Foreclosure sucks, but…

is delaying the inevitable the solution?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVd77NOyy2eA&refer=home

Majority of Modified Loans Fail Again, Regulator Says (Update2)

By Alison Vekshin

Dec. 8 (Bloomberg) — Most U.S. mortgages modified in a voluntary effort to keep struggling borrowers in their homes and stem foreclosures fell back into delinquency within six months, the chief regulator of national banks said.

Almost 53 percent of borrowers whose loans were modified in the first quarter were more than 30 days overdue by the third quarter, John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency, said today at a housing conference in Washington.

“The results, I confess, were somewhat surprising, and I say that not in a good way,” Dugan said, citing a third-quarter survey his agency plans to release next week.

Lenders and loan-servicing companies have been modifying mortgages by lowering interest rates or creating repayment plans through the voluntary Hope Now Alliance. The group, which includes Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., said last month it helped 225,000 borrowers keep their homes in October.

Foreclosures rose to a record in the third quarter as one in 10 U.S. homeowners fell behind on payments or were in foreclosure, the Mortgage Bankers Association said last week.

“Our third-quarter report will show many of the same disturbing trends as other recent mortgage reports,” Dugan said. “Credit quality continued to decline across the board, with delinquencies increasing for subprime, Alt-A and prime mortgages.”

The OCC’s survey represents institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion, Dugan said.

Foreclosure ‘Timeout’

New Jersey Governor Jon Corzine, speaking at the conference earlier today, urged a three- to six-month “timeout” on foreclosures, saying keeping people in their homes is necessary to correct a “deeply troubled” market.

“Housing markets and mortgage-finance markets are the fuel for this problem,” said Corzine, a Democrat and former chairman of Goldman Sachs Group Inc. “We need a systematic protocol and process.”

House Financial Services Committee Chairman Barney Frank said today the regulator’s figures reflect a failed focus on interest rates. If the size of mortgages were reduced, borrowers would be less likely to default again, Frank, a Massachusetts Democrat, said in an interview with Bloomberg Television.

“The people who made the bad loans or bought the bad loans from others need to realize” that they would be better off with principal reductions than with foreclosure, he said.

Federal Deposit Insurance Corp. Chairman Sheila Bair said “the quality of the mods are not where they should be.”

John Reich, director of the Office of Thrift Supervision, questioned whether the federal government should be more involved in foreclosure prevention.

“I do have a concern of allocating government resources with such a high rate of re-default,’’ Reich said.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net;

Last Updated: December 8, 2008 13:39 EST