The Lowdown on Loan Modification Programs

According to the government's Office of the Comptroller of the Currency, loan modification plans are getting nowhere fast. The number of loans modified in the first quarter that were 30 or more days delinquent was 37 percent after three months and 55 percent after six months. The number of loans modified in the first quarter that were 60 or more days delinquent was 19 percent at three months and nearly 37 percent after six months.

Comptroller of the Currency John C. Dugan stated that re-default rates increased each month, whether measured using 30-day or 60-day delinquencies, and showed no signs of leveling off after six months and even eight months.

Modified mortgages during the first half of 2008 were structured for about 200,000 borrowers who were falling behind on their payments. Unfortunately, most of those homeowners missed at least one payment after the loan modification which means that they're once again on the road to losing their homes to foreclosure.

Doing a modified refinance is one of the best ways to rescue those who are underwater on their mortgages, particularly if they can switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. But too many mortgages are encumbered by home equity loans or other second mortgages. And before considering loan modifications on primary mortgages, investors holding liens on smaller secondary loans must agree. Many do not, because a modified refinance costs them too much money.

The FDIC launched a program for the seriously delinquent customers of IndyMac (which is now under its control). The program seems to be working for those who are participating, but the problem is that so few actually qualify for the loan modifications (only about 10 or 12 percent). Admittedly, some homeowners haven't responded to offers for loan modification, but many who did don't meet the necessary criteria.

The $300 billion foreclosure prevention program managed by HUD and the FHA is supposed to help about half a million homeowners, but so far, it's only managed to save less than 300 borrowers across the entire country. The program is in the process of being revised; hopefully into a more effective incarnation than the last.

What's a homeowner to do?

* see ABC News report on the challenges of loan modification: http://abcnews.go.com/Blotter/story?id=6702731&page=1