Many mortgage modifications push payments higher

2009 September 15

Tens of thousands of financially strapped homeowners who have asked lenders to lower their mortgage payments are instead winding up with higher monthly payments and larger debts on their homes.

Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.

It’s too early to know if this pattern will continue under the Obama administration’s $75 billion initiative to get lenders to reduce monthly payments for homeowners struggling to make their mortgages. A total of 360,165 mortgage modifications are now in a three-month trial period under the government’s plan announced in March. But the initiative focuses on reducing interest rates rather than cutting principal, which has been found to be one of the most effective modifications for helping homeowners avoid defaulting a second time (known as a “re-default”).

Of loans modified from Jan. 1, 2008, through March 31, 2009, monthly payments increased on 27% and were left unchanged on an additional 27.5%, according to a recent report by banking regulators. Many modified mortgages fall delinquent — 25% to 40%, depending on the type of mortgage — often because of homeowners’ loss of income or additional outstanding debt, according to a report last month by CreditSights, a financial research firm.

Many mortgage modifications push payments …. higher

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