One-quarter Reported Delinquent on Trial Loan Mods

By:: Kara Johnson | December 07, 2009

More than one in four homeowners who obtained trial mortgage loan modifications under the government’s Making Home Affordable Program are already behind on their payments, according to a new information from the Treasury Department.

A recent Treasury survey of major mortgage servicers found that, of the 650,000 trial loan modifications begun so far, 73 percent of borrowers are current on their payments, meaning 27 percent are delinquent. Homeowners in the program must successfully complete a three-month trial phase before their loan modification is made permanent.

Critics of the program say the numbers raise doubts about its long-term effectiveness in helping financially stressed homeowners avoid foreclosure. Others say it’s still too soon to judge the program’s long-term impact.

It’s not clear why so many homeowners are being reported as delinquent on their trial loan modifications. Possible reasons include that homeowner’s new, reduced payments under the trial modification were still too high for them to meet or that they may have encountered further financial difficulties that prevented them from making payments.

Some homeowners have complained about receiving conflicting instructions from lenders on when to begin their payments, which might result in their being reported as delinquent. Still others have reported that their mortgage servicers are reported them to credit bureaus as delinquent because their trial payments are less than required under their original, unmodified mortgage terms.

There has also been confusion over the steps required to convert borrower’s trial loan modifications to permanent ones, with lenders reporting that they are still waiting for required documentation from borrowers, and many borrowers reporting that lenders keep requesting documents that have already been submitted.

The government-backed program provides incentives for lenders to modify mortgage terms to make them more affordable for financially pressed homeowners and help them avoid foreclosure. Qualifying homeowners can get their monthly mortgage payments reduced, provided that they still have an adequate income to meet the reduced payments. They must then complete a three-month “trial” period to show they can maintain the new mortgage payments before the loan modification is made permanent.

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