UNC Study Shows Writedowns Can Reduce Foreclosures

Allowing homeowners to reduce their monthly mortgage payments for the life of the loan can significantly lower the rate of defaults compared to loan modifications that require borrowers to eventually pay past due amounts and fees, according to a new study of recently modified loans conducted by the University of North Carolina at Chapel Hill's Center for Community Capital. Combining lower payments with a writedown of loan balances that exceed home values can prevent even more defaults, says Roberto Quercia, director of the center, part of UNC's College of Arts and Sciences. The study, "Loan Modifications and Redefault Risk: An Examination of Short-Term Impact," analyzed 10,000 loans that were modified to prevent default. These modified loans came from a pool of more than 1.3 million mostly subprime and adjustable-rate mortgages made during the peak of the mortgage boom, from 2005-2006. The results show that the type of modification matters. Six months after receiving a modification, homeowners who got a "traditional modification" - where past due amounts and fees are added to the loan and total payments on it ultimately rise - had a 60% higher rate of delinquency than those whose modifications led to a reduced payment for the life of the loan. A full third of delinquent borrowers in the sample received a modification that ultimately increased their total payments. Homeowners who obtained a rate reduction were about 13% less likely to redefault than similar borrowers who received a traditional modification.