Fears have been raised over the performance of mortgages in arrears that have been renegotiated on new terms to help struggling borrowers following a report by Fitch on US mortgage modifications.
Fitch warns that in the US, three-quarters of modified mortgages could redefault within a year, raising question marks over UK mortgages that have been renegotiated to help borrowers in arrears.
Modifications include payment holidays, switching to interest-only, term extensions or rate reductions.
The Obama administration has pledged nearly $10bn to modifying mortgages through its troubled asset relief programme. Fitch warns that as it pushes more aggressive modifications, redefaults are inevitable. It predicts that between 65 and 75 per cent of modified US mortgage loans will redefault within 12 months.
It says: “There are times when a loan modification simply is not a viable option. In these cases, the servicer can best help the borrower by using other strategies.”
Exact Mortgages managing director Alan Cleary says UK mortgage modifications are not as prevalent but if they were to increase, we would face similar risks to the US.
He says: “Loan modifications over here are just delaying the inevitable, they mostly default in the future. This is not the way to fix this issue.”
Fitch says servicers in the US are charging as much as $1,000 per modification, which Cleary believes is driving the dysfunctional behaviour.
He says: “Over here, we are not paid for loan modifications but I hope UK servicers do not use mortgage modifications to just cover over the cracks.”