The relief distressed homeowners get from mortgage modifications is short-lived, with most of the loans falling into distress within a year after hitting the reset button, Standard & Poor’s Ratings Services said in a new report Monday.
The New York-based rating agency said 80% of the loans cured by a modification in the time period stretching from 2007 to 2010 defaulted again within 24 months. S&P compiled its report by analyzing nonagency residential mortgage-backed securities data provided by CoreLogic.
The report titled “Loan Modifications Can Provide a Short-Term Cure, But Few Achieve Permanent Success” concluded that modifications are still acceptable market cures for lenders since they encourage more loan payments while keeping borrowers afloat.
Yet, the report says loan mods remain a short-term solution. In fact, principal reductions — which account for only 3% of loan modifications — have a better success rate in helping borrowers obtain a permanent solution, the report says.
More than 1 million nonagency loans were modified between 2007 and 2010, according to S&P. Of those loans, 19% of the outstanding accounts have already received at least one loan modification. After a modification is made on a loan delinquent for 60 days or more, borrowers generally make 7.8 additional payments before hitting a rough patch again, the S&P report says.
“At 24 months following modification, the payment statuses of modified loans showed no significant improvement compared with the month before they were modified,” said Managing Director Diane Westerback, who worked on the S&P report.