Loan Modifications May Lead to Redefault

I just learned in a recent email from my sister that my niece in Florida and her husband are benefiting from a mortgage modification on their home loan. He is self employed and she works part time, so they have been struggling with the high interest. They should be without pressure for at least 5 years...the payment is only $1,100 now with taxes and insurance, and they get to keep the home they both love.
Stories like this one show the positive side of this program, and lenders are ramping up efforts to avoid home foreclosures, but a report by bank regulators says more than half of borrowers who get help fall behind again.
More than 50 percent of homeowners with loans modified in the first half of last year have missed at least two months of payments a year later, but the results were better among those who saw their payments drop substantially.
About one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again within a year. That compares with more than 60 percent for borrowers whose loan payments were left unchanged or increased.
The administration's effort got off to a slow start, but has picked up speed in recent months. As of last month, about 360,000 borrowers, or 12 percent of those eligible, have signed up for three-month trial modifications. They are supposed to be extended for five years if the homeowners make their payments on time. There is currently no data on redefaults within the plan.
Previously, most lenders have offered payment plans that allowed borrowers to catch up on missed payments. But those modifications often do not involve an interest rate reduction and result in a higher monthly payment. All that does is set the borrower up for failure.
By contrast, under the administration plan, loans may be sustainable for homeowners. Borrowers' interest rates can go as low as 2 percent for five years under the new plan. Bank regulators say they have pressed lenders to shift their focus to modifications that reduced borrowers' payments. They made up nearly 80 percent of new modifications in the April-June quarter, up from about half in the first three months of the year. Still, borrowers are continuing to fall behind as job losses mount. More than 11 percent of borrowers covered by the report had missed at least one payment as of June 30, up from 10 percent in April.
Lenders offered help to about 440,000 borrowers in the April-June period, but they started foreclosure on about 370,000 homes, unchanged from the January-March period.