WASHINGTON — Lenders and servicers are still offering loan modifications that do not reduce a borrower's monthly payments, despite the fact that such loans are much more likely to redefault, according to a report released Friday by bank regulators.
The quarterly report by the Office of the Comptroller of the Currency and Office of Thrift Supervision found that modifications that cut monthly payments have a lower redefault rate but are far outnumbered by loans that left payments unchanged or higher.
Comptroller John Dugan said his agency would encourage bankers to pursue modifications aimed at reducing monthly payments and said the data backs up the Obama administration's foreclosure prevention plan, which focuses on payment reduction.
"If you reduce the payment significantly, you can make an impact," Dugan said. "That's good news for the administration's proposed modification change," whose central piece "is lowering the monthly payment."
When the OCC released its second-quarter data in December showing that loan modifications had a high redefault rate, some lawmakers latched onto the report as a reason not to support loan modifications or the administration's housing plan.
Though that report offered no explanation for the high redefault rate, the current report, based on fourth-quarter data, said unsuccessful modifications were often tied to monthly payments.
About 32% of modifications by national banks and federal thrifts increased borrower payments; 27% left them largely unchanged and 29% resulted in significant payment reductions.
Among modifications that reduced monthly payments, 22.7% were in default again after six months. In modifications that left the payment unchanged, 50.6% had redefaulted after six months, and 45.8% of borrowers that had higher payments redefaulted.
Overall, the report found that redefault rates of modified loans were high in each quarter of 2008.
Federal Deposit Insurance Corp. Chairman Sheila Bair said the new report proved her assertion that modifications addressing affordability are more sustainable.
"The report does confirm that modifications that reduce monthly payments have a substantially lower redefault rate than other modifications," she said. "OCC/OTS redefault statistics were cited by the media and policymakers as reasons against implementing a systemic loan modification program based on affordability and sustainability. The more granular data on redefaults and modifications based on lower payments should bury this argument for good."
The administration's housing plan, announced last month, is designed to encourage lenders to reduce monthly mortgage payments to 31% of a borrower's income.
Dugan said the weak economy probably explains the continuing high redefault rates, even in cases where payments were reduced.
"You have situations where borrowers are underwater on their homes, where the value of their home has gone down so much that the willingness to make the payments even if they can afford it can decline," he said.
Though regulators and the administration have brightened the spotlight on modifications, they continue to decline by comparison with other loan workout efforts, such as a change in payment plans. Loan modifications accounted for 40% of all workouts in the fourth quarter, compared to 43% during the third quarter and 52% in the second. There were 180,152 payment plans in the fourth quarter compared to 121,496 loan modifications.
The proportion of seriously delinquent credits was highest in subprime loans, but Dugan said he was also concerned about the increase in delinquent prime loans. The share of seriously delinquent prime loans rose to 2.4% in the fourth quarter, from 1.67% in the third quarter.
"It's a pretty big jump in percentage terms between the third quarter and the fourth quarter, and it's almost doubled over the course of the year," he said. "While it's still on a relative basis low, that number is higher than we've ever seen it before."
The joint agency report includes data from the nine largest national banks and four thrifts that hold 66% of all mortgages outstanding.
