Mortgage modifications jump 15% but more than 40% leave program

The total number of homeowners getting permanent mortgage modifications under the Obama Administration's program increased nearly 15% in June, but a large number of borrowers are being ousted from the program.

Growth in permanent modifications have averaged more than 50,000 per month over the last six months, according to a report Tuesday by the Treasury Department. A total of 530,000 homeowners, which amounts to about 40% of borrowers, have had their permanent modifications canceled.

REPORT:Mortgage modification program through June 2010
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Borrowers may be removed from the program for not providing proper documentation such as proof of income.

A total of 389,198 homeowners have gotten permanent modifications.

"It's good. The housing market and economy are starting to resolve the issues, though it's going to take years," says Joel Naroff, with Naroff economic Advisors. "It's helping. It's working to some extent."

For the first time, the government also included information on how many borrowers with modifications are re-defaulting. For permanent modifications that have been in place for six months, fewer than 6% are 60 or more days delinquent. Fewer than 3% of homeowners in permanent modifications at nine months have defaulted on their modification.

The low re-default rate may be because borrowers who were going to be unable to make payments defaulted earlier in the program, economists say. It could also be that the job market is stronger today so fewer homeowners are losing their jobs and sources of income.

"Now a lot of people getting modifications are keeping their jobs," Naroff says, adding that more stable home prices also provide an incentive to remain current on payments. "And they're not losing equity. Indeed, it may be going up."

Homeowners in permanent modifications are guaranteed lower payments for five years, then fixed terms at today's low rates for the life of the loan. Those in the permanent modifications experience a median payment reduction of 36%, more than $500 per month.

Homeowners get a temporary modification for three months. If they remain current on those payments during that time, they are then moved into a permanent modification.

All borrowers get interest rate reductions, but about 56% also get a term extension on their loan. Another 29.1% have gotten reduction in principal. The predominant reason homeowners seek a modification is loss of income.

Changes in the program, such as expanding it to allow for more principal reduction and incentives for short sales, may make it more widely used in coming months.

"(The program) is not helping a lot of people, but for those that have gotten it, it seems to be working reasonably well," says Mark Zandi, with Moody's Analytics. "The problem is not a lot of people are getting it."
By Stephanie Armour, USA TODAY

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