Are loan modifications merely postponing default?

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Consumer advocates expressed some skepticism today about a Fitch Ratings study predicting a high redefault rate for mortgages that are restructured to avert foreclosure.

The study, which I wrote about in today’s Times, looked at mortgages bundled up on Wall Street during the housing boom to back debt securities. It projected that 65% to 75% of subprime mortgages in these loan pools would be at least 60 days delinquent within a year of when they were modified.

Center for Responsible Lending officials said the study doesn’t adequately account for the more drastic lowering of payments expected as Obama administration loan-mod programs kick in. The buzzword here is ‘sustainability’ -- getting the loan payment to a level at which the borrower can realistically be expected to afford it over time.

The Obama programs aim at persuading lenders and loan investors to reduce payments on first mortgages to 31% of a borrower’s income. The initiatives include financial incentives for mortgage customer-service firms to accomplish this by lowering interest rates, extending loan terms and sometimes suspending interest payments on part of the principal of the loan.

‘The Fitch report applies to non-Obama plan mods,’ Center for Responsible Lending spokeswoman Kathleen Day said in an e-mail. ‘So this just shows the need for real sustainable mods.’

Any thoughts on whether Fitch was overstating the potential problems?

-- E. Scott Reckard