Loan modification Snafu: Defaults continue to rise

Add to home loan modification woes the latest missive from the federal government: serious delinquencies reached 6.2% in the third quarter, up nearly 17% from the previous quarter.

The release begins to add some context to earlier complaints that few of the temporary modifications under the government's Home Affordable Modification Program (HAMP) were being converted into permanent modifications. Though banks' sloth in getting folks into meaningful long-term adjustments remains a major factor worthy of scrutiny -- only 1% of the loans have been converted after all -- borrowers clearly share some responsibility.

In all, more than six in 10 loans in the first wave, modified a year ago, are now in default, according to the report released Monday by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. However, lenders take note: among modifications that actually reduced payments, the default rate was significantly lower. For instance, when payments dropped by 20%, defaults fell to 39% of loans modified in the third quarter of 2008. (see chart after jump).

The defaults were one more paver on the path to foreclosure, which reached a sad milestone this quarter as well, topping one million homes.

On the brighter side, banks and other lenders reported they had modified 680,000 loans in the third quarter of 2009, a nearly 70% increase from the previous quarter. Among homes on the verge of foreclosure, home retention efforts -- including HAMP -- rose to more than 21% after having hovered in the low- to mid-teens for the previous three quarters. (see Chart below).

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