Modified Mortgages Continue to Have High Default Rates

Even though mortgage modifications have helped many struggling homeowners avoid foreclosure, the “re-default” rate remains high, according to data from the Office of the Comptroller of the Currency (OCC.)

In its latest report, the OCC found that 52.3 percent of the almost three million mortgages that have been modified since 2008 are either delinquent or in foreclosure. Breaking it down, through the fourth quarter of 2012, 7.1 percent of all modified loans were delinquent by 30 to 59 days, 14.2 percent were considered ‘seriously delinquent,’ 7.7 percent were in the foreclosure process and 7.3 percent had already lost their homes to foreclosure.

These re-defaults are causing some concern for investors as ratings company Fitch warned about the continued risk.

“Improving conditions in the U.S. housing market and modest declines in foreclosure activity have yet to translate into a material reduction in credit risk for residential mortgages that have been modified since 2008,” said Fitch ratings company in a statement. It added, “We regard the high delinquency and foreclosure rates for recently modified mortgages as reflective of still elevated residential mortgage asset quality problems.”

The OCC found that certain types of modifications are more effective than others however. Of the homeowners who received a payment reduction of 10 percent or more since 2008, 54.8 percent had kept up on their payments or paid off their loans by the end of 2012. By contrast, only 36. 5 percent of those who received payment reductions of less than 10 percent were still current on their loans.

And lenders do seem to be catching on to which methods are most helpful in preventing foreclosure.

 “Servicers continued to emphasize alternatives to foreclosure during the quarter, implementing 367,169 home retention actions compared with 169,064 home forfeiture actions,” said the OCC in a statement. “The number of home retention actions implemented by servicers decreased by 4.1 percent from the previous quarter and decreased 20.2 percent from the prior year.”

Mortgage modifications may be less necessary in the coming years as home prices have started rising again and lenders have made significant headway in their foreclosure backlogs.

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