75% of modified home loans will redefault

By Les Christie, staff writer


NEW YORK (CNNMoney.com) -- Most borrowers who have had their mortgages modified through a government-sponsored program will redefault within 12 months, according to a report released Wednesday.

Between 65% and 75% of loans that are modified through the Home Affordable Modification Program but not backed by the federal government are likely to go bad, according to the report released by Fitch Ratings, a N.Y.-based credit-rating agency.

The main reason these borrowers continue to struggle is that HAMP does nothing to solve the rest of their debt problems, the report added.

"Many of these borrowers still have very heavy levels of other debt," said Diane Pendley, a Fitch managing director, "auto loans, credit cards and other expenses. The HAMP modifications reduce housing expenses down to 31% of income but do not touch these other obligations."

On average, HAMP-modified borrowers, according to Pendley, have 64% of their monthly pretax income spent before they even buy a quart of milk. If even a small emergency arises -- an unexpected car repair, a medical bill or a loss of overtime income -- they're in trouble.

"We're talking borrowers who don't have cash reserves," said Pendley. "If they did, they wouldn't be in this position in the first place. It doesn't take much for them to get in the same situation again"

Jay Brinkmann, the chief economist for the Mortgage Bankers Association, finds nothing at all surprising about the Fitch finding. "Over the course of studying this over several years," he said, "we find re-default rates from 40% to 60% on modified mortgages. You have borrower behavior that keeps coming back."

When that happens, lenders are much more likely now to recommend that borrowers opt for foreclosure alternatives instead of modifying loans a second time.

Currently, according to the Fitch report, about half of prime borrowers who lose their homes now do so through foreclosure.

The other 50% go through short sales, in which they sell their homes for less than what they owe the bank, or deed-in-lieu, a transaction where the bank takes back the property directly and forgives the outstanding balance.

The servicers have been encouraged to rev up their short sale engines by the Treasury Department, which runs HAMP and its sister program, Home Affordable Foreclosure Alternatives (HAFA), which provides cash incentives to the parties who agree to short sales..

Now, when borrowers re-default on HAMP mods or other bank workouts, banks are much more likely to offer help to execute a short sale or deed-in-lieu.

"HAFA gave the servicers an indication that this is where they should take these [re-defaulting loans]," said Pendley. "The banks are now assisting borrowers; they're being much more proactive, like helping them find real estate brokers for short sales."

The benefit of these transactions for borrowers is that it lets them move on more quickly with their lives. They can get out from under the unaffordable mortgage payments, find a cheaper rental, start to, perhaps, save a little cash and start to rebuild their credit scores. To top of page


Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.