Defaults Rise in Loan Modification Program

Defaults Rise in Loan Modification Program

By DAVID STREITFELD

The number of homeowners who secured cheaper mortgages through the government’s modification program only to default again nearly doubled in March, continuing a worrisome trend that threatens to undermine the entire program.

Treasury Department data released Wednesday showed that 2,879 loans that were permanently modified have defaulted since the program’s inception in the fall, up from 1,499 in February and 1,005 in January.

Almost all the cancellations were apparently prompted by the buyer being unable to make the new payment. A scant handful — 37 in March — were due to the loan being paid off, presumably because the borrower sold the house.

The modification program, which the Obama administration says will help as many as three or four million households avoid foreclosure, is too new to have much of a track record. But the evidence is beginning to suggest that for some borrowers, having a loan modified is not the end of their struggle against foreclosure.

Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington, said she expected the number of post-modification defaults to continue to rise.

“It’s definitely alarming to look at those statistics,” she said. “The current model for modifications doesn’t necessarily produce sustainable results.”

The Treasury Department said the defaults were expected. “We always anticipated that some homeowners would not sustain a modification,” a Treasury spokeswoman, Meg Reilly, said.

As a result, she said, the foreclosure relief program has been greatly expanded. New elements focus on allowing distressed homeowners to sell their properties for less than they owe and on shaving the principal owed by borrowers.

The notion of cutting principal, however, has already run into some resistance by the big banks, and its fate in uncertain. That program will not be in place until the fall.

Many modification recipients are burdened by a tremendous amount of debt, both on their house and credit cards.

Treasury data shows that the median savings for borrowers receiving permanent modifications is $512 a month. But the borrower’s debt load, which includes not only the house, property taxes and insurance but homeowner association fees, home equity loans, car loans, alimony and credit card interest, remains very high.

Even after modification, $61 out of every $100 earned by the borrower goes to servicing his debt, government figures show. For increasing numbers of modification recipients, it is apparently still too much to stave off financial collapse.

Many of these private plans either kept the payments the same or increased them. Inevitably, these mortgages suffered the highest failure rate — about two-thirds of the borrowers were once again behind in their payments after a year, government data shows.

Loans where the payments were decreased by at least 20 percent failed at a slower but still significant rate of about 40 percent.

On the surface, the modification program appears to be doing better after a much-criticized start. The process begins with a trial period of several months, after which the modification becomes permanent if both parties agree.

While fewer people are entering trial modifications each month, more of them are expected to receive permanent modifications.

The number of active permanent modifications in March was 227,922, an increase of 35 percent from February. Another 108,212 permanent modifications are awaiting borrower approval.

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