Modified Mortgage Loans Not Performing

According to a federal regulator more than half of delinquent borrowers who had their bad credit mortgages modified prior in the year to prevent foreclosure were behind on their new home loan payments after just 6 months.  John C. Dugan, US comptroller of the currency, announced at a housing forum yesterday that data his agency is collecting indicated the rise in repeat defaults by homeowners is “remarkably high.”  “Put simply, it shows that over half of the loan modifications seemed not to be working after six months,” Dugan said.

The findings raise several major questions for government and lending industry executives as they struggle for a fix to the nation’s foreclosure crisis: Are mortgage lenders not doing enough to modify loans so delinquent borrowers can afford them? Or, are too many borrowers just not cut out to be homeowners and shouldn’t be bailed out of their debts?  Dugan said his agency is asking lenders and their representatives why these – mortgage rates are so high. But many housing advocates and industry specialists said they already know:  Mortgage lenders are failing to give troubled homeowners affordable long-term fixes. In fact, lenders were more likely to offer a modified loan that resulted in a higher, not lower, monthly payment, according to a recent report by analysts at the financial services company Credit Suisse. 

Home loan modifications can take several forms. Lenders can either lower the mortgage interest rate, which results in a lower payment; they can write off some of the unpaid principal, which could either lower monthly payments or lower overall debt; or they could postpone some of the debt or extend the life of the loan, which may lower payments in the short term, but drive costs over the life of the loan higher.  According to Faith Schwartz, executive director of Hope Now, mortgage modifications can result in an increased payment if home loan lenders roll back into the note unpaid principal, as well as interest and escrowed taxes, “They tried to help them, but they could have foreclosed as the alternative,” Schwartz said. She added mortgage lenders should examine the federal data to see which approach works and which doesn’t. “It doesn’t mean they didn’t get a better interest rate.”

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