September 8th, 2010

Banks have been ramping up their mortgage modifications, helping out troubled borrowers who can't qualify for President Obama's foreclosure-prevention program. Too bad these homeowners redefault at more than twice the rate. Nearly 11% of mortgages modified under the government's Home Affordable Modification Program, known as HAMP, have fallen two months behind in payments, according to a banking regulators' report issued Friday. By contrast, just more than 22% of non-HAMP adjustments redefaulted.

The figures look at loans modified in the fourth quarter of last year. The reason for the gap is pretty clear, regulators said. HAMP modifications reduce a borrowers' monthly payment by an average of $608, while bank modifications lower it only by $307. "There is a correlation between sustainability of payment and the reduction in the payment," said Joe Evers, deputy comptroller at the Office of the Comptroller of the Currency, which put out the report along with the Office of Thrift Supervision.

Under HAMP, eligible borrowers can have their monthly payments lowered to 31% of their pre-tax income as long as its more profitable for the bank to modify the loan than to foreclose. The federal government pays servicers an incentive to participate in the program. There are no guidelines for bank modifications, though most now lower a borrower's monthly payment rather than just tacking delinquent payments on to the end of the loan, according to the report. Industry observers and consumer advocates are closely watching the redefault rates on mortgage modifications. Some experts say that the adjustments are only a temporary fix and artificially depress foreclosure figures. If many people redefault and wind up in foreclosure, home prices could plummet again.

Also, proprietary bank modifications are outpacing HAMP adjustments by more than 2-to-1. Many troubled homeowners are falling out of the government program and 44.5% of them are receiving bank modifications. Housing counselors have been wary of proprietary modifications, mainly because there is not a lot of information about them. They caution homeowners to make sure they understand the terms of the adjustment.