WSJ’s Bank Mod Story Incomplete

The Wall Street Journal reports that even banks that have modified home loans to help struggling borrowers are getting slammed by defaults.

The U.K. bank, which bought an Illinois subprime lender called Household International Inc. in 2003, has modified since the start of last year 238,000 home loans with a combined outstanding balance of $28.8 billion.

But even as HSBC tries to stem surging defaults and foreclosures, some borrowers are falling further behind on their payments. About 21% of the consumer loans modified under a program that essentially declares a loan current had fallen into default as of Sept. 30, up from 18% three months earlier, according to HSBC.

It’s a good angle to look at, but those numbers don’t tell me much because there’s no industry context. How have other banks’ consumer loans performed in the same timeframe? The WSJ doesn’t say.

And I think it lets HSBC spin a bit too much here. Sure, it has modified loans, but that’s meant relatively minor things like freezing interest rates so borrowers aren’t suddenly slammed by option-ARM resets. There’s no principal reduction or anything remotely radical.

Foreclosures cost banks 40 percent or so of the home’s value. It seems there’s wiggle room in there to reduce the principal for some borrowers if it really want to improve its default rate.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.