Strategic Defaults by Countrywide Homeowners

By Kyle Chezum Updated on 9/25/2013

Homeowners who are at least 60 days delinquent on their payments may be more apt to default if offered a loan modification even though their credit score would be damaged.

In a new report investigating Countrywide Financial Corp., researchers found the company's delinquency rate rose 13% a month soon after the loan modification program was announced.

Some homeowners whose default rates increased the most as a result of the loan modification program, were actually those who were least likely to default otherwise, including those with substantial liquidity through their credit cards and relatively low combined loan-to-value ratios.

More than 5 million homeowners have foreclosed on their homes in the past 3 years. Experts estimate another 11 million homeowners — about one out of every four of all homes with a mortgage — face possible foreclosure because they're either under water, or upside down (owe more than the value of the home).

Loan modification programs, such as the Home Affordable Modification Program (HAMP), have not worked well in stemming foreclosures or defaults. This is simply because extending benefits to mortgagors two months in arrears "could induce homeowners to default in order to obtain modifications benefits even though they would not have defaulted otherwise and hence lenders must vet homeowners on the verge of losing their home more thoroughly before beginning a modification program.

The Treasury Department has now released a free online calculator that giving homeowners an estimate on whether they qualify for HAMP modification or not.