Mortgages not worth saving

For weeks we’ve been hearing about the need to help homeowners who were slammed by the mortgage meltdown. All kinds of programs have either been initiated or are being considered – government programs as well as those from the lenders themselves. But what we’re starting to learn is that many of these mortgages are beyond saving. A study out this week found that 53 percent of the folks who had their loans modified to make payments more affordable wound up re-defaulting within six months. That pretty much matches what I found in researching an article on the foreclosure mess that appears in this month's Los Angeles magazine.

Mortgage brokers are often singled out for nudging customers into making bad decisions—and that certainly happened—but many borrowers were also unaware or unwilling to consider their financial situation. “There are borrowers who made $5,000 a month but put down $10,000 on the loan application because they wanted what they wanted,” says Bruce Solomon, a senior loan officer with Los Angeles Neighborhood Housing Services, a nonprofit that sponsors housing fairs like the one in Reseda. He estimates that seven out of ten home owners he sees cannot be helped—that is, they won’t be able to afford a loan even if it’s adjusted downward.

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Despite lawmakers’ wanting to help borrowers, more than 50 percent of the loans that get modified are likely to go through redefault after two years, according to Joseph Mason, professor of finance at Louisiana State University’s E.J. Ourso College of Business. For lenders, whether it’s a bank or the federal government, the process is like doubling down on a shaky bet. What this does is delay the inevitable by extending the foreclosure process through at least 2011 or 2012. That leads to more absentee owners and more empty houses, which lowers the worth of nearby real estate and results in additional foreclosures.

Patt Morrison got into this yesterday on her KPCC show. Here's the audio link.