Perfection Isn't Modification's Aim

June 5, 2009
Wall Street Journal

Like previous editorials, "Foregone Foreclosures" on May 27 cites shock statistics to criticize federal efforts to modify past-due mortgages. They come from a Fitch report projecting that up to 75% of "modified" subprime loans will redefault within 12 months. Omitted by the Journal were these facts from the Fitch report: that many 2007 loan modifications actually raised the monthly payment of borrowers, that 2008 loan modifications were much more likely to significantly reduce the monthly payment, and that delinquencies so far on subprime loans modified in 2008 are running at about 20%, or less than half the rate of the 2007 vintage at the same point in time -- and in a tougher economy. Clearly, payment reduction matters. The Home Affordable Mortgage Program doesn't promise perfection; it assumes that up to 40% of loans that come into the program 60 days past due will still end up in foreclosure.

But if even two million such loans can be properly modified, about 1.2 million families will be able to stay in their homes and recovery of our housing markets will be hastened. We would say this is "political capital" well spent.

Richard Brown
Chief Economist
Federal Deposit Insurance Corporation
Washington