Mortgage modification program doesn't work
The much touted mortgage modification program apparently doesn't work as planned and the Comptroller of the Currency John C. Dugan is quite surprised to the fact, that more than half of loans modified in the first quarter of 2008 fell delinquent within just 6 months. According to the Office of Comptroller of the Currency, 36% of borrowers who had their loans modified in the first two quarters of 2008 redefaulted after just 3 months. After 6 months, the redefault rate was roughly 56% and after 8 months, 58% of borrowers redefaulted. Default is defined by being more than 30 days past due your monthly payment date.
Now, the mortgage modification program has been at the core of government plans to stem foreclosures. The idea behind loan modification plan is to lower mortgage payments and overall debt in order to make the mortgage more affordable for a borrower. It is accomplished by one of three ways, or in some cases by combining them - lowering interest rates, or lowering monthly payments and deferring some of the interest adding it to the principal, or changing repayment period from 30 years to 40. The worst of it is that the very worst is still to come, as these unpleasant results are for the first half of 2008. Since then, real estate values have been going down while unemployment have gone up and will go higher. So, the redefault rate will be definitely higher for the third and fourth quarters.
A key question,according to Mr. Dugan, is why mortgage modification doesn't work and the number of redefaults so high? He wonders if the modifications did not reduce monthly payments enough to be truly affordable to the borrowers or consumers simply replaced lower mortgage payments with increased credit card debt, or the mortgages were so badly unaffordable to begin with, the borrowers simply can't afford even reduced monthly payments? Or is it a combination of these factors and everything else?
We are wondering too. It is still too early to say whether mortgage modification helps to homeowners in distress or becomes another wasted and convoluted, bailout-like mess.
Mon Dec 8, 2008 01:12PM by Tony | More in Mortgage | Comments (0)
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