Half of all modified mortgages redefault within a year

More than half of all homeowners with modified mortgages fell at least two months behind in their payments a year after the adjustment was made, according to a federal report released Wednesday.

However, the data also shows that modifications made in 2009, which emphasized reduced monthly payments, may perform better.

Only 40.7% of loans modified in the second quarter last year were delinquent after nine months, compared to 51.6% of those adjusted at the end of 2008, according to the report, published by the Office of Thrift Supervision and Comptroller of the Currency.

The quarterly report covers 64% of all mortgages outstanding in the United States -- some 34 million loans totaling nearly $6 trillion in principal balances. It offers one of the most comprehensive looks at the state of mortgages in America.

And modifications made under President Obama's foreclosure prevention program, known as HAMP, also had lower redefault rates than non-government modifications. Some 7.7% of HAMP modifications were delinquent after three months, compared with 11.3% of all modifications.

Under the HAMP program, borrowers' monthly payments are reduced to no more than 31% of their pre-tax income. Borrowers also receive incentives for making timely mortgage payments.

Interest rate reductions were the most common method that servicers used to reduce monthly payments in the first quarter, implementing them in 85.9% of all modifications. Term extensions were used in 46.8% of modifications, while principal reduction was utilized only 1.9% of the time.

Many experts say that servicers must do more principal reduction if they want to halt the foreclosure tidal wave. Homeowners are more likely to walk away if they owe much more than the home is worth, a situation about 1 in 4 borrowers find themselves in.

The report also found that delinquency rates dropped for both mortgage made to credit-worthy and to subprime borrowers. The number of newly initiated and completed foreclosures, however, increased by nearly 19% each.

Short sales increased by 9.2% for the quarter, but 120.4% for the year.

Still, servicers are working with borrowers to help them stay in their homes, the report found. There were 1.7 times as many modifications and payment plans initiated in the first quarter as new foreclosures.