics examining recent history.
“…of the loans modified in the first and second quarters of 2008, after three months, 36-39% of the borrowers had redefaulted by being more than 30 days past due. After six months, the rate was 51-53%, climbing to nearly 58% after eight months.”
For details see Understanding the Economic Complexities of Loan Modification Programs.
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