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Recent mortgage modifications seem to help

Borrowers who had their mortgages modified recently are faring better than those who had them altered earlier in the housing crisis.
/ Source: The Associated Press

Homeowners who had mortgages modified recently are faring better than those who did so earlier in the housing crisis, according to a report released Tuesday, possibly debunking predictions of a huge wave of defaults to come.

The State Foreclosure Prevention Working Group warned of other troubling signs, however, on the same day that a separate industry report showed the most severe July sales drop-off for previously occupied homes in 15 years.

The group of 12 state attorneys general and state banking regulators said Tuesday that foreclosures still easily outpace the number of loan modifications. Modifications lower monthly payments and reduce the odds of losing a home.

Nearly three years into the foreclosure crisis, the group of state officials also found that nearly 63 percent of homeowners who are at least 60 days behind on their mortgage payments aren't taking part in either government or private foreclosure prevention programs, the group found.

Banking officials warned that lenders must aggressively seek out homeowners who are teetering on the edge, even if it means short-term pain for banks.

"There is still a tremendous amount of work to be done to prevent unnecessary foreclosures," said Neil Milner, president and CEO of the Conference of State Bank Supervisors, which is part of the working group. "Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction."

The working group compared delinquencies for mortgages modified last year with those revised in 2008, and whether borrowers were keeping up with payments six months after terms were changed. Borrowers getting modifications in 2009 were nearly 50 percent less likely to end up at least 60 days behind than those with modifications in 2008. About 15 percent among the 2009 group ended up becoming seriously delinquent six months after modification, versus nearly 31 percent for the 2008 group.

The reduction "suggests that dire predictions of high re-default rates may not come true," the report said, noting some analysts have predicted re-default rates as high as 75 percent.

The report said recent modifications that reduce principal balances on loans have a lower default rate than those that merely cut the interest component of monthly payments.

But most banks don't trim the overall balance when they modify loans, according to the report. Only one in five modifications reduced the loan amount, with 70 percent of those studied in this year's first quarter actually increasing the total by adding service charges and late payments to the loan balance, the report said.

However, through adjustments of interest rates, about 89 percent of first-quarter modifications involved some reduction in monthly payments, the report said. Nearly 78 percent cutting payments 10 percent or more.

But the absence of loan balance reduction in most modifications will hamper future foreclosure prevention efforts, the report said. The authors noted that home prices have declined more than 30 percent from their 2006 peak, and nearly one-quarter of homeowners owe more than their homes are worth.

The group said it "anticipates hundreds of thousands of foreclosures will occur later this year absent additional improvements in foreclosure prevention efforts."

Michael Fratantoni, vice president of research and economics with the Mortgage Bankers Association, said modifications must strike a balance between helping borrowers stay in their homes, and enabling lenders and investors to avoid taking big losses.

Reducing a loan amount in a mortgage modification "can be the tool to get you there to that balance, but sometimes it isn't," Fratantoni said.

He said a key reason many at-risk borrowers don't take part in foreclosure prevention programs is they simply don't pick up their phone or otherwise respond when lenders contact them about mortgage modification.

"It really is a bit of a two-way street," he said.

The state officials' report examined mortgage modification trends at nine nonbank mortgage companies servicing 4.6 million loans nationwide as of March. Since the group of state officials began collecting data in October 2007, those nine companies have completed more than 2.3 million foreclosures. That's about three times greater than the 760,000 loan modifications they completed.

As of March 31, the nine servicers reported 778,000 borrowers were late at least 60 days on their payments.

On Friday, the Treasury Department said nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have fallen out. Economists said the report suggests the $75 billion government effort is failing to slow the tide of foreclosures, which are expected to grow well into next year.