Modified Mortgage Refinances Continue to Re-default

US bank regulators continue to report escalating re-default rates on mortgage loan modifications. Data being assembled by bank regulators is showing a steady trend of rising month-over-month loan work-outs falling back into delinquency within six months.

This data, being presented by the Office of the Comptroller of the Currency, is giving concern to aggressive efforts by Congress and the Federal Deposit Insurance Corp (FDIC) to increase loan modifications. FDIC Chairman Sheila Bair, as well as House Leaders Nancy Pelosi (D-CA) and Barney Frank (D-MA) have been pushing hard for the next round of TARP funding to include, even require, loan modifications.

"One very troubling point is that, whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of leveling off after six months or even eight months," John Dugan, head of the Office of the Comptroller of the Currency, said in a statement.

Defaults rose consistently across all loan types, but subprime loans understandably had the highest re-default average.

Although the data would indicate a general delay in the obvious, supporters of loan modifications advocate the over 60 percent that are staying current and preventing the costly foreclosure process. FDIC Chairman Bair has also questioned the loan modification process--pointing to data by Credit Suisse showing re-default rates as low as 19 percent is the mortgage rate is reduced.

Like any new lending product or process the data will have to evolve to create the right risk model. Loan modifications, although used in past mortgage crisis, have very little data and analysis on which to build underwriting models.