Foreclosure Help: Do Loan Modifications Work?

Written by Nick Timiraos

Do Loan Modifications Work?

Fitch Ratings has a report out today that looks at how well loan modifications work, as the WSJ notes Tuesday. The upshot: between 65% and 75% of modified subprime loans will become 60-days or more delinquent again within a year of the loan modification.

Modifications come in many stripes: Servicers may lower interest rates, extend the term of a loan, or change adjustable-rate loans to fixed-rate amounts. They even may increase the principal on a mortgage by adding delinquent amounts to the outstanding loan. 

But reducing the mortgage principal may be the most effective way to get delinquent borrowers back on track: A monthly mortgage survey released Tuesday by LPS Applied Analytics finds that modifications that reduce principal have a 25% lower re-default rate within six months of a loan modification. Many housing analysts have championed more aggressive reductions that reduce loan principal. Likewise, Fitch finds that loans with principal reductions had a 40% to 50% chance of a re-default. Modifications, meanwhile, that increase the loan’s principal have higher default rates, of around 60%-70%.