Homeowners avoid foreclosed houses but redefault, according to the U.S. Office of the Comptroller of the Currency and the U.S. Office of Thrift Supervision.
Based on data from the federal agencies, more than half of homeowners who had their mortgages modified in the first 6 months of 2008 had redefaulted within a year from date of loan modification.
The data showed that the level of monthly home loan payment reduction had significant impact on the rate of redefault.
About 1 in 3 mortgage borrowers whose monthly loan payments were lowered by at least 20 percent had redefaulted within 12 months. This ratio was far lower than the big percentage of redefaults in mortgages which were not modified substantially. Over 60 percent of homeowners whose monthly loan payments increased or remained unchanged redefaulted within 12 months.
These high rates of redefaults have prompted housing advocates and other critics of the Obama administration to say that the loan modification program is a waste of billions in taxpayer money because it is not able to help Americans avoid foreclosed houses.
Federal officials however argued that the foreclosure crisis could have plunged the country into worse conditions if the Home Affordable Modification Program was not crafted and implemented.
The Obama administration is now putting further pressure on lenders to make substantive changes in the way they modify loans so that monthly home loan payments become affordable. Officials have been encouraging lenders to reduce interest rates to as low as two percent.
As of August, the Obama foreclosure prevention program has put approximately 360,000 troubled homeowners into a 3-month trial period under the loan modification scheme. If the homeowners are able to sustain their monthly payments for three months, lenders would extend the payment of lower monthly payments to 5 years.
In the past months, most lenders modified home loans just to enable troubled homeowners to make their accounts current. This strategy increased monthly payments for a lot of hopeful borrowers who were expecting substantially lowered monthly payments.
After federal agencies put more pressure on lenders and servicers, especially those which have received billions in bailout funds from the government, lenders shifted their modification strategy to reduce monthly loan payments.
These reduced monthly loan payments accounted for almost 80 percent of all new loan modifications in the second quarter of this year. This significant increase from the percentage in the first quarter is expected to help more homeowners avoid foreclosed houses.