According to a report issued today by the State Foreclosure Prevention Working Group, increased use of loan modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications. The number of foreclosures continues to outpace the number of loan modifications being made, but there are reasons to be optimistic about the improvement in loan modification performance. The State Working Group’s data indicate that some recent modifications are performing better than loan modifications made earlier in the mortgage crisis.

In addition, the State Working Group found that modifications which significantly reduce the capital balance of the loan have a lower rate of redefault compared to loan modifications overall. Currently, however, only one in five loan modifications reduce the loan amount, and the vast majority of loan modifications actually increase the loan amount by adding servicing charges and late payments to the loan balance.

Despite these positive developments, the numbers of foreclosures continue to far outpace the number of loan modifications. The State Working Group finds that more than 60 percent of homeowners with serious delinquent loans are still not involved in any loss mitigation activity. Absent additional improvements in foreclosure prevention efforts, the State Working Group anticipates hundreds of thousands of foreclosures will occur later this year.

“The report certainly indicates there are positive developments with regard to loan modifications,” said Neil Milner, president and chief executive officer of the Conference of State Bank Supervisors (CSBS). “However, there is still a tremendous amount of work to be done to prevent unnecessary foreclosures. Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction.”

The State Foreclosure Prevention Working Group, which consists of 12 state attorneys general (AZ, CA, CO, FL, IL, IA, MA, NV, NC, OH, TX, WA), bank regulators for NY, NC and MD, and the Conference of State Bank Supervisors, was founded in 2007 and has issued four prior reports.

Click here to view the State Foreclosure Prevention Working Group' Data Report No. 5 - August 2010.

For more information, visit www.csbs.org.