It's official: When you reduce a person's monthly mortgage payment, there's a better chance he can afford to pay it

The last time the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) came out with a report on mortgage servicers changing the terms of loans to try to keep people in their homes, the headline was, You can try to help folks out, but chances are, they're just going to miss payments again anyway. This was seen as evidence that maybe we shouldn't be so quick to throw government resources at struggling borrowers.

Well, turns out, as some people anticipated, those results were largely due to the fact that in many cases, when servicers changed loan terms, they were actually raisinga troubled borrower's monthly payments. Counterintuitive, huh? But not illogical: Taking missed payments and back interest and stretching them out over the remaining  life of the loan is, technically, giving a person a second chance, even if it means owing more money each month. 

This morning the OCC and OTS came out with a new report, one that quantifies the difference. When loan modifications reduced monthly payments by 10% or more, after nine months about 26% of borrowers were again 60 or more days delinquent. A reduction of less than 10% led to a redefault rate of 38.6%. But when modifications left monthly payments unchanged (a simple interest-rate freeze, say), the redefault rate hit 53.5%. (Interestingly, modifications that raised monthly payments had a lower redefault rate--49%--which the report's authors think might have to do with the fact that unchanged payments often include a less-intensive evaluation of what a borrower can truly afford to pay.)

Now, we're actually a little past this conversation at this point, considering that the federal government has already rolled out a multi-pronged housing-rescue plan based largely on the premise that reduced monthly payments do good in the world. Still, it's nice to know, even after-the-fact, what we're dealing with in terms of likely borrower behavior. We also now know what we're dealing with in terms of servicer behavior: in the fourth quarter of 2008, more than 37% of loan modifications reduced monthly principal and interest payments by more than 10%. In the first quarter, that figure stood at  24%. Mortgage companies are doing more to try to help. Unfortunately, the OCC/OTS can't tell us exactly how often servicers are making different sorts of changes--interest rate freezes, principal reductions, reamoritizations--and how effective each is. That's not cool, but, on the other hand, if I didn't have something to complain about with regard to loan-modification data, I'm not entirely sure what I would do with myself.

The million-dollar question now is whether the housing plan that was rolled out in February will successfully entice mortgage services to do more. The OCC/OTS folks don't have a strong opinion on that yet. Their numbers--which come from national banks and thrifts and cover some two-thirds of outstanding U.S. first lien residential mortgages--are only through the fourth quarter.

Nonetheless, their data does underscore what's at stake. At the end of December, 16.4% of subprime loans were seriously delinquent, compared with 10.8% at the end of March. In a way, what's more worrisome is that over the same time period, serious delinquency among prime loans more than doubled, from 1.1% to 2.4%. Those numbers may seem small by comparison, but they're significant, considering that most people have prime loans. More evidence that the housing-bubble roller-coaster ride isn't yet over.

Barbara!