Reworked mortgages still face default

The projection is based in part on "shrinking disposable income, escalating job losses and possibly some deceptive practices on the part of the borrowers themselves," the New York-based ratings company said in a statement.

Lenders and regulators are increasing efforts to get mortgage terms modified to stem the soaring US foreclosures that are harming consumers, housing markets, and banks.

The efforts include the Obama administration's $75 billion Making Home Affordable program announced in February.

"Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not, reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses," Diane Pendley, a managing director at Fitch, said in the statement.

About 7 percent of US home loans packaged into securities without government support have been modified through April 30, including 18 percent of subprime loans, Fitch said.

With home prices slumping, "there is growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay," Pendley said.

More than 1.6 million mortgages have been modified since 2007, according to Hope Now, a coalition of mortgage companies in Washington.

Between 41 and 46 percent of those loans may relapse, according to Office of Thrift Supervision data. Home prices in 20 major metropolitan areas fell more than forecast in March, according to an S&P/Case Shiller index released yesterday.

It "could take months" for Fitch to fully incorporate modification trends in ratings, it said. Because the Obama administration's guidelines, which offer government subsidies to lenders, servicers, and borrowers to rework loans, are "only now being implemented, identification of any impact they may have on redefault rates will also be delayed," Fitch said.