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Aid for struggling US property owners not working

Research from the Office of the Comptroller of the Currency shows that more than 50% of property owners who get help end up missing at least one payment within six months.

The high default rate on reworked mortgages is complicating efforts to address a property crisis that is already among the worst on record. It has sent government and industry officials scrambling to find new fixes as President Obama's administration pledges to spend $50 billion to $100 billion to help property owners.

The high default rate is an indication of severe problems according to John Dugan, comptroller of the currency, whose office regulates some mortgage lenders. It is not just that the number is high, but that it keeps getting worse each month,' he said.

'It is troubling to see a large number aren't staying current and we don't know why,' said Faith Schwartz, executive director of Hope Now, an alliance of lenders.

Most modifications aimed at preventing foreclosure and they succeed in the short term. But experts are pointing out that in the long term this is not the case.

According to a Credit Suisse report on subprime loans, those that were modified by lowering the interest rate or the principal balance owed were the least likely to become delinquent again.

Modifications in which lenders simply gave homeowners time to catch up but raised monthly payments to cover missed amounts and late fees, or lowered interest rates for a time but then restored the rates to their previous level, were the least successful.

Alan White, an assistant law professor at Valparaiso University, has found that even with property prices dropping rapidly, lenders have been reluctant to lower the borrower's principal. Instead, the average modification adds $10,000 to the main amount owed.

This has contributed to a higher re-default rate, White said. 'Negative equity is the biggest predictor of re-default. If you have equity, you can always sell your house and you get some money and get a fresh start. They are less motivated to struggle to make payments if they are underwater on their house,' he added.

Even with the government's largest foreclosure programme, known as Hope for Homeowners, about 40% of homeowners are expected to fall behind on payments again.