According to a recent study of loans that were modified by lenders, only 29% of loan modifications made at the end of last year actually reduced borrowers’ payments by more than 10 percent.
Now this is a good news, bad news story. The good news is that some loans did receive some needed modifications. The bad news is that for a large percentage of loans that consumers were hoping could be modified to help them save their homes from foreclosure, it does not look like the modifications actually offered are substantial.
This lack of substantive mortgage loan modifications will only lead to re-default by the very same homeowners. So rather than an effective tool to avoid foreclosure, the loan modification process may only serve to delay foreclosure.
The report from the Office of Thrift Supervision also reveled that re-default rates on modified mortgages were both high and rising during the first three quarters of 2008, with loans modified in the third quarter showing the highest re-default rates. For example, the percentage of modified loans that were seriously delinquent (60 or more days past due) after eight months was 41 percent for loans modified in the first quarter and 46 percent for loans modified in the second quarter.
Overall for 2008, about 42 percent of modified loans resulted in reduced payments, 27 percent in unchanged payments, and 32 percent in increased payments. The proportion that reduced payments increased significantly in the fourth quarter, to more than 50 percent of all modifications.
As an expected result, the re-default rate was lowest among mortgage that actually had their payments reduced by modification. Who didn’t see that coming.
If you’d like to read the entire released report from the Office of Thrift Supervision, you can find it here.