Fitch Ratings says 75% of mortgages that are modified will re-default after 12 months. That’s massive considering the actual fragile state of the housing market and the economy in general.
From DJ: “Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses,” said Fitch Managing Director Diane Pendley.
She added that as home prices continue to fall, “there is growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay.”
Falling home prices have been a key reason for surging delinquencies, as borrowers are unable to refinance their mortgage as the loan amount is higher than the value of the home. As such, people are opting to stop paying the loan and instead deal with the consequences on their credit record.
According to Fitch, 7% of loans in residential mortgage-backed securities, including 18% of subprime loans, were modified in April. As the damage from mortgage foreclosures continues to spread throughout the economy, we wouldn’t be surprised to see re-defaults surpass in a year the 75% level suggested by Fitch.