May 2, 2009

Mortgage Modification: 10 is the Magic Number

Office of the Comptroller of the Currency and the Office of Thrift Supervision released their quarterly report on first lien mortgage performance for 2008 Q1. The report covers approximately two-thirds of all outstanding mortgages.

The joint report broke the loan mod results into four categories:
1. Reduced monthly payments by more than 10%
2. Reduced monthly payments by 10 percent or less
3. Unchanged monthly payments
4. Increased monthly payments.

The data shows that the default rate for payments reduced by 10% or more had the lowest redefault rates. The redefault rate was 26% after nine months when monthly payments were cut by more than 10%. When payments increased or remained the same the redefault rate rose to 50%.

A weak economy, falling home prices and too much leverage on the part of buyers created more problems for owners and lenders. Note that even in the best of the loan mod situations the default rate continued to worsen over time. Even in the magic "10" category, default rates looked to have almost doubled from three months to nine months.

To date, the bank loan modifications are not helping enough distressed owners. If you were in trouble before you went through the loan mod process, almost half of you left in the same sorry situation.

To be fair, lenders have stepped up their efforts to reduce foreclosures. The percentage of modifications that reduced loan payments by more than 10% increased to 37% in the fourth quarter from 26% in the third quarter. Still, roughly one in four borrowers saw their payments increase after their loan was modified.

* Chart Source: Via the wall Street Journal

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Howard Bell
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