Reworked mortgages not working

Even after help, homeowners end up back in default

Representative Barney Frank threatened to tie up financial industry rescue money unless some is used to modify troubled mortgages.

More than half of delinquent borrowers who had their mortgages reworked earlier this year to avoid foreclosure were behind on their new loan payments after just six months, a federal regulator said yesterday.

John C. Dugan, US comptroller of the currency, told a housing forum yesterday that data his agency is collecting show the increase in repeat defaults by homeowners is "remarkably high."

"Put simply, it shows that over half of the loan modifications seemed not to be working after six months," Dugan said.

The findings raise several major questions for government and lending industry executives as they struggle for a fix to the nation's foreclosure crisis: Are lenders not doing enough to modify loans so delinquent borrowers can afford them? Or, are too many borrowers just not cut out to be homeowners and shouldn't be bailed out of their debts?

Dugan said his agency is asking lenders and their representatives why these redefault rates are so high. But many housing advocates and industry specialists said they already know: Lenders are failing to give troubled homeowners affordable long-term fixes. In fact, lenders were more likely to offer a modified loan that resulted in a higher, not lower, monthly payment, according to a recent report by analysts at the financial services company Credit Suisse.

Ask LaWanda Fils. This single mother was behind on payments on her Dorchester two-family home when she asked for help from her lender, Option One Mortgage Corp. The solution Option One offered didn't seem to make sense - she would pay $800 a month more, after rolling in past-due principal, taxes, and insurance. Desperate to save her home, Fils agreed to the deal anyway in February.

Two months later, she defaulted and now is again facing foreclosure.

"I think it is more for them to pat themselves on the back to say at least they tried," said Fils. "It's not feasible and it doesn't work and they end up having people falling behind."

Option One declined to comment.

Loan modifications can take several forms. Lenders can either reduce the mortgage's interest rate, which results in a lower payment; they can write off some of the unpaid principal, which could either lower monthly payments or lower overall debt; or they could postpone some of the debt or extend the life of the loan, which may lower payments in the short term, but drive costs over the life of the loan higher.

A loan modification can result in a higher payment if lenders roll back into the note unpaid principal, as well as interest and escrowed taxes, according to Faith Schwartz, executive director of Hope Now, a private sector alliance of mortgage servicers, counselors, and investors that is coordinating loan modifications.

"They tried to help them, but they could have foreclosed as the alternative," Schwartz said. She added lenders should examine the federal data to see which approach works and which doesn't. "It doesn't mean they didn't get a lower rate."

Even some professionals in the lending industry are mystified at why so many companies are charging delinquent borrowers more in a modified loan when they clearly could not afford the original, lower amount.

"I don't know why a lender would enter into that kind of agreement knowing what the outcome would be," said Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association. "Why would it not go into foreclosure? Why would it not fail?"

The new federal data did not distinguish among types of loan modifications. It showed that of borrowers receiving loan modifications earlier this year, 39 percent were 30 days in arrears after three months, and 51 percent after six months.

Dugan said 60 days in arrears is a more reliable indicator of homeowners who will ultimately lose their homes. On that measure, the results were equally dismal: More than 35 percent were 60 days past due on their mortgage payments six months after getting help.

It's clear the type of help can determine the outcome. Credit Suisse's analysis revealed that 44 percent of modifications that included higher payments redefaulted within eight months. Meanwhile, among those who had some of their principal permanently forgiven, 23 percent had redefaulted within eight months, while just 15 percent of those with adjustable rates whose rates were decreased or frozen had defaulted.

Even an increasingly popular proposal floated by the head of the Federal Deposit Insurance Corp. to refinance as many as 2.2 million troubled homeowners into affordable, fixed-rate mortgages estimates as many as a third, or about 700,000, could fall behind again by the end of 2009.

US Representative Barney Frank said that even with significant default rates, the majority of those who are helped stay in their homes and slow the bleeding in neighborhoods struggling from abandonment and blight.

Frustrated with the pace of help to homeowners, the Newton Democrat yesterday threatened to tie up the remaining half of the $700 billion financial industry rescue money unless the Bush administration provided some of it for modifying troubled loans.

Other specialists said the problem is as much the homeowners. Paul Willen, an analyst for the Federal Reserve Bank of Boston, said too many borrowers simply cannot afford to own their homes.

"Many of the people in the foreclosure process are in deep, deep trouble. They are not a modified loan away from financial happiness," said Willen. "Many people who are heading into foreclosure don't need a modification, they need an exit strategy."

Jenifer McKim can be reached at jmckim@globe.com.