Home Modification Loans Going Back Into Default

A recent report issued by New York-based Fitch Ratings, a credit-rating agency, shows that the majority of homeowners that have gone through the loan modification process using the modification program offered by the Obama administration will end up going back into default within 1 year.

According to the report, up to 75 percent of loan modifications processed through the Home Affordable Modification Program (HAMP) which are not backed by the federal government will end up defaulting.

Experts say the reason for this high number is that the loan modification process does nothing to help them combat their debt issues, which is their main problem.

Most of these homeowners are still saddled with abnormally high amounts of debt, including loan payments and high interest credit cards. The loan modifications enable them to reduce mortgage payment down to about 31 percent of their overall income level, but this has no effect on other debts that the families may have already acquired.

In most cases, the average family that has had their mortgage modified via HAMP has more than half of their monthly income, before taxes, already spent before they even get a chance to buy groceries. They live paycheck to paycheck, and when emergency expenses arise, like an unexpected automobile repair, they are going to have extreme difficulty paying for it.

According to the chief economist for the Mortgage Bankers Association, this information does not come as a surprise. Historically they have found that old borrower behavior returns, and that mortgage defaults in the 40 to 60 percent range are the norm when dealing with loan modifications.

When a homeowner defaults for a second time, lenders often seek out foreclosure alternatives, rather than trying to go through the loan modification process again.

About 50 percent of homebuyers that end up losing their homes will do so through foreclosure. The remaining 50 percent will use the short sale route, where they sell their home for less than what they owe the bank, or using the deed-in-lieu process, where they simply forfeit their property to the bank in exchange for them forgiving them the outstanding loan balance.

The Treasury Department has been encouraging lenders to consider short sale options, and even offer cash incentives to people that agree to short sales through their Home Affordable Foreclosure Alternatives program (HAFA). If a homeowner does re-default on their HAMP modified loan, banks will often help them to proceed with the short sale or deed-in-lieu process.

Short sales can be beneficial to debt-ridden homeowners, since it allows them to carry on with their lives more quickly. It allows them to immediately move to more affordable housing and begin rebuilding their credit scores.

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