Modifying a loan may not help

PHILADELPHIA — As lawmakers and housing advocates push the federal government to help cut the foreclosure rate, Comptroller of the Currency John Dugan offers this sobering statistic:

More than half of loans modified in the first quarter of 2008 still fell delinquent within six months.

Dugan based his statement on data collected in a survey of institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion.

Experts say one possibility is that the modifications might not have lowered monthly payments enough to be truly affordable.

"The loan modifications I have seen demonstrate that the lenders are only agreeing to the smallest-possible changes that have provided only temporary relief for the borrowers," said Bruce Sattin, a lawyer in Lawrenceville, N.J., who handles foreclosure cases.

Sattin said most modifications required borrowers to continue their normal monthly payments and pay additional amounts each month to make up payments missed before the loan was altered.

"There are individuals for whom any loan modification would result in a mortgage payment they can't afford, because they couldn't really afford the original mortgage in the first place," said Farah Jiminez, executive director of Mt. Airy USA, a community-development corporation.

"Trying to save the homes of those in such arrangements may only be prolonging the pain — especially for the homeowner," she said.

RealtyTrac chief economist Rick Sharga has heard of instances where payments actually rose after modification.

"The loans need to be structurally changed in order for the problem to be resolved," Sharga said.

Ocwen Financial, a West Palm Beach, Fla., servicer of mainly subprime loans, took issue with Dugan's estimate, saying it has "kept 60,000 troubled mortgages performing and the borrowers in their homes" this year. Its data show just 24.5 percent of these loans were delinquent after six months.

A major roadblock to reducing the foreclosure rate is that homeowners had to be 60 to 90 days late on their mortgage before they were eligible for modification.

Fannie Mae recently announced, however, that it would permit loan modifications for struggling homeowners who pay mortgages on time.

"All prior government efforts to help homeowners have been completely flawed because they have forced homeowners to be 60 or 90 days late on their payments in order to qualify for relief," said Gibran Nicholas, of the CMPS Institute, which certifies mortgage bankers and brokers.

Nicholas said he believed that the high rate of delinquencies from modified loans was due to their not involving principal reductions, a point also made by other experts.

"Homeowners are still left with debt burdens that exceed the value of their homes," Nicholas said.

Sharga said he believed that real loan modifications could work, but that these require the lender — and the investors who bought the notes — to take a significant write-down in principal.

"But many loan services don't have the contractual right to lower the terms that dramatically, and many of the investors who hold the notes are reluctant to discount the assets that much," he said.