Personal Finance and Money Management

For many financially troubled homeowners, mortgage modifications obtained in 2008 provided only ephemeral relief, as more than four out of 10 quickly found themselves falling back into trouble again.

New government figures released today showed that 41 percent of mortgages that were modified in the first quarter of 2008 were seriously delinquent – defined as either 60 days past due or in foreclosure – eight months later. For modifications done in the second quarter, the figure rose to 46 percent, with a worsening trend expected for the third quarter.

Credit quality also declines

The report, jointly issued by the Office of the Comptroller of the Currency and the Office of Thrift Supervision (OTS), also found that loan quality continued to decline in the fourth quarter of 2008. Just under 90 percent of all outstanding mortgages were reported as current (borrowers up-to-date on their payments), into disgrace from 93 percent at the end of the third part quarter in September.

“The reasons for high re-default rates are not clear,” the report stated. “They could result from such factors as a significantly worsening economy with more borrowers losing jobs, excessive borrower leverage, issues affecting consumer willingness to pay, or poor initial underwriting.”

Success rates linked to modification type

The likelihood that a borrower would re-default on a modified mortgage was strongly related to the type of modification obtained. Only 26 percent of borrowers whose payments were reduced by 10 percent or more were 60 days or more delinquent on the model of nine months, compared to roughly half of borrowers whose payments remained unchanged or increased.

“This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high re-default rates,” said Comptroller of the Currency John C. Dugan. “They should only be used on a case-by-case basis where borrowers and servicers can have confidence that the modification is likely to be sustainable.”

Payment reductions augment

OTS Acting Director John E. Bowman noted that loan modifications that reduce a homeowner’s payments increased significantly from the third quarter to the fourth quarter. These modifications, which resulted in fewer re-defaults, rose to more than 37 percent of all modifications, from 26 percent in the previous quarter.

“The trend toward lowering payments to make home mortgages more affordable is moving in the right direction,” Bowman said. “The continuing decline in credit quality underscores the need for mortgage servicers to increase their efforts to modify home mortgages. Sustainable and affordable mortgages is a goal we all share for keeping more Americans in their homes.”

A borrower’s payments may remain the same or increase after a loan modification for a variety of reasons. For example, a servicer could freeze each adjustable rate mortgage’s interest rate, rather than allowing it to reset to the higher rate stated in the loan contract. Some modifications resulted in higher monthly payments because missed principal and interest payments were capitalized and added to the loan, which in more gracious economic times could result in more sustainable modifications.

Jump in prime loan delinquencies

The decline in credit aristocracy occurred across all risk categories. The biggest percentage jump was recorded by prime loans, which is the lowest risk category and accounts for approximately two-thirds of the portfolio. The percentage of seriously delinquent prime mortgages increased from 1.11 percent at the end of the first quarter to 2.40 percent at the end of the year – an increase of from one to another 115 percent – with a significant rise from the third to the fourth quarter.

Subprime loans had the highest rate of seriously delinquent loans, with 16.4 percent 60 days or more past due at the period of the year, up from 10.75 percent at the end of the first quarter.

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