Repossessed Houses Rising due to Higher Loan Payments

The number of repossessed houses will continue to rise in many areas because tens of thousands of troubled homeowners who have applied for loan modifications to reduce their monthly home loan payments have instead got new loan schedules showing much higher monthly loan payments and much higher home loan amounts.

Homeowners are discovering that lenders are incorporating back taxes, late penalties and other fees into the loan principal, making it impossible for many of them to sustain payments.

Currently, there are 360,165 loan modifications undergoing a trial period of three months under the Obama foreclosure program. Most of these modifications have been the result of rate reduction instead of principal reduction, which has been effective in preventing redefaults.

According to data from financial research firm CreditSights, out of all loans modified from January 2008 to March 2009, 27 percent had their monthly payments increased and 27.5 percent had their monthly payments unchanged.

The firm also reported that many borrowers who had their home loans modified fall into default again because of job loss and additional debt burdens. About 25 to 40 percent of borrowers have fallen into default again after having their loans modified, adding more units to lists of repossessed houses.

CreditSights also found that out of around 660,000 home loans modified this year, about 90 percent had their principal balance increased after modification.

One case is an adjustable-rate mortgage loan of $550,000 taken by a couple in Scottsdale, Arizona. When their first five years of low monthly payments passed, their monthly payment readjusted and increased by about $1,000 to $2,600. They were able to modify their loan, but instead of getting an affordable monthly payment plan, their monthly loan payment increased to $3,500.

According to Wells Fargo, over 80 percent of its loan modifications since June resulted in reduced monthly loan payments and most of them involved rate reduction. The bank reported it has done over 240,000 loan modifications, with over 30,000 worked out under the Obama foreclosure prevention program.

CitiMortgage meanwhile reported that about 92 percent of its loan modifications involved rate reduction, loan term extension or a combination of the two. It also said that it reduced monthly payments by reducing the principal in about 8 percent of its modifications.

Nonetheless, despite loan modification efforts, many still redefault because of job loss or income reduction. Advocates are now urging the federal government to provide short-term loans to help jobless homeowners save their homes from becoming repossessed houses.

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