Loan Modification Program: Defaults on the Rise

Data released by the Treasury Department and the Housing and Urban Development Department show that the number of homeowners who defaulted on their mortgages even after securing cheaper terms through the government’s modification program nearly doubled in March.

They could not explain the growing number of what it called cancellations, almost all of which were apparently prompted by the borrower’s being unable to make the new payment.

The Treasury’s stated goal is for the modification program to help as many as four million households, the oversight report said, “but only some of these offers will result in temporary modifications, and only some of those modifications will convert to final, five-year status.”

The report continued: “Even among borrowers who receive five-year modifications, some will eventually fall behind on their payments and once again face foreclosure. In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem.”

While the program is too new to predict its long-term success, the data on previous modification efforts is not encouraging.

According to the latest Mortgage Metrics Report compiled by the Office of Thrift Supervision and the comptroller of the currency, sixty percent of modifications undertaken by banks in late 2008 were in default a year later.

Many of these private plans either kept the payments the same or increased them. Inevitably, those mortgages suffered the highest failure rate: about two-thirds of the borrowers defaulted again.

Loans for which the payments were decreased by at least 20 percent failed at a slower but still significant rate of about 40 percent.

The government program takes a more aggressive approach, lowering the interest rates for all loans. On many loans, terms are also extended or principal payments put off for years. Treasury data shows that the median savings for borrowers receiving permanent modifications is $512 a month.

Many borrowers remain deeply indebted, however. They owe not only on the house, but on homeowner association fees, home equity loans, car loans, alimony and credit card interest.

Government figures show, even after modification, $61 out of every $100 earned by the borrower goes to servicing debt. For increasing numbers of modification recipients, mortgage relief is apparently not enough to stave off financial collapse.

The Treasury said on Wednesday that it had always anticipated that some homeowners would not sustain a modification, which was one reason the program had been greatly expanded. New elements focus on allowing distressed homeowners to sell their properties for less than they owe and on shaving the principal owed by borrowers.

The notion of cutting principal, however, has already run into some resistance from the big banks, which do not want borrowers to get the idea that their mortgage can be chopped on a whim.