According to a new report from state attorneys general and bank supervisors from across the country, more than 60 percent of homeowners with seriously delinquent loans are still not involved in any form of loss mitigation with their servicer.
The ratio is disconcerting considering the group also found that one of servicers’ primary loss mitigation options today, loan modifications, are resulting in significant payment reductions with fewer redefaults.

The State Foreclosure Prevention Working Group says loans modified in 2009 are 40 to 50 percent less likely to be seriously delinquent six months after modification than loans modified at the same time in 2008.

“This improvement in loan modification performance suggests that dire predictions of high redefault rates may not come true,” the group said in a paper released Tuesday. “This positive trend suggests that increased use of modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications.”

The consortium of state regulators and chief attorneys also found that recent modifications that significantly reduce

the principal balance of the loan have a lower rate of redefault compared to loan modifications overall, suggesting that servicers should strategically increase their use of principal reduction modifications to maximize prospects for success.

Principal writedowns, though, have been slow in finding their way into the mod equation. The group’s study shows that only one in five modifications reduce the loan principal, and in fact, some 70 percent actually increase the loan amount by adding servicing charges and late payments to the loan balance.

The government’s Home Affordable Modification Program (HAMP) recently introduced a principal reduction alternative to its standard waterfall to give servicers the option of prioritizing the reduction of principal, but the state group says “the optional nature of this alternative and its inapplicability to GSE loans will likely significantly limit its impact in the HAMP program.”

Three years into the foreclosure crisis, with just over a third of distressed homeowners working with their servicer’s loss mitigation departments, the State Working Group says it anticipates hundreds of thousands of foreclosures will occur later this year unless improvements are made in foreclosure prevention efforts.

“The report certainly indicates there are positive developments with regard to loan modifications,” said Neil Milner, president and CEO of the Conference of State Bank Supervisors and a member of the Foreclosure Prevention Working Group.

Milner added, “However, there is still a tremendous amount of work to be done to prevent unnecessary foreclosures. Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction.”