CORRECT: Modified mortgages often re-default

CORRECT: Modified mortgages often re-default
By Alistair Barr, MarketWatch
Last update: 4:34 p.m. EST Nov. 18, 2008
Comments: 132
(This is an update to correct a previous version. Lender Processing Services' data on re-defaults of modified mortgages refer to the industry generally, not to IndyMac home loans specifically.)
SAN FRANCISCO (MarketWatch) -- Sheila Bair, chairman of the Federal Deposit Insurance Corp., has proposed modifying millions of mortgages to prevent foreclosure.
However, changing home loans like this doesn't always prevent problems, according to Lender Processing Services (LPS:
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LPS 20.41, -1.08, -5.0%) , which processes mortgage payments and tracks roughly 39 million of the 50 million outstanding home loans in the market.
Bair said the FDIC's modification plan would cost $24.4 billion and proposed that some of the Treasury's $700 billion Troubled Asset Relief Program be used to pay for it. See related story.
The FDIC has already modified more than 5,000 delinquent mortgages owned or serviced by failed lender IndyMac (IDMCQ:
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IDMCQ 0.04, -0.01, -16.0%) and Bair's broader proposal is modeled on those efforts.
Under the IndyMac program, eligible homeowners have been offered more affordable monthly payments through reduced interest rates on the loans, extended amortization and deferred principal payments.
Lender Processing Services told analysts at Keefe, Bruyette & Woods that the results of such modification are often uninspiring.
"Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don't prevent them from taking place," Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.
For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments, Lender Processing Services told the analysts.
The FDIC's broader modification proposal assumes a re-default rate of roughly 33% -- about 2.22 million mortgages would be altered to avoid 1.5 million foreclosures, according to the plan. The government would share up to half of the losses from re-defaults with lenders and investors.
To qualify for the plan, borrowers would need to make six consecutive payments. This eliminates early-payment defaults - a trend that has inflated industry-wide default data, FDIC spokesman Andrew Gray noted.
Bair said on Tuesday that the FDIC's IndyMac efforts have already prevented "many foreclosures that would have been costly to the FDIC and to investors."
Under the FDIC, IndyMac has mailed more than 23,000 loan modification proposals to borrowers, and will mail over 7,000 more soon, Bair added. That's in addition to more than 5,000 mortgages that have already been modified.
On average, the modifications have cut each borrower's monthly payment by more than $380, or 23% of the monthly payment on principal and interest, she reported.
"Over the next two years, an estimated 4 [million] to 5 million mortgage loans will enter foreclosure if nothing is done," she said. "The stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification protocols."
The internal models of Lender Processing Services suggest that the number of foreclosures will continue to rise through 2010 before peaking in 2011, the KBW analysts reported.
Foreclosures six months ago were mostly associated with bad loans, but now job losses are increasingly the cause in newer foreclosure notifications, Lender Processing Services also noted. End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.