Modified mortgages still defaulting

Tens of thousands of homeowners who were hoping for lower payments are discovering that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That’s one reason many reworked mortgages are sliding back into default. Monthly payments, on loans modified from Jan. 1, 2008, through March 31, 2009, increased on 27% and were left unchanged on an additional 27.5% according to a recent report by banking regulators. Many modified mortgages fall delinquent — 25% to 40%, depending on the type of mortgage. It’s too early to know if this pattern will continue under the Obama administration’s $75 billion initiative to get lenders to reduce monthly payments for homeowners struggling to make their mortgages.

A total of 360,165 mortgage modifications are now in a three-month trial period under the government’s plan announced in March. But the initiative focuses on reducing interest rates rather than cutting principal. “Payments have [either] gone up [or] the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind.

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