Half of newly modified loans become delinquent

Comptroller of the Currency John Dugan said more than half of loans modified in the first quarter have become delinquent within six months of being modified with more favorable terms.

“After three months, nearly 36 percent of borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months 58 percent,” he said.

Why is the re-default rate so high? Were the loans so badly underwritten that the customers were never qualifiable at any payments. Here are some headlines from lender solicitations I received in years past:

  • Credit score of 620? No job no proof of income no problem
  • 1 day out of a chapter 7 bankruptcy 100% financing available
  • $417,000 loan amount with a $322 payment No proof of income required!
  • 100% stated income stated asset investment property purchases available

The loan modification process is a road paved with good intentions but they might as well be building it on a sandy beach unless they start re-underwriting the loans prior to any changes.

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