A recurring theme in the Portrait of HAMP failure series I did was this: the borrowers would get a trial modification, pay out for several months while being assured that their permanent mod was just around the corner, and then they would be told that the permanent mod was rejected and they had to pay the difference between the modified and the original payment immediately or face foreclosure. I suspect that’s what’s driving these new statistics from the OCC:

One in five homeowners whose mortgages were modified under a program aimed at reducing foreclosures defaulted again within a year after their payments were cut, the U.S. Comptroller of the Currency reported today.

Twenty percent of modified loans were at least 90 days delinquent within a year in the second quarter, according to the Comptroller’s “Mortgage Metrics Report.” Delinquencies for loans 30 to 59 days late increased 0.4 percentage points to 3 percent from the previous quarter.

“Foreclosures may continue to increase in future quarters as a large number of foreclosures work through the process and alternatives to foreclosure are exhausted,” the Comptroller, a division of the U.S. Treasury Department, said in a statement.

Aside from the trial mod scam, a number of other explanations are available for this redefault rate. Mods that cut the interest rate but not principal will do nothing for a borrower’s equity. The private modifications that banks offer these days, often so someone can avoid a serious rate recast, are often MORE expensive than the original payment. So lumping in all “modifications” in an attempt to make a case that they just don’t work in the current environment is a bit reductionist.

What we can say is that we know certain mods work. Principal reductions have a very good track record of preventing redefaults and moving troubled loans to performing loans. But those are precisely the modifications that the banks and their servicers don’t want to execute. Alternatively, the banks can be taken to court for fraud in the origination, securitization and servicing process, and forced to give $57,000 to each homeowner. It’s really their choice.

David Dayen

David Dayen