Mod Success Hurt By Borrowers Who Abandon

But Fitch is concerned that post-modification performance will return to pre-modification levels. Based on reports from servicers, it appears borrowers might be using modifications to improve their position.

The New York-based ratings agency projects that between 65 percent and 75 percent of modified loans will become at least 60 days delinquent within 12 months.

A report from Lender Processing Service indicated loans where only the term and rate were modified had a default rate near 70 percent after nine months, while the rate was less than 50 percent on loans where unpaid principal balance was also modified.

The OCC and OTS Mortgage Metrics Report released last month indicated that 44 percent of loans modified during the first-quarter 2008 became at least 60 days past due within nine months. That report also found that re-defaults were 12 percent to 20 percent higher on loans not owned by the servicer.

In March, Moody’s Investors Service estimated that around one-third of borrowers modified under the Housing Affordability and Stability Plan will re-default.

“More often than not reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses,” Fitch Managing Director Diane Pendley said in the statement. “With continued home value declines in many markets, there is growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay.”

She added that ongoing home-price declines will only exacerbate abandonment on negative-equity properties.

Fitch noted it may take months to fully assess the performance of modified loans.