Bailing out mortgages was a bad idea from the beginning. It wasn’t hard to predict that trying to keep homeowners in homes they can’t afford is a losing proposition. But President Obama and the democrats (as well as John McCain) thought that if they could only stop foreclosures they would be able to stop the recession. Not only are we still knee deep in the recession, but it’s becoming clear that bailing out subprime loans was a bad idea.
Yesterday’s Journal reports that Fitch Ratings looked at mortgages bundled into securities between 2005 and 2007 and managed by some 30 mortgage companies. Fitch found that a conservative projection was that between 65% and 75% of modified subprime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. This is an even worse result than previous reports by federal regulators. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.
The reasons for the high redefault rate aren’t surprising. Many of the borrowers never could afford these homes in the first place, yet the political pressure has been strong to modify loans even for these borrowers. As home prices continue to fall in some markets, borrowers remain underwater and many of them simply walk away from the home and thus redefault.
Who knows, if the government had done nothing, perhaps housing prices would have already reached the bottom and started a recovery by now. Either way, this is just another example of the government throwing good money (in this case, our children’s money) after bad. What a waste.
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