WASHINGTON The desperate straits of many U.S. homeowners showed in new data released on Monday, suggesting efforts to help them are having limited success.
As the recession throws more people out of work, the rate of re-default on modified mortgages is rising and may worsen as the economy deteriorates, banking regulators said.
After much browbeating from Congress, banks and other mortgage lenders are beginning to do more, to modify home loans so that distressed borrowers can avoid foreclosure.
But the latest figures from regulators raise questions about how modifications are being done and how much they help, even as foreclosure rates hit record-setting levels.
"You have to think that it will get worse before it gets better," John Dugan, the U.S. Comptroller of the Currency, said in an interview with Reuters.
Critics say most loan modifications up until a few months ago were temporary and not aimed at providing for sustainable payment plans, so it comes as no surprise that homeowners are defaulting.
At the same time, a lenders' group known as Hope Now warned on Monday that the number of U.S. homeowners seeking help to avoid foreclosure would double next year to 2 million.
The housing crisis and the recession will keep Congress busy when it returns on January 6, 2009, from a holiday break, and preoccupy President-elect Barack Obama after he is sworn in on January 20.
Between January 6 and the inauguration, congressional Democrats are expected to introduce legislation urging more aggressive efforts to help those homeowners who are in over their heads.
A bill being drafted by Massachusetts Rep. Barney Frank might include a sweeping mortgage relief plan from Federal Deposit Insurance Corp Chairman Sheila Bair, a House aide said on Monday.
The bill is sure to insist that more be done to help homeowners under a plan already under way -- the Treasury Department's $700 billion Troubled Asset Relief Program.
That plan, known as the TARP, has given hundreds of millions of dollars in aid to banks and, more recently, to major U.S. automakers. But Frank and other Democrats contend the TARP is doing little to help homeowners.
WHAT IS LOAN MODIFICATION?
The Office of the Comptroller of the Currency and the Office of Thrift Supervision, both key U.S. banking regulators, said that after six months, nearly 37 percent of mortgage loans modified in the first quarter were 60 or more days delinquent.
After three months, 19 percent were 60 or more days delinquent or already in the process of foreclosure, they said.
"One very troubling point is that whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of leveling off after six months or even eight months," Dugan said in the joint OCC-OTS report.
Possible explanations for the high re-default rate include the faltering economy as well as loan terms were not being modified enough to help homeowners, Dugan said.
But critics said the data were misleading because they included repayment plans that did not significantly modify home loans.
For example, some repayment plans freeze the interest rate for just a year, according to the Center for Responsible Lending, a nonprofit group that aims to help homeowners.
"You really have to work it out to a sustainable loan, not just one that is designed to default because after a year it's going to rise again," said spokeswoman Kathleen Day.
A spokesman for IndyMac Bancorp, which was taken over by the FDIC in July, said lenders were only tinkering with loan terms up until a few months ago and not making true modifications.
"Modifications in the past were never about finding the borrower an affordable payment," Evan Wagner said. "So I think it shouldn't be surprising that you are seeing a lot of these folks redefaulting."
The data, some of which was released in preliminary form earlier this month, were based on information collected from some of the biggest U.S. financial institutions, including Bank of America, Citigroup and JPMorgan Chase.
(Reporting by Kim Dixon, Alister Bull and Kevin Drawbaugh; editing by Gary Crosse)