Repeat Failures on Home Loans Reveal Faulty Modifications

The following is a statement by Michael Calhoun, President -- Center for Responsible Lending:

"Today in Washington, several groups issued updates on mortgage performance and the success of attempts to repair distressed home loans. These reports show we are still losing the battle to stop the continuing epidemic of foreclosures at the root of the growing economic crisis. The proverbial vicious cycle continues as these foreclosures, in turn, continue to batter our economy and put a recovery further out of reach.

"The weak economy is, of course, a factor, in the default of modified loans. But the underlying cause of both the worsening economy and the growing number of re-defaults is that loan servicers have thus far failed to modify loans often enough or, when they do, to use the type of sustainable loan modifications most likely to succeed.

"We're losing the battle because the lending industry's voluntary effort to stem foreclosures has failed on two fronts: Industry has failed to modify unaffordable loans into mortgages that are affordable long-term. And it has failed to make such modifications for a sufficiently large enough number of families to make a difference to the economy.

"Sustainable modifications can be made in several ways: 1) lower the interest rate, 2) lower the principal balance, 3) extend the term of the loan or 4) some combination of these approaches. Such changes result in a lower monthly payment for what had been an unaffordable loan, which is the only way to ensure that a family who has nearly fallen into foreclosure won't repeat that grim scenario. Of no help in this situation is a modification that increases monthly payments to bring a family in arrears up to date; such a solution is appropriate only for families who can afford their loan but have fallen behind because of a one-time setback such as a divorce or temporary job loss or sickness. Yet recent research by Professor Alan White suggests that half the modifications on the types of loans at the root of this crisis don't lower monthly payments. That fact helps explain the high level of re-defaults.

"The government information released today also suggests that modifications of mortgages held by a lender, rather than ones pooled into a mortgage-backed security, have been defaulting at lower rates. The reason may be that servicers have more flexibility to modify these loans, which further supports the notion that sustainable modifications can be made if obstacles to doing so can be overcome.

"Today's reports underscore the need for large-scale mortgage modifications that are sustainable. By bringing a halt to the foreclosure epidemic and keeping families in their homes, we can begin to repair the economy."