Loan Modifications Without Payment Reduction Results in High Re-Default Rates

“Loan modifications” have been the buzz words for both the Bush and Obama administrations when it comes to fixing the mortgage foreclosure crisis. And millions of struggling homeowners have received such loan modifications over the past year, but new studies show that the types of modifications being made were largely ineffective in keeping homeowners out of default.

A report released Friday from the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision, surveyed almost 35 million loans totaling roughly $6 trillion in collective value. The data showed that slightly more than 10 percent of all the loans were delinquent or in foreclosure, an increase over the 7 percent measured at the end of September.

Many of the loans surveyed were in fact modified in the past year, but surprisingly the majority of them were not changed to provide a lower payment. During the first the three quarters of 2008, only about 25 percent of all modifications included a decrease in monthly payments, and while the numbers grew to 37 percent in the fourth quarter, there were also roughly 25 percent that actually experienced an increase in payments.

The result was that the homeowners whose payments were unchanged or increased, almost half of them fell back into default. Of those whose payments were cut by 10 percent or more only about a quarter of them fell back into default.

“This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high re-default rates,”said Comptroller of the Currency John Dugan in a statement.

Still regulators like John Bowman, acting director of the Office of Thrift Supervision, are seeing the number of mortgage modifications with payment reductions increasing, a fact that may mean fewer foreclosures in the near future.

According to Bowman, “The trend toward lowering payments to make home mortgages more affordable is moving in the right direction.”