Uneasiness for Redefault Risk Cited in Modification Plan

By Kate Berry

Critics of the Obama administration's loan modification proposal say that it would not adequately address consumers' non-mortgage debt loads or the second liens on their homes, and that many borrowers would end up defaulting again.

The proposal, part of a broad housing plan unveiled last month, would subsidize principal or interest rate reductions that lower a monthly mortgage payment to 31% of the borrower's income.

But there is no maximum for the total debt-to-income ratio a borrower may carry to be eligible for a modification. Nor is there any requirement or incentive for a consumer's other creditors to write down their loans.

"You're not getting a complete picture of what the borrower can afford to pay if you don't take into account all their debt," said Fred Melgaard, an executive vice president at DRI Management Systems, a Newport Beach, Calif., provider of default management software.

To be sure, industry participants are not objecting to this perceived shortcoming of the plan solely out of concern for the borrower...