Fitch: Most Loan Modifications Will Fail

As many as 75 percent of all mortgages modified through the government’s Home Affordable Modification Program (HAMP) will go into deafult again within 12 months, according a new report from Fitch Ratings.

Why aren’t the modifications enough for these borrowers? Fitch says its a matter of being overloaded with other debts as well.

“Many of these borrowers still have very heavy levels of other debt,” said Diane Pendley, a Fitch managing director, as quoted in a CNN article “auto loans, credit cards and other expenses. The HAMP modifications reduce housing expenses down to 31% of income but do not touch these other obligations.”

“We’re talking borrowers who don’t have cash reserves,”she added. “If they did, they wouldn’t be in this position in the first place. It doesn’t take much for them to get in the same situation again.”

The Fitch survey found that the average borrower with a HAMP-modificed loan owes 64 percent of his monthly pretax income to debt payments. That doesn’t leave much over emergency situations.

What this all suggests is that loan modifications are not worth the effort, perhaps one reason so many banks have been dragging their feet on them for so long anyway. These redefaulting borrowers either could not afford their homes in the first place or unemployment and hard economic times have left them unable to afford their homes now.

The Mortgage Bankers Association confirms what the Fitch study showed. Said Jay Brinkmann, MBA chief economist,

“Over the course of studying this over several years, we find re-default rates from 40% to 60% on modified mortgages. You have borrower behavior that keeps coming back.”

At least one good thing may have come from all the modification redefaults though. It appears that some lenders are much more willing to allow short sales when borrowers default on modified loans. These short sales can help borrowers get out of their loans and homes much quicker than with a foreclosure, making it possible to get on with life and start rebuilding their credit.