Mortgage Re-Default Rates. Be Scared. Be Very Scared.

Comptroller of the Currency John C. Dugan spoke before the 3rd Annual National Housing Forum of the Treasury’s Office of Thrift Supervision today. He didn’t waste any time getting to the point.

Dugan provided the bad news first. The third quarter OCC Mortgage Metrics report – on mortgages serviced by the largest banks and thrifts – reinforces the unnerving trends we already know about: declining credit quality, increasing delinquencies (especially for prime mortgages), increased foreclosures, and accelerating foreclosure sales.

And then he provided the badder news.

For the first time, the OCC tracked “re-default rates”, the percentage of borrowers who re-defaulted on their mortgages following restructuring or other modifications designed to allow them to retain possession and ownership of their homes. The data is not pretty.

Consider the first quarter of 2008. After three months, 36 percent of borrowers with mortgages modified in this quarter had re-defaulted (with payments more than 30 days past due). At six months, this re-default rate had risen to 53 percent. And after eight months, it had reached 58 percent. The data is almost identical for mortgages modified in the second quarter of 2008. For those arguing that 60 days past due is a better predictor of ultimate default and foreclosure, the numbers are hardly better, with re-defaults in excess of 35 percent after six months.

Dugan asks the right questions about the cause of these high re-default rates, but admits the OCC – and probably no one else – yet has any answers. The deep structure to this problem may lie with the vicious cycle into which the housing credit meltdown has spun the nation – with rising unemployment, loss of health insurance, mounting credit claims, and an underlying psyche of despair – limiting the positive scope of simply restructuring mortgages to make them more “affordable”.

Part of the problem, of course, is also that lame ducks can only quack. They cannot walk. We will need to await the launch of the Obama Administration and the policies of incoming Treasury Secretary Timothy Geithner to see what impact a more mobile, systematic, and full-bore attack on this complex set of economic problems can achieve. Reversing the rising rate of unemployment via stimulus may be the key. Until then, our response can only be one of shock and awe.