Re-default data shows Obama housing plan potential

WASHINGTON (Reuters) - More than 58 percent of U.S. home loans modified in 2008 did not result in a decreased monthly payment, and those modifications often did not produce sustainable mortgages, according to a report released on Friday.

A house for sale has a "Reduced Price" sign in front of it in Dearborn, Michigan, March 27, 2009. REUTERS/Rebecca Cook

The recent data on re-default rates for modified home mortgages indicate that the Obama administration’s modification plan is headed in the right direction, said John Dugan, Comptroller of the Currency.

Dugan said in light of the data released by his office on Friday, the OCC is going back to each of the servicers and directing them to review their modification policies to ensure that they are producing sustainable mortgages, and not just changing terms.

The OCC is the regulator for the nation’s largest banks.

Modifications for loans that had “teaser rates” can result in payments that are unchanged or increase, but do not increase as much as contractually required.

“I think what that tells us is it really does make a difference to have reduced payments as a factor in getting at the sustainability of a mortgage modification,” Dugan said.

“The approach the administration has taken with its program, which focuses very heavily on reducing monthly payments, this validates that kind of thought.”

The Obama administration announced in February a modification plan that commits up to $275 billion to help reduce mortgage payments for up to 9 million families.

Prior attempts at broad modification programs focused more on borrowers who had already fallen behind on their mortgages, rather than reducing monthly payments for all at-risk borrowers.

A total of 8.1 million U.S. homes, or 16 percent of all households with mortgages, could fall into foreclosure by 2012, according to a report by Credit Suisse.

The data showed that re-default rates were high and rising for loans modified in each of the first three quarters of 2008.

About 31.3 percent of loans modified in the third quarter were in re-default -- defined as 60 or more days delinquent -- three months after the modification. That is an increase from loans that were modified in the second quarter, which had a 26.8 percent re-default rate three months after modification.

“We saw the same trend ... quite high re-default rates, no matter how we measured them,” Dugan said on a call with reporters on Thursday.

The OCC said it still does not have a solid explanation for why the modified mortgages are sinking into trouble. The agency revealed the trend in data released in December, which at the time threatened to scuttle a nationwide modification plan being pushed by the Federal Deposit Insurance Corp.

FDIC Chairman Sheila Bair said in December that the high re-default rates could be explained by a large number of “cosmetic” modifications.

The OCC said on Friday that its data cannot capture the reasons for the delinquencies.

“They could result from such factors as a significantly worsening economy with more borrowers losing jobs, excessive borrower leverage, issues affecting consumer willingness to pay, or poor initial underwriting,” the report said.

Dugan noted that data shows a marked deterioration in prime mortgages, which is the lowest risk loan category and accounts for about two-thirds of all mortgages studied.

The percentage of seriously delinquent prime mortgages increased to 2.4 percent at the end of the fourth quarter, from 1.11 percent at the end of the first quarter.

He said that while the delinquent rate is low compared to other classes of mortgages, the increase is concerning because prime mortgages account for such a large number of mortgages outstanding.

Reporting by Karey Wutkowski