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Modified mortgages no big help for many
Report: 1 in 4 resulted in increased payments

By Alan Zibel
ASSOCIATED PRESS

Though lenders are boosting their attempts to curb record-high home foreclosures, fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent, data released yesterday show.

The report, based on an analysis of nearly 35 million loans worth more than $6 trillion, was published by the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision. It provides the most detailed and broad analysis to date of efforts to stem the foreclosure crisis, which President Barack Obama is trying to combat with a $75 billion plan to promote loan modifications.

The report helps explain why many loans are falling back into default after being modified. Many borrowers and consumer groups contend that the modifications offered by the lending industry aren't very generous, despite public prodding from regulators.

For instance, nearly one in four loan modifications in the fourth quarter actually resulted in increased monthly payments. That situation can happen when lenders add fees or past-due interest to a loan and spread those payments out over the 30- or 40-year period. Perhaps unsurprisingly, the report found that loans were far less likely to fall back into default if a borrower's monthly payment is reduced by a healthy amount.

Nine months after modification, about 26 percent of loans in which payments had dropped by 10 percent or more had fallen back into default. That compares with about half of loans in which the payment was 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," Comptroller of the Currency John Dugan said in a statement.

In San Diego County, mortgage broker Mike Dillon said it would not be surprising to find that borrowers who had their loans modified are still defaulting on their payments. A modified loan still does not address the issue of sharply reduced equity in homes purchased in the last few years, he noted.

"What I hear from people is they're so distressed by the drop in value of their homes that they feel like maybe they should walk away," said Dillon, owner of TCS Mortgage. "So the bank tries to do a modification so you can make your payment every month, but you haven't really fixed the problem, which is loss of income, in some cases, and depreciation of the home."

The San Diego Housing Opportunities Collaborative, a nonprofit coalition that has worked with distressed borrowers, is seeing increasing evidence of homeowners who are still having trouble making payments despite loan modifications, said Appaswamy "Vino" Pajanor, executive director.

"Most of these mortgages that are being modified are being done without the homeowners knowing their options," he said. "They are getting into a modified mortgage that they still can't afford. You will find out that most of them who are defaulting shouldn't have gotten a modified loan to begin with."

The collaborative will sponsor a clinic to help troubled borrowers from 10 a.m. to 2 p.m. today at the Montevalle Community Center, 840 Duncan Ranch Road in Chula Vista. Homeowners, who should bring their mortgage documents, can get one-on-one counseling.

Regulators said they saw a positive trend in the new federal data, collected from mortgage companies including Bank of America Corp., JPMorgan Chase & Co. and Citigroup.

Traditionally, lenders have seen loan workouts as a way to get a borrower back on track after a temporary disruption in income. Now, with the economy sinking fast and foreclosures soaring, they are increasingly coming around to the idea that more permanent changes are needed.

Among loan modifications made in the October-December quarter, about 37 percent resulted in a drop in payments of more than 10 percent, compared with about one-fourth in the first nine months of the year. Regulators saw that growth as a positive sign.

"The trend toward lowering payments to make home mortgages more affordable is moving in the right direction," John Bowman, acting director of the Office of Thrift Supervision, said in a statement.

Staff writer Lori Weisberg contributed to this report.