Newer Loan Modifications Less Likely to Redefault

Fewer homeowners with mortgage loan modifications are falling back into default, casting doubt on predictions that most of these borrowers will eventually go into foreclosure anyway.

A new report found that homeowners who obtained loan modifications in 2009 were about half as likely to become seriously delinquent within six months as were borrowers whose mortgages were modified the year before. That’s according to the State Foreclosure Prevention Working Group, which released the report Tuesday.

Recent modifications more likely to reduce payments

The report suggested the difference was due to the fact that recent loan modifications are more likely to reduce a borrower’s monthly mortgage payments, rather than increasing them to make up for arrearages. Nearly 78 percent of all loan modifications performed in the first quarter of 2010 significantly reduced a borrower’s monthly payments, compared to only 57 percent in 2008.

“This improvement in loan modification performance suggests that dire predictions of high redefault rates may not come true,” the report read. “This positive trend suggests that increased use of modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications.”

The Working Group is comprised of the representatives of 12 state attorneys general, as well as state banking regulators. It was established in 2007 to work with mortgage servicers to prevent unnecessary foreclosures.

Gap closing between foreclosures, modifications

Although loan modifications have been increasing, the group notes that they continue to be outpaced by the rate of foreclosures, although the report shows that loan modifications have been closing the gap over the past year. The nine mortgage servicers tracked by the Working Group have performed about 2.3 million foreclosures since 2007, versus 760,000 loan modifications, whereas figures for March 2010 showed roughly 60,000 new foreclosures versus 50,000 loan modifications.

The report said that the biggest failure of foreclosure prevention efforts continues to be the inability to engage homeowners in meaningful loss mitigation efforts in the first place. Despite outreach efforts such as the government’s Home Affordable Modification Program, the group found that more than 60 percent of all seriously delinquent homeowners are not involved in any kind of foreclosure mitigation efforts.

It said some of the reasons for the low rate of involvement are mixed messages to struggling homeowners about anti-foreclosure opportunities, confusing information provided to homeowners, poor customer service by lenders and long delays in the loan modification process.

Few include principal reductions

The report also found only about one in five loan modifications reduce the principal owed on a mortgage, which has been shown to significantly reduce the likelihood of default.  In fact, it said, the vast majority of modifications actually increase the principal owed by including late payments and service charges in the balance.

“The report certainly indicates there are positive developments with regard to loan modifications,” said Neil Milner, President and CEO of the Conference of State Bank Supervisors, which participates in the group. “However, there is still a tremendous amount of work to be done to prevent unnecessary foreclosures. Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction.”