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More recent mortgage modifications seem to be sticking

August 26th, 2010 9:16 AM by Lehel S.

More recent mortgage modifications seem to be sticking

Homeowners whose loan payments were reduced in 2009 are falling back into default less often than those who got modifications in 2008.

BOSTON — Homeowners who had mortgages modified recently are faring better than those who did so earlier in the housing crisis, according to a report released Tuesday, possibly debunking predictions of a huge wave of defaults to come.

The State Foreclosure Prevention Working Group warned of other troubling signs, however, on the same day that a separate industry report showed the most severe July sales drop-off for previously occupied homes in 15 years.

The group of 12 state attorneys general and state banking regulators said Tuesday that foreclosures still easily outpace the number of loan modifications. Modifications lower monthly payments and reduce the odds of losing a home.

Nearly three years into the foreclosure crisis, the group of state officials also found that nearly 63% of homeowners who are at least 60 days behind on their mortgage payments aren't taking part in a foreclosure prevention program.

Banking officials warned that lenders must aggressively seek out homeowners who are teetering on the edge, even if it means short-term pain for banks.

"There is still a tremendous amount of work to be done to prevent unnecessary foreclosures," said Neil Milner, president and chief executive of the Conference of State Bank Supervisors, which is part of the working group. "Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction."

The working group compared delinquencies for mortgages modified last year with those revised in 2008, and whether borrowers were keeping up with payments six months after terms were changed. Borrowers getting modifications in 2009 were nearly 50% less likely to end up at least 60 days behind than those with modifications in 2008. About 15% among the 2009 group ended up becoming seriously delinquent six months after modification, versus nearly 31% for the 2008 group.

The reduction "suggests that dire predictions of high re-default rates may not come true," the report said, noting some analysts have predicted re-default rates as high as 75%.

The report said recent modifications that reduce principal balances on loans have a lower default rate than those that merely cut the interest component of monthly payments.

But most banks don't trim the overall balance when they modify loans, according to the report. Only one in five modifications reduced the loan amount, with 70% of those studied in this year's first quarter actually increasing the total by adding service charges and late payments to the loan balance, the report said.

However, through adjustments of interest rates, about 89% of first-quarter modifications involved some reduction in monthly payments, the report said. Nearly 78% of the modifications lowered payments by 10% or more.

Still, the group said it "anticipates hundreds of thousands of foreclosures will occur later this year absent additional improvements in foreclosure prevention efforts."

Posted in:General
Posted by Lehel S. on August 26th, 2010 9:16 AM

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