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August 24, 2010


Report Recommends Greater Emphasis on Principal Reduction and
Stronger Foreclosure Prevention Programs

Chicago — A report issued today by Attorney General Lisa Madigan and the State Foreclosure Prevention Group indicates that there are reasons to be optimistic about the performance of loan modifications going forward. According to the report, while the number of foreclosures continues to seriously outpace the number of loan modifications, recent loan modifications are performing better than modifications made earlier in the mortgage crisis.

“While much work remains to be done in order to see loan modifications work for struggling homeowners, this is a step in the right direction and a hopeful sign that newer modifications may actually provide these homeowner with a workable solution for saving their homes,” said Attorney General Madigan.

The State Working Group’s report indicates that the improved performance of loan modifications over the past year actually suggests that redefault rates in the future will be lower than predicted. According to data collected by the group from nine mortgage servicers, loans modified in 2009 are 40 - 50 percent less likely to be seriously delinquent six months after modification than loans modified during the same time period in 2008.

The redefault rate is even lower for loan modifications that had significant principal reduction of more than 10 percent of the principal balance. A comparison of modifications with principal reductions made in August and September 2008 to modifications with principal reductions made in August and September 2009 showed that redefaults fell from 35.4 percent to just 12.9 percent.

“Too many loans mods actually increase the amount the homeowner owes,” said Attorney General Madigan. “As this report shows, it’s absolutely critical that lenders increase their use of principal reduction to help ensure the long-term success of loan modifications.”

The State Working Group also noted that despite the progress made toward successful loan modifications, lenders still were failing to provide resources to far too many delinquent homeowners. Without improvements to foreclosure preventions efforts, the group anticipates that hundreds of thousands of these homeowners in crisis could end in foreclosure.

“Lenders simply must put better systems in place to identify homeowners who need help,” said Madigan. “They also must do a significantly better job of staying in touch with homeowners and actually working with them after they have made initial contact. My office still hears daily from homeowners who are receiving little or no follow-up from their lenders as they attempt to navigate the incredibly complex loan modification process. We’re three years into the foreclosure crisis; it’s high time that lenders got their act together.”

Other Working Group findings include:

  • foreclosures continue to outpace modifications – 6 out of 10 seriously delinquent borrowers are still not in any loss mitigation activity;
  • the majority of loan modifications (89.3%) tracked by the Working Group for the first quarter of 2010 showed some reduction in payments, and 77.6% lowered the monthly payment by more than 10%;
  • only 21.2% of loan modifications actually reduce the loan’s principal amount;
  • permanent loan modifications dipped in 2009 as servicers transitioned to HAMP.

The State Foreclosure Prevention Working Group, which consists of 12 state attorneys general (AZ, CA, CO, FL, IL, IA, MA, NV, NC, OH, TX, WA), bank regulators for NY, NC, and MD, and the Conference of State Bank Supervisors, was founded in 2007 and has issued four prior reports, which are available at


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