Securitization Is Back! Investor-Owned Mortgages Have High Re-Default Rates, Says Report

The securitization of mortgage loans has been blamed for helping cause the financial crisis -- and now it seems to be complicating recovery efforts.

About half of all modified investor-owned mortgages, undertaken to help troubled borrowers and investors looking to cut losses, re-default within six months, according to a new quarterly report by federal bank regulators. These are loans that are sliced and diced and sold to investors in the form of securities.

That compares with a 25 percent re-default rate for modified loans held in-house at banks, according to data as of Sept. 30.

The high re-default rates for investor-owned mortgages underscore the difficulties faced by the Obama administration in trying to stem the growing foreclosure crisis. Through the end of November, 3.6 million homes have entered foreclosure this year, according to a spokeswoman for RealtyTrac.

The administration's nine-month-old $75 billion program, Making Home Affordable, aims to help three to four million distressed homeowners avoid foreclosure by modifying their mortgages to a more affordable monthly payment. Of the nearly 760,000 modifications that have been enrolled in three-month trial plans, less than 32,000 have transitioned into permanent relief for homeowners. Nearly 87 percent of the modifications under the administration's program are for investor-owned mortgages.

The administration's program largely does not address what many experts believe to be the root cause of foreclosures -- homeowners owing more on their mortgages than their homes are worth.

Being "underwater," or having negative equity, "is the most important predictor of default," argued Laurie S. Goodman, senior managing director at Amherst Securities, during a Congressional hearing earlier this month.

Speaking on behalf of her firm, she said: "We are concerned that if policies continue to kick the can down the road -- working with a modification problem that does not address negative equity -- delinquencies will continue to spiral with no end in sight."