The Offices of Thrift Supervision and of the Comptroller of Currency released a recent report that shows a portion of loan modifications made between April and June of this year involved reducing the principal amount on the loan and the number of these reduced principal loans increased from 3.1% to 10% as compared to the first quarter.

While strategies such as lowering interest rates or extending mortgage terms can temporarily help borrowers struggling to make payments, reports show that often time’s borrowers re-default because the modifications do not lower payments to a truly affordable level.  Of loans modified in the first quarter of 2009, 28 percent were in default again within three months, according to the Office of the Comptroller of the Currency.  Among those modified in last year’s second quarter, 56 percent were in default again a year later.

Banks are beginning to reduce mortgage principal due, in part, to prodding from the Obama administration, whose housing plan includes financial incentives for mortgage-servicing firms that modify loans.  At the same time, banks now have more flexibility to modify loans because of their success in stabilizing their balance sheets and, in some cases, raising fresh capital.

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Many modified loans never make it: Homeowners in trouble often default again

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