Daily Real Estate NewsFebruary 18, 2009

After President Obama signed the $787 billion economic stimulus plan into law Tuesday, he said now the focus needs to be on stopping the spread of foreclosures and falling home values.

“We must … do everything we can to help responsible home owners stay in their homes,” Obama said.

The challenge, say those who have been studying the problem, is to lower the amount of money borrowers must pay every month.

More than half of mortgage modifications have left borrowers with the same or higher loan payments because lenders tack on past-due principal, interest, taxes and insurance, which drives the total owed higher, according to an analysis by Alan M. White, a professor at Valparaiso University School of Law. The study looked at more than 23,000 modifications. At the same time, White says, lenders have been unwilling to reduce principal even for borrowers owing vastly more than their homes are worth.

As a result, 49 percent of borrowers redefaulted within six months after receiving a modification that increased their principal and interest payments by 10 percent to 20 percent, according to ratings company Fitch.

The re-default rate was 21 percent for borrowers who saw their payments fall by 20 percent or more.

Source: The Wall Street Journal, Ruth Simon (02/18/2009)