A new government report provides a reason why default rates for modified home loans have remained fairly high: in many cases, lenders aren’t actually modifying the loans by very much.
Fewer than half of loan modifications made at the end of last year actually reduced borrowers’ payments by more than 10 percent… [while] nearly one in four loan modifications in the fourth quarter actually resulted in increased monthly payments.
How can a loan modification, which is meant to bring a troubled borrower back on track, actually increase fees? Some lenders add fees or past-due interest to the loan when they modify it. In cases where the modified loan resulted in a less than 10% reduction or where the payment amount increased, default rates are at nearly 50%.
The “good” news is that lenders seem to have done a little better at actually reducing loan amounts for troubled borrowers in the last quarter of 2008—the percentage of loans reduced by more than 10% jumped from a quarter of all modified loans to 37%.