Home loan modifications not doing the job

Banks hoping to take advantage of the Financial Accounting Standards Board's change to the mark-to-market rule had better tread very carefully. Home loan modifications are not working, according to a report by the Office of Thrift Supervision in today's Washington Post. At least 57 percent of homeowners whose loans were modified missed at least one payment in the nine months after modification, and 35 percent missed at least three payments.

The report also found that an increasing number of borrowers default on their loans before making a single payment, which matches what the FHA found.

Although the new mark-to-market rule allows banks a lot of leeway in how they value mortgage-backed securities, banks must be careful not to set a value for these products that's too high. Given that loan modifications are failing at such a high rate, the value of these mortgage-back securities are still very hard to peg.

The problem with the loan modification program so far is that most borrowers received loan modifications that did not actually lower their monthly payments. The Office of Thrift Supervision found that the more a borrower's payment is lowered, the more likely he or she will stay current on the loan. Does that finding surprise you? It doesn't surprise me either.

The number of homeowners falling behind is increasing. This increase could be a sign of fraud, which is what the FHA suspects, or it could be that the loans were not properly reviewed. But, this also could be a sign of a worsening economic environment and an increasing number of job losses. The most likely scenario is that all three reasons for failure are factors.

Lita Epstein has written more than 25 books, including The 250 Questions You Should Ask to Avoid Foreclosure.

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