Just in time, Sarah Caroll of UPENN Law School and Wenli Li of the Federal Reserve have released a study of homeowners who filed bankruptcy. The wanted to see how many filers kept their house and how many entered foreclosure. The results are interesting.

First, close to 30% of the filers lost their houses in foreclosure despite filing for bankruptcy. The rate rose to over 40% for those who were 12 months or more behind on their mortgage payment, about the same fraction as among those who entered into foreclosure directly.

Second, filing for bankruptcy allowed those who eventually lost their houses to foreclosure to remain in their houses for, on average, an additional year. Third, although the average final sale price exceeded borrowers' own estimates at the time of filing, the majority of the lenders suffered losses.

All of this raises a related question. Could mortgage modifications help at lease some of these people keep their homes?

Another report by Credit Suisse found that certain tools appear to be more effective than others.

Some 34% of borrowers who were put on a repayment plan that resulted in a higher payment -- typically because missed payments and fees were added to their loan balance -- were at least 60 days past due after six months, according to the analysis, which focused on subprime mortgages packaged into securities that were modified in the fourth quarter of 2007.

But the percentage of borrowers who were behind after six months dropped to 17% when lenders reduced the principal of the loan, and to 13% when mortgage companies froze the interest rate of adjustable-rate mortgages.

categories: Understanding The Crisis

12:04 - October 10, 2008

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