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Mortgage Modifications Redefaulting at Increasing Rate

April 15, 2010

New reports show redefaults of modified mortgages have doubled.

It’s still a small number—something like one percent of the modded mortgages. But people who watch these things expect the number to increase, both in absolute and percentage terms.

Meanwhile, there still seems to be some “debate” over what caused the crash. Was it, a) the proliferation of derivatives and the too-big-to-fail moral hazard thinking of people who make $1 million per day? Or was it b) the Community Reinvestment Act, Barney Frank, and Fannie Mae?

The answer: a. Monster greedheads at the biggest banks, and their minions and helpmates down the subprime chain of command. Republicans are insane on this point, and Dems are right—but they better be careful. Fannie increased its max loan limit over $415,000 circa 2003. That was a huge error, as was the idea that hybrids like Fannie and Freddie could serve the needs of both shareholders and moderate income home buyers. The companies have been nationalized already; we should make it official, and tighten lending standards too. Current standards for income/monthly payment affordability seem to be based on assumptions about job and income security that have not been realistic since the 1970s. This is part of the reason for the increasing default rate on the loan modifications, as is the fact that even very slippery players have been in line for mortgage mods.

But it’s long past time to lay to rest the argument that CRA and other government encouragements towards affordable housing/lending “caused” the crash. Anyone making that claim is either uninformed or unserious.

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