Federal bank and thrift regulators are warning servicers the redefault rate on loan modifications where the homeowner's monthly payment is unchanged or increased is "unacceptably high." They said servicers should strive to reduce and make the payments more affordable.

The Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) have discovered through their quarterly Mortgage Metrics Report that redefaults are cut in half to 23% if the monthly payment is reduced by at least 10%.

"By contrast, about 51% of the loans in which payments remained unchanged were seriously delinquent after six months. The comparable number for loan modifications in which payments increased was 46%," the OCC/OTS report says.

Only 42% of loan modifications in 2008 resulted in lower monthly payments, although that percentage rose to 50% in the fourth quarter. Modifications that increase payments or leave then unchanged "should only be used on a case-by-case basis where borrowers and servicers can have confidence that the modification is likely to be sustainable," comptroller John Dugan said.

Separately, Federal Deposit Insurance Corp. (FDIC) chairman Sheila Bair told bankers that the streamlined modification program FDIC introduced at IndyMac Bank last October has an 8% redefault rate.

The IndyMac program modified 13,000 loans by reducing the homeowners' monthly payments to a mortgage debt-to-income ratio of 38%. After a few months in operation, FDIC adopted a 31% DTI ratio.

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