BOSTON -- Homeowners who had mortgages modified recently are faring better than those who did so earlier in the housing crisis, according to a report released Tuesday, possibly debunking predictions of a huge wave of defaults to come.
The State Foreclosure Prevention Working Group warned of other troubling signs, however, on the same day that a separate industry report showed the most severe July sales drop-off for previously occupied homes in 15 years.
The group of 12 state attorneys general and state banking regulators said Tuesday that foreclosures still easily outpace the number of loan modifications. Modifications lower monthly payments and reduce the odds of losing a home.
Nearly three years into the foreclosure crisis, the group of state officials also found that nearly 63 percent of homeowners who are at least 60 days behind on their mortgage payments aren't taking part in either government or private foreclosure prevention programs, the group found.
Banking officials warned that lenders must aggressively seek out homeowners who are teetering on the edge, even if it means short-term pain for banks.
The working group compared delinquencies for mortgages modified last year with those revised in 2008, and whether borrowers were keeping up with payments six months after terms were changed.
Borrowers getting modifications in 2009 were nearly 50 percent less likely to end up at least 60 days behind than those with modifications in 2008. About 15 percent among the 2009 group ended up becoming seriously delinquent six months after modification, versus nearly 31 percent for the 2008 group.
The reduction "suggests that dire predictions of high re-default rates may not come true," the report said, noting some analysts have predicted re-default rates as high as 75 percent.
The report said recent modifications that reduce principal balances on loans have a lower default rate than those that merely cut the interest component of monthly payments.
Most banks don't trim the overall balance when they modify loans, according to the report.
Only one in five modifications reduced the loan amount, with 70 percent of those studied in this year's first quarter actually increasing the total by adding service charges and late payments to the loan balance, the report said.
However, through adjustments of interest rates, about 89 percent of first-quarter modifications involved some reduction in monthly payments, the report said. Nearly 78 percent cutting payments 10 percent or more.
But the absence of loan balance reduction in most modifications will hamper future foreclosure prevention efforts, the report said. The authors noted that home prices have declined more than 30 percent from their 2006 peak, and nearly one-quarter of homeowners owe more than their homes are worth.
The group said it "anticipates hundreds of thousands of foreclosures will occur later this year absent additional improvements in foreclosure prevention efforts."