Do Loan Modifications Work?
Fitch Ratings has a report out today that looks at how well loan modifications work, as the WSJ notes Tuesday. The upshot: between 65% and 75% of modified subprime loans will become 60-days or more delinquent again within a year of the loan modification.
Modifications come in many stripes: Servicers may lower interest rates, extend the term of a loan, or change adjustable-rate loans to fixed-rate amounts. They even may increase the principal on a mortgage by adding delinquent amounts to the outstanding loan.
But reducing the mortgage principal may be the most effective way to get delinquent borrowers back on track: A monthly mortgage survey released Tuesday by LPS Applied Analytics finds that modifications that reduce principal have a 25% lower re-default rate within six months of a loan modification. Many housing analysts have championed more aggressive reductions that reduce loan principal. Likewise, Fitch finds that loans with principal reductions had a 40% to 50% chance of a re-default. Modifications, meanwhile, that increase the loan’s principal have higher default rates, of around 60%-70%.
Modifications have emerged as the loss mitigation tool of choice for most lenders, accounting for 56% of all loan workouts–these also include payment plans, short sales, or any other remedy to avoid foreclosure– in the last six months of 2008, compared to just 31% of all loan workouts in the last six months of 2007, Fitch reports. Short sales, where the lender allows the borrower to sell the home for less than the value of the mortgage have also jumped in popularity, growing to 11% of all workouts for the last half of 2008, up from around 4% for the previous six month periods."