Report: Half of Borrowers Re-Default After Workouts

Keeping distressed homeowners out of foreclosure is often cited as one of the chief cures to the country’s economic woes.

But new data from the Comptroller of the Currency throws a spotlight on a potential wrinkle on various government and industry foreclosure prevention efforts: borrowers often are delinquent again months after their loans have been modified.
It is known as the re-default rate and it has been one of the most tricky aspects of the foreclosure crisis.

In a speech today in Washington, Comptroller of the Currency John C. Dugan noted that after three months nearly 36 percent of borrowers had re-defaulted on their loan. After six months, nearly 53 percent were late again.

So why is this happening? No one knows for sure, but some of it has been blamed on the country’s rising unemployment rate. Some lay the blame with the types of loan modifications that lenders provide. In some cases, the new loans are not much better that the deals the homeowner originally had, nonprofits have argued. If the payments are only lowered for a short period, the homeowner will default again once the costs begin to increase again.

That question “has important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months,” Dugan said.

--Renae Merle