Loan aid often fails to lower payments
A snapshot of the reeling mortgage industry, released Friday by federal bank regulators, illustrates the challenges the Obama administration faces with its $95-billion plan to help lower mortgage payments for struggling borrowers.
In the last three months of 2008, most troubled borrowers were being offered not true modifications but breathers on payments followed by a resumption of the original mortgage terms, or even higher payments.
Moreover, many of the mortgages that were modified were falling back into default, according to the report, which also found that serious delinquencies continued to spiral to record levels in the fourth quarter.
In an especially ominous sign, the number of delinquent “prime” loans -- the ones to the most creditworthy borrowers -- more than doubled in the course of the year.
When loan contracts were actually changed, just 37% of the loan modifications reduced monthly payments by more than 10%, the report said, provoking criticism from fair-lending activists and Sheila Bair, head of the Federal Deposit Insurance Corp.
Bair, a leading proponent of lowering loan payments to combat foreclosures and the damage they inflict on the economy, said many banks and loan servicers continued to provide only temporary relief to borrowers.
The report “unfortunately demonstrates a continued reliance by many servicers and lenders on repayment plans and modifications that do not reduce the borrower’s monthly payment,” Bair said in a statement.
Produced by the Treasury Department’s bank regulators, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, the report analyzed mortgages serviced by 13 large financial institutions, representing about two-thirds of all the outstanding home loans in the country.
The companies included such first-round recipients of the government’s bank bailout funds as Bank of America, Wells Fargo, Citigroup and JPMorgan Chase, which collectively have received $145 billion in government money.
The report said efforts were initiated to help 301,648 borrowers in the fourth quarter, up 44.5% from the first quarter of 2008. Of those homeowners, just 58,315, or fewer than 1 in 5, had their payments lowered by any amount, compared with 25,249 in the first quarter.
The regulators said the data showed that banks and thrifts in the final days of the Bush administration appeared to have been moving toward the type of loan modifications advocated by Bair and President Obama.
Such restructurings lower interest rates, extend the terms of the loans and make other changes to cut payments to what is considered an affordable percentage of borrowers’ incomes.
The Center for Responsible Lending, a North Carolina-based advocacy group, said the report showed that the law should be changed to allow bankruptcy judges to modify home loans.
“Foreclosures are still exceeding modifications by a wide margin,” said Kathleen Day, a spokeswoman for the group.
Judges currently are powerless to change loan terms to help keep borrowers in their homes.
The Treasury agencies said that 41% of loans modified in the first quarter and 46% of loans modified in the second quarter were 60 or more days past due after eight months. The trend appeared to continue for loans modified in the third quarter, they said.
The reasons for the repeat defaults are unclear but could include the worsening economy, the agencies said.
Lowering monthly payments also lowered the risk of repeat defaults, the regulators said.
When modifications cut monthly payments more than 10%, just under a quarter of the loans became seriously delinquent six months later. By contrast, more than half the loans for which payments remained unchanged were seriously delinquent after six months.
“In the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high re-default rates,” said Comptroller of the Currency John C. Dugan, warning that such strategies “should only be used on a case-by-case basis.”
Overall for 2008, 42% of modified loans reduced monthly payments, 27% left payments unchanged, and 32% increased payments. In the fourth quarter, however, the proportion that reduced payments topped 50% of all modifications.
Servicers cited several reasons that changes to loans might not lower payments. For example, a servicer could help a troubled borrower by freezing the interest rate on an adjustable-rate loan rather than letting it rise. And payments could go up if a lender allowed a borrower to skip some payments, then added the missed principal and interest back onto the loan balance.
Among all the home loans included in the study, 7% were classified as nonperforming at the end of September. By the end of the year, the figure exceeded 10%.
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