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New Moody’s Study Finds Nearly Half of Modified Loans Re-Default Within 12 Months

Seattle Short Sales - Thursday, February 10, 2011

A new study by Moody’s Investors Service, reported last week by DSNews.com, confirms the growing view that loan modifications programs such as HAMP are a failure.

The study authors looked at two million residential mortgage loans. They found that 47%, or nearly half, of loans that were classified as "current" after they had been modified re-defaulted within 12 months. As a comparison, only 16% of unmodified current loans defaulted within the same time period.

A relationship between payment reduction and likelihood of default was discovered: for every 20% that monthly payments were reduced, the borrowers were 10% less likely to redefault.

The most successful type of loan modification involved reducing the principal balance, which reduced monthly payments by an average of 34% and resulted in the lowest rate of re-default after 12 months. Lenders, however, are generally reluctant to reduce loan principal.

Other means of modifying loans, such as lowering interest rates, extending terms, and forbearance modification, reduced monthly payments by between 20-25%, and resulted in higher rates of borrowers re-defaulting.

The Moody’s authors also compared the re-default rate between different major loan servicers. For this comparison, they used the likelihood of borrowers redefaulting within 6 months of their loan modification, for loan modifications initiated between early 2009 and the middle of 2010. They found a range in default rates, with Bank of America having the poorest record:
• Bank of America – 33%
• Wells Fargo – 29%
• American Home Mortgage – 26%
• Ocwen – 24%
• GMAC Mortgage – 23%
• JPMorgan Chase – 22%
• CitiMortgage – 20%
• Litton Loan Servicing – 20%
Lenders are becoming more aggressive in making sure that loan modifications result in lowered monthly payments, and this does seem to be improving the long-term success rate of loan modifications.

High default rates of loan modifications mean that, for many struggling homeowners, their loan modification was only a temporary fix. Failure to keep a modified loan current (or for many, failure to ever have their trial modification approved as permanent even if they did keep it current) can delay foreclosure. But for many, by the time their modified loan has become seriously delinquent, it is too late for them to attempt other strategies such as a short sale, and foreclosure has become their only option.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/


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