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Modified Loans Defaulting Like Subprime Mortgages

Even some professionals in the lending industry are mystified at why so many companies are charging delinquent borrowers more in a modified loan when they clearly could not afford the original, lower amount.  “I don’t know why a mortgage lender would enter into that kind of agreement knowing what the outcome would be,” said Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association. “Why would it not go into foreclosure? Why would it not fail?” The new federal data did not distinguish among types of loan modifications. The OCC report indicated that of borrowers receiving loan modification plans earlier this year, 39% were thirty days in arrears after three months and 51% after six months.  Dugan said 60 days in arrears is a more reliable indicator of homeowners who will ultimately lose their homes. On that measure, the results were equally dismal: More than 35 % were 60 days past due on their home loan payments six months after getting help.

It’s clear the type of help can determine the outcome. Credit Suisse’s analysis revealed that 44 % of mortgage note modifications that included higher payments re-defaulted within eight months. Meanwhile, among those who had some of their principal permanently forgiven, 23 % had re-defaulted within eight months, while just 15 % of those with adjustable rates whose rates were decreased or frozen had defaulted.  Even an increasingly popular proposal floated by the head of the FDIC to refinance as many as 2.2 million distressed homeowners into affordable, fixed-rate mortgage loans estimates as many as a third, or about 700,000, could fall behind again by the end of 2009.

US Representative Barney Frank said that even with significant foreclosure default rates, the majority of those who are helped stay in their houses and slow the bleeding in neighborhoods struggling from abandonment and blight.  Frustrated with the pace of help to homeowners, the Newton Democrat yesterday threatened to tie up the remaining half of the $700 billion financial industry rescue money unless the Bush administration provided some of it for restructuring troubled subprime mortgage loans.

Other home preservation specialists said the problem is as much the homeowners. Paul Willen, an analyst for the Federal Reserve Bank of Boston, said too many borrowers simply cannot afford to own their homes.  “Many of the people in the foreclosure process are in deep, deep trouble. They are not a modified loan away from financial happiness,” said Willen. “Many people who are heading into foreclosure don’t need a modification, they need an exit strategy.” Article written by Jenifer McKim

Posted in Mortgage News, Published Article.

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