Rising Redefaults Could Prompt More Principal Reductions

Despite the income verifications and trial modification periods being carried out by mortgage servicers, modified loans continue to redefault at extremely high rates. The debt ratings agency ""DBRS"":http://www.dbrs.com estimates that more than half of all restructured mortgages are at least two months delinquent or fall into foreclosure again within six months of modification.
[IMAGE] [COLUMN_BREAK]

As a result, DBRS expects modifications that forgive mortgage debt to become the preferred loss mitigation strategy for many servicers during 2010, according to notes released Monday by the Toronto-based agency's New York office.

DBRS' analysis of the latest ""mortgage metrics report"":http://www.occ.gov/ftp/release/2009-163a.pdf from the Office of the Comptroller of the Currency (OCC) found that more than 80 percent of all loan modifications implemented in the third quarter reduced monthly principal and interest payments for the borrower, which increases the probability that the loan will remain current.

While modified terms were primarily interest rate cuts and term extensions, principal reductions have already begun to grab a larger percentage of modifications. DBRS says mortgage restructurings employing principal reductions increased to 13 percent of all modifications in the third quarter, up from 10 percent in the second quarter and 3 percent in the first.