Subprime mortgage holders will probably default, even after refinancing

The Obama administration's stimulus program has given incentives to mortgage lenders and homeowners under water to modify their loans, rather than foreclose. The effort has had some success, but a new study suggests that these modifications are just delaying the inevitable for many. More than half of reworked highly leveraged mortgages are likely to end up at least 60 days delinquent within the next year, according to Fitch Ratings; for subprime mortgages, that figure could reach 75 percent.

By the end of May, approximately seven perecnt of the private-label home loans from 2005 to 2007 that were bundled in mortgage-backed securities had already been reworked, the report notes, including 18 perecnt of subprimes. Bank of America (BAC) alone has modified 50,000 mortgages as part of its settlement to compensate for the predatory lending of Countrywide Financial. Close to 29 percent of the reviewed loans couldn't be modified and ended up in foreclosure.

The biggest factor in delinquency is the amount of the monthly payments, and lenders have adopted a variety of strategies to reduce those payments through forbearance (21.7 percent), lowering interest rates (47.5 percent), reamortization (58.3 percent), and forgiveness of some delinquent payments (17.8 percent). Some borrowers wound up with larger monthly payments after the renegotiations, when past-due payments were rolled into the loan balance, or formerly delayed debts were incorporated. Three-month trials of revised loan terms are helping lenders identify which modifications work.

But some homeowners who find themselves upside-down, given their plummeting home prices, just walk away -- even those who can meet the revised terms. And many who had hoped to qualify for the government's Making Home Affordable program can't participate, due to a 105 percent of current market value cap on the funding made available through this program. The Home Affordable Modification Program, targeting subprime loans, does offer incentives to both lenders and borrowers to reduce payments and reduce the propensity for delinquency or abandonment.

An unsettling point from the study: Fitch estimates that 40 percent of loans delinquent by 90 days or more are secured by unoccupied properties. With no one on a local level watching the properties after the owners have defaulted, we could soon be seeing more abandoned houses in our towns.

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