Loan Mods = Tomorrows foreclosures

• IR : Interest Rate - Current Interest Rate for the loan.
  
• SR : Start Rate or Initial Rate - Initial Interest Rate for the Loan
• RR : Reset Rate - Rate at which the loan will reset

Much of the drop in REO activity can be attributed to loan modifications. But the million dollar question is will the loan mods work. Considering the re-default rate is over 50% after 6 months I think the answer is obvious. Loan mods are not working. The ones that survive in the short term will very likely default a few years down the road. Unless of course the bubble prices return. Chances of that happening are about the same as for me marrying Salma Hayek.

Why wont the loan mods work? The only way a loan mod will work is if the principal balance is reduced to market value. Practically zero of the loans are getting principal reductions. And personally I don't believe any loan should get a principal reduction. Most of the loan mods are simply getting interest rate reductions or freezes at the start rate of the loan or some other favorable rate. A few loans are getting extended terms (this is idiotic). The end result is that the home owners are still stuck miles underwater. Sure they may be able to afford the payments but they are trapped and will never be able to sell. I suppose if the payments are similar to what rent would be, then you could justify it by saying "it's the same as rent". But renters can move!

Many of the loan mods are only freezing or reducing rates for 5 years. Then what? I don't think anyone with half a brain thinks prices will be any better in 5 years. Are the banks going to do another loan mod? We are just turning today's foreclosures into tomorrow's.