2009-07-11 — barrons.com
Here's an excerpt from Mark's part of the article (not visible behind firewall; transcribed from paper copy)
Unfortunately, Mark is right with regards to the vast majority of modifications that have been done to date. They are little more than forbearances, with a hope that the home valuation and hence loan principal are appropriate, and that the economic position of the typical homeowner will soon improve, rather than deteriorate.
In other words, they're totally inappropriate for the bubble valuations, and for the economic downturn we are now solidly enmeshed in (and will be facing for quite a while, all of which we predicted here well before-the-fact).
Around here, the house view is that loan modifications indeed are what is sorely needed -- but those must involve hefty principal write-downs by the note holders, or they simply will not be sustainable. And unfortunately, the vast majority of mods to date avoid this kind of reckoning like the plague. The reasoning is obvious: keeping the values pegged high and just extending forebearance allows the assets to continue to be booked unrealistically high, and banks (and other financial firms) can avoid taking the full brunt of the write-downs they need to. This would harm bank valuations, you see, and they feel they've already had "enough hurt".
The government has made things vastly worse by not only propping these firms up, but giving them a green light to continue with the fictional valuations. At the same time, it is now whining that they won't do more meaningful write-down.
Here's a simple message for the Obama administration: pick one, meaningful and sustainable writedowns for distressed homeowners, or elevated bank valuations.
The answer to this dilemma (given through actions), should be interesting -- showing whether the administration believes its bread is better buttered by popular support, or the banking lobby. I won't be holding my breath for meaningful populism.
Some excerpts of the default data: on initially-current loans, Countrywide modified $87M of loans but 59% had re-defaulted within 10 months (this is the worst performance of initially-current loans). Wells Fargo came in second, with 49% re-defaults on $334M of modifications.
On initially-delinquent loans, Wells Fargo came in 11th (tied with Ameriquest), with 70% re-default on $605M of loans. Countrywide came in first again, with 80% re-defaults, which ties it with WaMu (the two thrifts modified $388M and $566M of loans respectively).
The best record on initially-current loans was a "mere" 34% re-default rate after 10 months. By contrast, the best record for initially-delinquent loans was 62% -- held by (the non-WaMu part of) JP Morgan Chase.
(The study interval and sampling methodology were note reported).
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