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Walking a Tightrope? Some Modified Mortgages Move toward Delinquency

No one said it was a perfect solution. It is not a surprise to hear that just over 50% of the modifications made in the first half of 2008 were already at least two months delinquent again, according to a report by the U.S. Comptroller of the Currency (OCC). However, the justification for why these delinquencies are reemerging may not be apparent to the casual observer.

At Loan Mitigation Advocates, we believe the following reasons have contributed to the high percentage of second time delinquencies.  First off, many of the modifications performed were on mortgages with adjustable rates. The borrowers attached to these adjustable rate mortgages were already having difficulty making their existing payment. Compounding the issue is that these adjustable rates were scheduled to reset at a higher rate, thus increasing the total monthly payment due. Unfortunately, the modification solution for many of these mortgages was to freeze the rate at the original interest rate.  Essentially, the modification had little or no impact and only delayed the problem.

A second component leading to the repeat of delinquencies involves forbearance and repayment plans.  Basically, these two options allow a homeowner to delay payment of their mortgage and catch-up on their payment schedule for a certain time period. Under certain circumstances, these two options may be viable for many people.  However, the central problem with forbearance and repayment plans is that the mortgage payment that is not made during the agreed upon time period is typically tacked on to the existing mortgage balance. Once the delay of payment is removed, the payment is typically the same or higher due to the increased mortgage balance which creates a worse circumstance. If this solution is not worked in conjunction with an interest rate reduction, the result could be disastrous for the borrower.

A third reason could be attributed to fly-by-night loan modification businesses that are popping up all over the industry. It seems that many of these places are interested in earning a quick buck and not that concerned about truly helping people stay in their homes and playing a central role in helping fix the economy.  A primary concern would be that these companies are not doing the due diligence to understand a client’s total financial picture and then effectively presenting that scenario to the lender when negotiating a loan modification.  Our goal at Loan Modification Advocates is to find a sustainable solution for the borrower. We do our best to obtain a solution that will preserve the client’s homeownership well into the future.

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