Over half of homeowners who get a mortgage modification or forbearance don't get the happy ending they expected. They simply get behind on their payments again according to a new report by bank regulators. More than 50% of mortgage borrowers with loans modified in the first half of last year had missed at least two months of payments a year later, government officials claimed.
However, those whose modifications dropped their payments significantly were far more likely to have stayed out of trouble. Approximately one third of those whose monthly payments were reduced by at least twenty percent fell behind again within a year, compared to over 60% whose loan payments weren't changed or actually increased to cover arrearages.
The report tracked 34 million home loans and spotlights a major problem with the efforts of many lenders to keep foreclosures at bay. In cases where modifications were approved just to prevent the write-down or write-off of loans gone bad, borrowers ended up back in trouble because just throwing arrearages onto the balance or rolling them into a new loan with even higher payments is not a good long-term solution. If you can't make your current payment, you surely won't be able to continue making a higher payment, duh. Meaningless modifications just allow loan servicers to cook their books another year or so before the bad loans hit the fan once again.
Under the administration's Making Home Affordable plan, borrowers' interest rates may be reduced to low as 2% for five years--the goal being to bring the total mortgage payment (PITI) to no more than 31% of the borrower's gross monthly income. The administration's effort got off to a slow start, and some banks that received bailout funds have yet to modifiy a single loan.Making Home Affordable has picked up steam in recent months, however. As of last September, approximately 360,000 borrowers (12% of eligible homeowners) were granted three-month trial modifications. They get extended to five years if the homeowners successfully make the new, lower payments.
In the past most lenders offered payment plans to help borrowers catch up on missed payments, but those modifications often result in a higher monthly payment. Make sure that if you agree to a loan modification that your monthly payment, including princpal, interest, taxes, and insurance, is no more than 31% of your gross monthly income. Then work on paying off other debts so that in five years, when your payments go back to normal levels, you can continue to pay on time each month.
