Lisa Simpson
Jan 27,2010
In: home loans

More and More Modified Loan Takers are Defaulting

Many modified loan takers are defaulting.

The biggest challenge to solving the foreclosure crisis is that more and more modified loan takers are defaulting. It has come as a surprise that within a year those who have managed to modify their loans are once more defaulting.
Lenders have several options by which they can help troubled borrowers – generous grace periods, stretched out payment schemes, reduced interest rates or even reduced principal balance. But 40% of those borrowers whose payment schedule has been reduced by 20% or even more in 2008 are once more delinquent according Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The most probable reason for this is that the economy continues to be weak and jobs are still vanishing. Fred Phillips Patrick of the thrift office said, “Even if you’ve gone through a modification, your situation may deteriorate.”
This trend does not portend well for the Obama government’s plan to contain foreclosures. The lenders who have participated in the plan have offered a trial modification period for 760,000 qualified borrowers since the programme made its debut last March. Only 31,000 have been able to reach the permanent status after completing the trial run and providing proof of income. Till November an equal number have fallen out of the plan or were not found eligible.

The negligible success will hardly make a dent on the overall scenario. A staggering 14% of borrowers with mortgages are hovering around foreclosure. It means pain to not just the borrowers but in a chain reaction to all as property prices fall. The worst hit states are Arizona, California, Florida and Nevada.
Recently some encouraging signs came from regulators. Nearly 20% have missed a minimum of 2 to 3 payments. It is an improvement on previous numbers (35%) during the same period during the previous year.

Another good news is that 31,000 short sales have been completed during the last 3rd quarter. In a short sale the house is sold at a price that is less than the loan amount due. It needs the consent of the lender to proceed with the sale. The numbers show a 22% spike of short sales from 2008 during the same quarter.

The numbers may be confusing but the general feeling is that things have not improved as much as they should and there are apprehensions that the worst is yet to come. Unemployment is largely held responsible for this. Without food on the table people are finding it impossible to pay mortgage dues – even at reduced rates.