Lower Payment, Better Mods

Washington-Federal banking regulators are starting to see better results when loan modifications end up lowering the homeowner's monthly payments, which could put more pressure on servicers to lower the interest rate and forgive missed payments.

A recent report by the Office of the Comptroller of the Currency and Office of Thrift Supervision says redefaults on modified loans are cut in half if the monthly payment is reduced by at least 10%.

The fourth-quarter OCC/OTS Mortgage Metrics Report shows the redefault rate on modifications with a substantial reduction in the borrowers' payments is only 23%, compared to 46% if the payment is increased.

When the payment remains unchanged, the redefault rate is 51% after six months.

"This new data shows that, in the current stressful environment, modification strategies that result in unchanged or increased mortgage payments run the risks of unacceptably high redefault rates," OCC said.

"They should only be used on a case-by-case basis."

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