Loans Recently Modified Re-defaulting at an Alarming Rate

October 20th, 2009 | Tags: Loans

The loan modification is changing the foreclosure scenario

Nearly 50% of the loans that had been modified during the fist half of 2008 redefaulted within a year. Lenders are claiming they have stepped up their efforts to renegotiate loans but report released by bank regulators observe that over half of the borrowers who availed of the facility are again lagging behind in payment despite reduction of amount. Most of them are a minimum two months behind in payment observed the Office of the Comptroller of the Currency as well as the Office of Thrift Supervision.

However the number of re-defaulters was less among those borrowers whose monthly payments had substantially decreased following modification of the loan. One third of the borrowers whose monthly dues fell by 20% or more redefaulted. It can be compared with 60% for borrowers whose amounts remained the same or underwent increases.

The report is presenting a grim challenge to the plans of the Obama administration to tackle the foreclosure menace. $50 billion has been poured in for the financial sector for this purpose. The plans made a slow start but it picked up speed recently. In August nearly 360,000 house owners facing defaults calculating to 12% who were thought to be qualified for assistance signed up for a trial period of three months. If they pass the trail their benefits would be extended for five years. So far no defaults have been reported from this section.

The majority of the lenders have come forward with plans that permit the borrowers to catch up with the payments they have missed. But these modifications are not including interest rate reduction and the result is that monthly payments increase rather than go down. Thus all that it succeeds in doing is to prepare the borrower to face sure failure in the near future.

Commenting on this Kristi Cahoon of Legal Services of Northern Virginia said, “A lot of them aren’t true modifications.” She feels that under the Obama plan the loans will become more sustainable and maintainable by the borrower. The interest rate for example would go down to as much as 2% for a period of five years under the programme formulated by the Obama government.

The regulators are saying that pressure is being placed on the lenders to give more importance to those modifications that will bring about a reduction in the monthly payments. These comprise of nearly 80% of the new modifications during the second quarter of this year.

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