Half of modified mortgages go sour in 6 months

Thrift regulator releases study on success rate of reworked loans

By Ronald D. Orol, MarketWatch

Last update: 4:15 p.m. EST Feb. 24, 2009

WASHINGTON (MarketWatch) - More than half of all modified mortgages defaulted again within six months, a top banking regulator testified on Tuesday.

A study looking at loans that were modified in the first three months of 2008 showed that 37% of borrowers were more than 30 days behind on their payment within three months, and 55% had re-defaulted within six months¸ said Grovetta Gardineer, a managing director at the Office of Thrift Supervision, which conducted the study.

The statistics echoed the results of a similar report released last year by the Office of Comptroller of the Currency that also showed a similar high level of re-defaults on modified mortgages.

Gardineer described details of a "mortgage metrics" report at a House Financial Services Committee hearing on Capitol Hill.

The testimony about the success rate for loan modifications comes a week after President Barack Obama announced a more ambitious plan costing some $75 billion to help homeowners refinance or modify their loans before they have technically defaulted. See full story.

That plan seeks to use government funds to encourage private mortgage investors and other lenders to modify mortgages for troubled homeowners who are still current on their payments. The government hopes it can help up to 9 million homeowners avoid default or foreclosure.

The plan also seeks to help other borrowers that owe more than 80% of the value of their homes to refinance high-cost mortgages into ones that have lower interest rates. In many cases, borrowers in these circumstances owe more than their homes are worth and otherwise wouldn't be able to refinance.

It's unclear whether the Obama approach will reduce the number of homeowners who re-default on mortgages modified as part of the program.

Whole mortgages

The OTS report also showed that modified mortgages held by banks had slightly lower re-default rates than those serviced on behalf of third parties, such as investors in mortgage securities. It showed that 35% of modified whole mortgages held by banks re-defaulted after three months while 51% re-defaulted after six months.

"The lower re-default rate for loans held by servicers may suggest that there is greater flexibility to modify loans in more sustainable ways when loans are held on a servicer's own books than when loans have been sold to third parties," Gardineer said.

Roughly 88% of the mortgages in the study were held by third parties through securitized mortgages, according to the report. These securitized mortgages are held by Fannie Mae , Freddie Mac and private mortgage investors.

OTS will release its report on the fourth quarter of 2008 in March.

The report also suggests that borrowers who owe more than their homes are worth after a modification are more likely to default on their mortgages. The result suggests that the Obama administration's borrower refinancing program may have a greater chance of succeeding.

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