Bank Regulators Reporting Mortgage Loan Modifications Still Defaulting

Bank regulators and congressional leaders are still at a loss on how to help troubled homeowners. A surprising report by the Office of the Comptroller of the Currency (OCC) revealed 51 percent of borrowers receiving modifications to their mortgage loans become delinquent or slip back into foreclosure within 6 months.

Bank regulators, government policy makers, and private executives gathered at the Office of Thrift Supervision's (OTS) annual housing conference looking for solutions. Unfortunately, the forum of key policy makers and industry leaders most likely left with more questions than answers.

The new OCC data became the center of the discussion. The OCC and OTS cited the data as surprising and challenging to designing solutions for struggling homeowners.

OTS Director John Reich concluded that the OCC data suggested that Congress should focus its solutions and rescue funds elsewhere. Reich questioned the utility of expending government resources on mortgage loan modifications with such a high rate of failure. Reich's comments questioned if the deepening economic crisis and rising unemployment made it more effective to fight the foreclosure crisis on another front--job creation.

Several forum participants agreed that the foreclosure prevention fight is one that can only be won by fighting on multiple fronts. "These problems are deep enough, persistent enough, pervasive enough, that we are going to have to attack it on many different fronts at the same time," explained Federal Reserve Vice Chair DonaldKohn.

However, proponents of loan modifications pointed out that the OCC report was missing key details that would be critical to conclude that loan modifications don't work.

Even Comptroller John Dugan conceded that the data lacked important context to the quality of the loan modifications and if the modified mortgage loans reduced payments to an affordable level. "These answers are important, because they have important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months,"Dugan said.

FDIC Chairman Sheila Bair, a staunch advocate of loan modifications, stated that loan modifications are not what they should be highlighting examples of modification that actually increased the monthly payments on borrowers.

Bair pointed to a similar study performed by Credit Suisse for better answers to what works. This analysis confirmed high defaults on loan work outs that increase mortgage payments with 44 percent of these loan modificationsredefaulted within eight months. However, modifications with principle reductions redefaulted at a lower 23 percent rate within eight months, yet just 15 percent of loan modification that had their interest rate lowered defaulted.

These statistics had Bair and Democrat leaders, like US Representative Barney Frank (D-MA) still demanding loan modifications be a condition of releasing the final $350 billion of TARP funds to the Bush Administration.