Modified loans are performing poorly

More than half of all homeowners who had their loans modified to make the payments more affordable in the first half of the year are already in default again, banking regulators said Monday.

The new data raise questions about whether government money may be better spent on creating jobs rather than averting foreclosures, said John Reich, director of the federal Office of Thrift Supervision, at a housing industry forum sponsored by his agency.

“I do have concerns about allocating federal resources,” Reich said.

Many experts say the bulk of loan modifications don’t actually provide much financial relief for borrowers.

The government’s data don’t include enough detail about the types of loan modifications that were made, said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp.

“The quality of the [modifications] are not what they should be,” she said.

The U.S. economic picture has darkened over the last month. One in 10 Americans with a mortgage is either behind or in foreclosure, and more than 500,000 jobs were lost in November.

Unemployment stands at 6.7%, and the worldwide credit markets have improved only modestly from the freeze that led Congress to approve a $700-billion bailout before the election.

Discussion on Monday focused on how broad the government’s intervention should be, rather than whether the government should play any role at all. The U.S. is on track for 2.25 million foreclosures this year.

“We need a bottom-up approach, in my view, by modifying people’s mortgages and helping them stay in their homes,” New Jersey Gov. Jon Corzine said.

Corzine called for a three- to six-month halt to foreclosures while the government worked out a more aggressive plan.

Mark Zandi, chief economist at Moody’s Economy.com, said the public was likely to be more sympathetic to efforts to assist troubled borrowers, because the link between the foreclosure crisis and the sinking economy is increasingly clear to most Americans.

“It’s now in every corner of the country,” Zandi said. “I think that people understand that this is a broader issue.”