Close to Half of Subprime Workouts Back in Default

July 15, 2008 No Comments »

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Almost 50 percent of subprime borrowers who received a loan workout in the first half of 2007 have re-defaulted on their loans, according to a Moody’s Investors Service report released yesterday.

The credit ratings firm said 42 percent of subprime adjustable-rate mortgages that were worked out during that time were at least 90 days in arrears as of March 31, which could be attributed to the fact that many were simple repayment plans.

Repayment plans are not as favorable as actual loan modifications because they only give borrowers more time to make mortgage payments, without actually reducing mortgage rates or easing terms.

To that effect, borrowers who receive repayment plans may buy a little more time, but if their monthly mortgage payments weren’t manageable in the first place, they will do little more than extend the pain before eventual foreclosure.

Loan modifications, on the other hand, actually result in lower monthly payments for borrowers, helping those who had to grapple with payment shock more effectively manage payments going forward.

And it’s for this reason that mortgage lenders and loan servicers have begun pushing loan modifications over simple repayment plans, though they still continue to be outnumbered.

Foreclosure prevention group Hope Now said two weeks ago that it provided 170,000 loan workouts in May, including 70,000 loan modifications and 100,000 repayment plans.

(photo: davidboyleindc)

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