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Loan modifications that don’t help

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KAI RYSSDAL: A key part of the Obama administration’s plan to turn the housing market around hinges on restructuring mortgages for people who are in trouble. It stands to reason, right, if a homeowner can’t make payments and the lender comes in and substantially reduces the monthly amount due, then you’d think the borrower has a better chance of staying current with the mortgage. And so a better chance of staying in the house.

A study released today by federal banking regulators confirmed that that is what happens. Unless it doesn’t. From Washington, Tamara Keith reports that most of the loan modifications made last year didn’t stick.

Tamara Keith: Let’s say your adjustable rate mortgage adjusted right out of reach. You call your lender hoping for some help, a loan modification. Well, there’s a whole lot of things the lender might offer. It could cut your interest rate a couple of points, saving you hundreds a month. It could extend the term to 40 years. It could even reduce what you owe on the home. But more often than not lenders have been offering payment plans that don’t cut monthly payments. More than 30 percent of modifications last year actually lead to higher payments. David Barenbaum is with the National Community Reinvestment Coalition.

David Barenbaum: Many of these modifications were not affordable to the consumer and ultimately because they were unsustainable will still lead to default.

Which misses the point. But the good news is that trend appears to be shifting. In the latest data crunched by federal regulators, at the end of last year, there was a jump in the percentage of loan modifications where monthly payments were trimmed.

Grivetta Gardeneer: What we see is that, that certainly works.

Grivetta Gardeneer oversaw today’s report for the federal Office of Thrift Supervision. The report found that cutting monthly payment by more than 10 percent is what works. Those borrowers were far less likely to get behind again.

Gardeneer: If the payments are actually reduced, then the re-default rate is lower.

Obama administration officials say the point of their new foreclosure prevention plan is loan modifications that reduce payments.

In Washington, I’m Tamara Keith for Marketplace.

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