Re-default Risk Cited in Obama's Mod Plan

Critics of the Obama administration's loan modification proposal say that it would not adequately address consumers' nonmortgage debt loads or the second liens on their homes, and that many borrowers would end up defaulting again.According to a report in American Banker, the proposal, part of a broad housing plan unveiled last month, would subsidize principal or interest rate reductions that lower a monthly mortgage payment to 31% of the borrower's income. But there is no maximum for the total debt-to-income ratio a borrower may carry to be eligible for a modification. Nor is there any requirement or incentive for a consumer's other creditors to write down their loans. "You're not getting a complete picture of what the borrower can afford to pay if you don't take into account all their debt," said Fred Melgaard, executive vice president of DRI Management Systems, a Newport Beach, Calif., provider of default management software.