Half of all troubled homeowners face foreclosure only six months after lenders reduce their monthly mortgage payments, said a top banking regulator when commenting on the state of the housing crisis (“Homeowners Re-defaulting After Getting Aid,” Reuters, Dec. 8, 2008).

In fact, according to the results of a recently completed foreclosure study, of the homeowners whose mortgages were modified just within the first quarter of 2008, nearly 36 percent had re-defaulted only three months later, while almost 53 percent had become delinquent on their payments at the six-month mark.

John Dugan, comptroller of the currency, said that the study results were surprising and that they raised important questions about how the government should proceed with loan modifications, considering it is unclear why such a large number of borrowers were back in default after getting help.

“Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt?” Dugan asked at a recent housing conference at the nation’s capital. “Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”

Foreclosure Relief Funds, Government Programs Questioned

Regardless of exactly why borrowers are re-defaulting, both the FDIC and Federal Reserve have projected that banks will foreclose on approximately 2.5 million homes this year, more than double the 1 million homes foreclosed on prior to the housing crisis (“Regulators Scratch Heads Over Housing Crisis,” Reuters, Dec. 8, 2008). A portion of those foreclosures will be cases where borrowers have re-defaulted after already completing a loan modification, according to Dugan’s foreclosure study.

And that makes regulators and industry insiders nervous. John Reich, director of the Office of Thrift Supervision, said after examining the data from the new study that he has concerns about “allocating significant resources to loan modifications with such a high rate of re-default.”

Originally, funds from the $700 billion government bailout approved in October were allocated to help troubled homeowners, but how those funds will be used in the future is now uncertain, as the effectiveness of loan modification and other government programs attempting to keep borrowers out of foreclosure may now be in question.

Consumer advocates are frustrated that regulators have failed to develop an adequate strategy to arrest the crisis. “It is exasperating that they keep talking about the need to do something about foreclosure, but they keep coming out with programs that miss the mark,” said John Taylor of the National Community Reinvestment Coalition, an advocacy group for troubled borrowers.

Donald Kohn, vice chairman of the Board of Governors for the Federal Reserve, believes that a broad approach may the best solution. “Problems are deep enough, persistent enough, pervasive enough that we’re going to have to attack it on many different fronts at the same time.”

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