Dugan: ‘Learning as We Go’

Just ahead of the Christmas holiday, BusinessWeek featured an exclusive interview with John Dugan, the Comptroller of the Currency, on the occasion of a joint release of housing and mortgage metrics — much of the focus now being placed by regulators is on redefault rates. On Dec. 8, ahead of the release of the agency delinquency data, Dugan made waves by suggesting that recidivism — or, loans going bad after modification — was a problem. “After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due,” Dugan said in a statement at the time. “After six months, the rate was nearly 53 percent, and after eight months, 58 percent.” He told BusinessWeek that his agency has “just begun within this quarter to focus more on modifications and default rates,” and said that federal regulators “unfortunately have to learn as we go.” “We’ve never seen a problem on this scale before; we’ve never seen delinquencies at this rate,” he said. “So there’s not the wealth of industry experience with how to deal with this problem.” That’s fudging the truth a bit; while delinquencies are indeed at record levels nationally, we have seen high delinquency rates regionally before — the early 1990s come to mind, in particular. Furthermore, the fact that Dugan believes there isn’t industry experience in how to deal with this problem only underscores the fact that current regulators are now guilty of making the same mistake originators made during the boom: everyone is still ignoring what those servicing the loans have to say about this mess. Had Dugan asked, nearly every servicing manager on the planet would have told him that a 50 percent recidivism rate is pretty much part for the course, irrespective of credit class. The reasons for this are numerous, but redefaults on loan modifications can and usually do happen all the time — look at it this way: even if a loan mod results in lower payments, does an extra $300/month really help certain borrowers? Bad financial skills are bad financial skills, regardless of payment, for one thing. Job losses are job losses, too; and in this market, many unemployed are finding it harder to re-enter the work force than in years past. “What we can’t tell from the raw data is whether these high delinquency rates … are because the modifications didn’t reduce the monthly payments enough to make them sustainable, or whether the economy has just gotten worse,” Dugan told BusinessWeek. Which underscores just how much learning Dugan, and likely other regulators, have yet to do. What regulators will find out as they go through their training on loan servicing techniques is that nominal reductions in monthly payments may help reduce recidivism somewhat, but will not push redefaults into oblivion — doubly so, given the millions of borrowers that now owe much more on their mortgage than their home is currently worth. It isn’t just servicing practices that appear new to the OCC, and perhaps other regulators as well; Dugan also said in his interview that the OCC was caught flat-footed by securities purchases that reached heavily into the nation’s secondary mortgage markets. “Honestly [we thought] there were companies that weren’t taking much subprime risk because they weren’t making subprime loans—only to find that their securities arms were buying them from third parties,” Dugan told BusinessWeek. “They were making and holding on to pieces which proved to be the really toxic instruments that caused the problems. And the very fact that it was a surprise tells you about how risk management was being handled.” The fact this came as a surprise to the OCC, however, also should tell you just how far behind the curve regulators really have been when it comes to the mortgage space. The secondary mortgage market dwarfed our equity markets during those boom years, yet regulators were ignoring such activity at the institutions they were responsible for regulating? Read the entire interview here. Write to Paul Jackson at [email protected].