A new report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision shows that the portion of loan modifications in the second quarter that involved reducing the principal increased to 10 percent from 3.1 percent in the first quarter.

While strategies such as lowering interest rates or extending mortgage terms can temporarily help borrowers struggling to make payments, reports show that often times borrowers re-default because the modifications do not lower payments to a truly affordable level.  Of loans modified in the first quarter of 2009, 28 percent were in default again within three months, according to the Office of the Comptroller of the Currency.  Among those modified in last year’s second quarter, 56 percent were in default again a year later.

Banks are beginning to reduce mortgage principal due, in part, to prodding from the Obama administration, whose housing plan includes financial incentives for mortgage-servicing firms that modify loans.  At the same time, banks now have more flexibility to modify loans because of their success in stabilizing their balance sheets and, in some cases, raising fresh capital.

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