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).