Red flag on re-defaults

REUTERS
Tuesday, December 23rd 2008, 4:00 AM
Mortgage modifications meant to keep homeowners from defaulting on their loans are often failing to do the trick, U.S. banking officials said Monday.
After three months, 19% of mortgage loans modified in the first three months of the year were 60 or more days delinquent or in the process of foreclosure.
After six months, nearly 37% were 60 or more days delinquent, according to a joint report by the Comptroller of the Currency and the Office of Thrift Supervision.
"Re-default rates increased each month and showed no signs of leveling off after six months or even eight months," said John Dugan, head of the Office of the Comptroller of the Currency.
"I don't think we've seen the worst yet," he said later in an interview with CNBC.
Possible explanations for the re-defaults include the faltering economy and that the loan terms are not modified enough, Dugan said.
Some lawmakers and the head of the Federal Deposit Insurance Corp. have called for a more aggressive effort by lenders to modify mortgage terms to help keep people in their homes.
According to the government's data, delinquencies rose across all loan categories, although subprime loans had the highest default rates. At the same time, 90% of home loan borrowers remain up to date.
Critics said the data are misleading because it includes repayment plans that fail to significantly modify a home loan. For example, many freeze the interest rate for just a year, according to the Center for Responsible Lending.
"You really have to work it out to a sustainable loan, not just one that is designed to default because, after a year, it's going to rise again," said Kathleen Day, a spokeswoman for the nonprofit group, which aims to help homeowners.
A spokesman for IndyMac federal bank, which was taken over by the FDIC in August, said until a few months ago, lenders were only tinkering with loan terms and not doing true modifications.
"Modifications in the past were never about finding the borrower an affordable payment," said IndyMac's Evan Wagner. "So I think it shouldn't be surprising that you are seeing a lot of these folks re-defaulting." nydailynews---12-23-08---P-37