Experts Say High Re-Default Rates Inevitable

Many subprime borrowers who receive loan modifications are still likely to fall back into default, according to servicing executives who spoke Thursday at SourceMedia's second annual mortgage servicing conference in Dallas. Weak housing markets, a possible recession, and changing borrower behavior mean that helping borrowers avoid foreclosure by modifying their loans will not always keep those borrowers out of trouble for long, the speakers said. Larry Litton, president and CEO of Litton Loan Servicing, said 35% of the high-foreclosure-risk loans that are modified at his firm end up back in default after the modification. Robert Meachum, executive vice president at Saxon Mortgage, said he believes that is actually on the low side. He expects 40% to 45% to re-default. While a 35% or higher default rate may sound high, Mr. Litton said it may be inevitable in today's environment. Moreover, he said such modifications are probably still in the interests of servicers, investors, and borrowers. Tightening up on modification requirements would lead to a higher frequency of foreclosure, and given the rising loss severity rates, it is best to try to keep foreclosure frequency down, he said.