Are loan modifications merely postponing default?

Consumer advocates expressed some skepticism today about a Fitch Ratings study predicting a high redefault rate for mortgages that are restructured to avert foreclosure.

The study, which I wrote about in today's Times, looked at mortgages bundled up on Wall Street during the housing boom to back debt securities. It projected that 65% to 75% of subprime mortgages in these loan pools would be at least 60 days delinquent within a year of when they were modified.

Center for Responsible Lending officials said the study doesn't adequately account for the more drastic lowering of payments expected as Obama administration loan-mod programs kick in. The buzzword here is "sustainability" -- getting the loan payment to a level at which the borrower can realistically be expected to afford it over time.

The Obama programs aim at persuading lenders and loan investors to reduce payments on first mortgages to 31% of a borrower's income. The initiatives include financial incentives for mortgage customer-service firms to accomplish this by lowering interest rates, extending loan terms and sometimes suspending interest payments on part of the principal of the loan.

"The Fitch report applies to non-Obama plan mods," Center for Responsible Lending spokeswoman Kathleen Day said in an e-mail. "So this just shows the need for real sustainable mods."

Any thoughts on whether Fitch was overstating the potential problems?

-- E. Scott Reckard

Comments

[Nick]

The one-word answer would be 'yes'. The slightly expanded and possibly more accurate answer would be "duh, of course."

[Shan]

First, how does Fitch have any credibility.

Secondly, it appears to me that either Fitch or the media is making this look like this report refers to the new Obama modification plan. There is no way to judge the Obama plan yet. This plan will drastically reduce payments as opposed to previous mods where payments went up in some cases.

Right or wrong, I really thing the Obama mod plan will help people get on their feet and offer optimism. I can't see people walking away from their homes after modifications just because they are underwater. I believe they will have more disposable income and more income to pay down their debt.

[Darv]

"getting the loan payment to a level at which the borrower can realistically be expected to afford it over time. "

That about summarizes it. If you bought a house that you can't afford, let's talk... how much CAN you afford?

We'll just keep lowering your payment until you can afford your home. You're a victim, after all.

All you idiots who waited on the sidelines, thinking these homes would come back on the market at reduced, realistic prices: SUCKERS!

[Maggie Knowles]

Loan modifications will not work until they reduce principle to market value. Add to that an interest rate reduction and you'll see 180 degree turnaround. The math is very simple, too bad the banks, investors, and politicians don't get behind it. Maybe they'll start to consider it soon.

[speaker-to-animals]

Reducing principal will not happen. The banks couldn't care less about these losses - as long as this administration allows the banks to participate in the fraudulent PPIP program it is the taxpayer shouldering 93% of these losses, not the banks themselves. Who would pass up a deal like that?

[allenbarela]

I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgage-modification-do-you.html If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.

[Home Loan Modification]

Thanks for sharing this informative post.