Mortgage Modifications Surge Higher

By Kevin Chiu

Despite rising home foreclosures, mortgage modifications are increasing as a result of government efforts to aid the housing market as some banks demonstrate more willingness to work with mortgage borrowers, a Housing Predictor study has found.

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More than 2.4-million mortgage modifications have been extended to give homeowners a second chance of staying in their homes. The federal government’s Home Affordable Modification Program has accounted for nearly 1.3-million modifications, but only 168,000 have become permanent. A national sampling of 50 housing markets shows that smaller banks are more willing to work with mortgage holders than many big banks, but there are indications that the trend is changing.

An estimated 1.1-million other mortgages have been modified by bankers not associated with the federal program, many of which are smaller community banks.

Obama administration efforts to develop a recovery in the housing market by paying bankers a portion of the amount of mortgage principal cut from loans are triggering an increase in modifications. The government program has been slow to transition loans into permanent modifications by slashing the amount of principal on a loan or lowering payment amounts.

However, the nation’s pool of problem mortgages is growing with rising defaults resulting in more foreclosures. Between 3-million and 3.5-million homes are forecast to be foreclosed in 2010 by Housing Predictor. An estimated 7-million properties have been foreclosed since the epidemic started more than two years ago.

The study also found that more than a third of all homes in default for more than six months have not yet entered the formal foreclosure process. Increasing defaults as a result of high unemployment and mortgages that are too expensive for many mortgage holders to afford are projected to increase foreclosures over at least the next two years.

Millions of homes that are owned as investment properties are also having an impact on markets pressuring home prices as owners walk away from properties as a result of declining prices. At least one out of every three foreclosures is investor owned. So far most banks have been unwilling to work with investors to reduce the size of mortgage principal on a loan. The White House plan only covers owner occupied properties.

The modification process can be a long procedure under which homeowners typically receive a temporary modification for a minimum of six months before bankers are willing to make changes permanent. The 10 states that have been targeted to receive housing aid through the Troubled Assets and Relief Program (TARP) are seeing the highest volume of foreclosures.